Traditionally, venture capitalists have calculated that about two in 10 investments will generate most of a fund’s profits. If a fund hopes to achieve a 20% return, then those two in 10 winning investments must generate or return between 20-30 times the money invested into them. Investors in these companies eventually require an exit, to allow for monetization, either via an IPO or through a trade sale. Not all target companies fit this accelerated growth path. VC funding is appropriate for certain, but not all companies, as many of these do not fit this specific high-growth profile.
It is therefore worthwhile looking at how women founders and leaders of SMEs grow their companies. Research suggests that female founders often start their ventures with less capital and seek small and/or alternative sources of funding, which often comes at a greater cost.
They usually rely more heavily on family financing, which hurts those who come from low-income backgrounds. But even in cases where financing is obtained from family and friends, women face greater scrutiny than men. This also highlights that gender biases appear as well within family and friends’ circles. Raising traditional debt financing for start-ups is often challenging, given these typically neither have a previous track record, generate steady cashflow, nor own adequate collateral. Nevertheless, on occasion, advance customer cash payments can provide the necessary liquidity for growth and debt financing.
A further option sometimes used by start-ups is to monetize the value of the receivables from their customers, thereby allowing them to generate incremental liquidity. These alternative sources of funding have historically proven successful for entrepreneurs who choose to build their business
slowly and steadily.
Crowdfunding is another alternative source of funding that shows potential. Research indicates that women have better access to crowdfunding because they are viewed as more trustworthy than men. Furthermore, women investors seem to support and prefer women-led projects in an effort to support
their fellow entrepreneurs who face similar challenges.
