By Allie Burns and Shruti Chandrasekhar
This article was originally published on Fast Company on March 18, 2020.
New research from IFC and the World Bank Gender Innovation Lab in partnership with Village Capital and the Women Entrepreneurs Finance Initiative (We-Fi) shows that acceleration exacerbates the equity financing gap in emerging markets.
What if we told you that a widely used intervention to help startups raise financing–accelerators–is actually making the gender financing gap worse?
The data is commonly cited. Female-founded companies receive far less venture capital than their male counterparts. In emerging markets, startups with a woman on their leadership team receive only 11% of total seed financing and only 5% of later-stage financing.
Accelerators, with a focus on democratizing access to mentor and investor networks, play a connecting role between founders and funders. They are in an ideal position to improve the fundraising gap and unleash the potential of female-led companies to bring entrepreneurial solutions to today’s most pressing development needs.
So, it’ll probably surprise you–as it surprised us–that our research shows that accelerators are having exactly the opposite impact, and in fact, widening the gender financing gap. It’s an important wakeup call that accelerators can–and must–do more to support female-led companies.
What do we mean when we say accelerators are exacerbating the gap? Let’s imagine two fictional entrepreneurs, Marcos and Ana, who are both raising funding for their Bogotá-based startups. With similar levels of education, prior founding experience, and operating in similar sectors, both entrepreneurs apply and are accepted into the same accelerator program.
However, when they arrive on the first day of workshops, they’re already on an uneven playing field. Marcos walks into the room with around $45,000 of equity financing under his belt, while Ana arrives with roughly $25,000, which is the average amount of capital male and female-led startups have when starting an accelerator. This is the start of the gap. Male-led startups begin accelerator programs with nearly 1.8 times as much equity financing as women. And without a suitable intervention to address this gap, Ana’s fundraising disadvantage will compound over time: regardless of acceleration, for every $1 of equity raised, startups raise an additional 77¢ in equity in the next calendar year.
Fast forward roughly three months, after the accelerator ends. Both Marcos and Ana have met the same investors, were coached on the same business strategy, learned the same fundraising skills, and listened to the same lectures on finance. They’ve returned home to their offices with a well-developed plan to raise funding for their businesses.
What happens next? In the calendar year after the program, Marcos would hypothetically raise just over $100,000 in equity funding, the average amount that male-led startups raise post acceleration. Meanwhile, Ana raises about $47,000, the average amount that female-led startups raise post acceleration.
Our research produced a surprising result. Accelerators seem to have no positive impact on the ability of female founders to raise equity which is the type of financing that is generally well-suited to accelerate the scale of high-growth startups. Male founders, on the other hand, seem to reap the benefits of acceleration, increasing the amount of equity they raise by 2.6 times as much as startups with a female founder. Just like Marcos and Ana.
Accelerators–and the investors in their networks–need to make some important changes to capitalize on the role that they can play in reversing these trends.
While there is no one clear solution, there are a few efforts underway to address these challenges. IFC’s new ScaleX program aims to counter that gender gap by incentivizing emerging markets accelerators with performance-based payments of $25,000 for every accelerated woman entrepreneur that raises $1 million from investors. These performance-linked payments will encourage accelerators to spend extra time and effort to actively help women entrepreneurs raise equity investment.
At the same time, we will be testing strategies through experimental programs over the next year to close the gender financing gap — primarily focusing on overcoming investor bias and perception of risk that seems to be contributing to this gap. Most importantly, we will share our learnings on what’s working and what isn’t in real-time.
Accelerators are on the front lines with startups very early in their fundraising journey and have huge potential to influence diversity in who receives capital, and who doesn’t. To be successful in closing the gender financing gap, accelerators will need to take a close look at their programs, test new strategies, and get creative with their approach to close the gender financing gap.
Allie Burns is the CEO at Village Capital and Shruti Chandrasekhar is the head of Startup Catalyst and SME Ventures at the International Finance Corporation (IFC).
