Gender and Race Gaps on the Path to Startup Success
Depending on the data source, 12 and 28 percent of high-growth startups are run by women, although women make up 45 percent of the overall labor force. Fewer than 10 percent of entrepreneurs are Black. In Race and Gender in Entrepreneurial Finance (NBER Working Paper 30444), Michael Ewens surveys available data and presents a framework for assessing gender and race gaps in startup founding, financing, and growth.
The startup path is complex: individual entrepreneurs must secure financing, grow, and successfully exit. In addition to the initial decision to launch a startup, decisions on firm type, scale, industry, location, and long-term goals must be made by founders. They also need to approach individual investors or institutional investors to obtain funding to hire early employees, retain lawyers and accountants, and identify intellectual property. Growth requires additional hiring, investment, and customer acquisition. Returns are ultimately realized through an initial public offering or a sale.
Men start new businesses at a rate 64 percent higher than that for women. Blacks start new businesses at a 22 percent lower rate than Whites.
Gender and race gaps are present at each point along the startup path. During the two years 2019–20, men started new businesses at a 64 percent higher rate than women; from 1996 to 2020, Blacks started new businesses at a 22 percent lower rate than Whites. Among startups backed by venture capital (VC), 14.5 percent were run by women and 2.4 percent by Hispanics and Blacks. Moreover, less than 30 percent of angel investors and 16 percent of general partners at VC firms were women; 4 percent of general partners were Black. The failure rate among Black-owned firms was 20 percent higher than that among White-owned firms. In contrast, female-founded VC-backed startups had a 19.4 percent exit rate — higher than the percentage of women-run VC-backed startups. These gaps have narrowed, but only slowly, in recent years.
There are many possible reasons for the gaps. Founding a firm requires wealth, and there have been persistent wealth gaps, especially in inherited wealth, between Whites and Blacks. Black owners have less work experience in family businesses and their startup industries. Entrepreneurship demands long and inflexible hours, a burden for mothers. Early life experiences, including family background and social networks, also impact entrepreneurship. Stereotypes and self-stereotypes may also play a role: lab participants believe women are worse at math than men, and women founders tend to sort into “gender-congruent” industries.
Differences in access to capital may also be an important factor. In surveys of small business owners, Black borrowers report expecting to be rejected for credit more frequently and, conditional on borrowing, to be charged higher interest rates. The deal evaluation process is also prone to discrimination. These factors notwithstanding, initial firm attributes appear to be the best predictors of investor interest; investors prefer pitches presented by men, are more likely to ask women about not losing capital or maintaining gains, and interpret pitch delivery characteristics differently by gender. Other research, however, finds that initial firm characteristics explain most of the gender funding gap.
Ongoing changes in financial markets may affect gender and race disparities across startups. Since 2010, private capital markets have been significantly deregulated in an attempt to lower barriers to founding and growing startups. In addition, valuations paid by early-stage investors, participation levels of nontraditional investors, and venture debt have all increased. Novel financing and data may also affect bargaining power and lower information asymmetry, thereby affecting the gaps described in this study.
—Whitney Zhang
