Growing Champions: A better bet with women-led start-ups

This article first appeared in Forum, The Edge Malaysia Weekly, on August 13, 2018 - August 19, 2018.
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Over the past decade, Malaysia has seen an increasing number of entrepreneurial ventures by high-potential women. According to 2016 statistics, women owned 20.6% of the total number of small and medium enterprises, with 51% equity and above, or held the CEO position with equity ownership of at least 10%.

The National Policy on Women continues to encourage women’s participation in the workforce and in the development process. For instance, Deputy Prime Minister Dr Wan Azizah Wan Ismail recently highlighted the need to focus on women in the workforce. “We have to think about how to enable mothers to remain and adjust themselves in the job market. We have many highly educated women with great track records, but they also have small children to breastfeed and take care of. If we don’t tap the opportunity, it will be a great loss to the country,” she said.

It is clear that Malaysia assigns a high priority to bringing women to the forefront of all development as a productive economic resource. The business case is also very clear. From a global perspective, women — despite the disparity of early-stage investor capital — deliver higher revenue per dollar invested compared with men. But the issue of the gender investment gap is as real and prevalent as the gender pay gap and other forms of gender inequality. There is a need to understand the dynamics, to steer investors and start-up accelerators towards women-led or women-owned establishments.

 

Does gender influence investment decisions?

Our analysis of global data suggests that while investors make calculated decisions that are based on business plans and projections, organisations with a higher percentage of women in leadership roles outperform male-dominated companies. And women-owned companies do not get the same level of financial backing as those founded by men.

A review of five years of investment and revenue data by MassChallenge, a US-based global network of accelerators, indicated a clear funding gap. Investments in companies founded or co-founded by women were less than half of the average invested in companies founded by male entrepreneurs. However, over time, the start-ups led by women performed better, generating 10% more in cumulative revenue over a five-year period. In addition, these start-ups generated 78 US cents for every dollar of funding, while male-founded start-ups generated just 31 US cents. These findings are statistically significant and similar trends could be found in countries such as Malaysia.

 

Why is there a disparity?

• The common presumption that women lack technical knowledge and men are the “technology” experts affects the way investors respond to women founders during their pitch presentations.

• A common observation is also that women are more likely to accept negative criticism from investors/funders as productive feedback, as opposed to men, who would be ready to respond and defend their pitch ideas with logic and aggression.

• Similarly, male founders are known to be more bold and ambitious in their growth projections and assumptions, which also indicates their risk appetite and business acuity. Women entrepreneurs, in contrast, are generally more conservative and may simply be asking for less than men.

• Many male investors have little familiarity with the products and services that women-founded businesses market to other women or in the childcare segment, which are usually based on personal experience or issues they struggled with in their own lives.

 

What can be done?

Venture capital firms and investors need to avoid affinity biases when making funding decisions. In other words, they should avoid investing only in people and products that are familiar to them. They should look for realistic projections rather than bold and ambitious numbers (common with pitches from male founders).

It is also critical for VC firms to achieve gender balance and hire more women in their organisations. This could, in turn, mean more creative and unconventional problem-solving and broadening the lens of potential investments.

Start-up accelerators can help to reduce the gender investment gap by promoting a balanced slate of applicants and actively recruiting promising women entrepreneurs. The accelerators should also ensure that they have a sufficient number of women experts, covering multiple industries and sectors, who can act as role models and mentors, helping to orientate female entrepreneurs to the realities of the market. In the long term, accelerators can bring together a community of start-ups, women-friendly investors and VC firms, building a compelling case for positive change.

Women entrepreneurs must recognise and work around the current dynamics of the industry and the areas of disparity that pose a clear disadvantage to them. They should work under the guidance and active mentorship of those with VC experience. This includes practising formal pitches, asking for bigger investments, avoiding underselling their companies and, most importantly, preparing to deflect and defend against potential criticism by investors. In addition, women entrepreneurs and investors should be aware of which VC firms are led by women or have a strong track record of investing in women. For instance, according to the Wharton Social Impact Initiative, there are 50 funds, capitalised at more than US$1 billion, that invest exclusively in women-owned companies.

In conclusion, it is important to understand the biases that put women entrepreneurs at a disadvantage and prevent VC firms and investors from making objective funding decisions. Women founders, while mobilising support for long-term change, can operate intelligently within the current system by taking the right approaches and preparing themselves to meet the current expectations of the marketplace and investor communities therein. There is a great opportunity for women-led start-ups, globally as well as in Malaysia, to deliver significant value to the economy and the community as a whole.

At the World Economic Forum 2018, Alibaba founder Jack Ma expressed his strong belief in women and their meaningful roles in the workplace, saying, “If you want your company to be successful, if you want your company to operate with wisdom, with care, then women are the best.”

Besides, countries such as Malaysia, which have highly educated and talented female resources, must seriously consider the economic “value” in promoting more women in business. As Canadian Prime Minister Justin Trudeau asserts, countries and their leaders should do it not because “it’s the right thing to do, or the nice thing to do, but because it’s the smart thing to do”.


Nurlin Salleh is principal at The Boston Consulting Group in Kuala Lumpur

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