Opinion

The Great Debate

Gender, capital and ‘the crowd’

By Sheila Bapat
July 20, 2012

It’s an old, and at this point weary, tale that women entrepreneurs receive far less venture capital than men. Women currently own 46 percent of all American small businesses, generate $1.3 trillion in revenue and employ 7.7 million people. Yet Dow Jones Venture Source says that of the U.S.-based companies that received a round of venture capital financing in 2010, roughly 6 percent had a female CEO and 7 percent had a female founder.

Against this backdrop, it is interesting to look at a new crowdfunding law that was passed as a provision of the JOBS Act in April. The law, which will be effective in early 2013, is an exemption to existing securities law that for nearly a century has enabled only wealthy individuals or banks to offer entrepreneurial capital. Kevin Lawton argues against the arcane securities law in his book, The Crowdfunding Revolution, saying that it stymies the democratization of investing.

The crowdfunding law frees entrepreneurs to accept capital from “the crowd.” Under the new law, people who earn less than $100,000 in annual income may invest up to $2,000, or 5 percent of their income (whichever is greater), in businesses of their choosing via approved intermediaries. People who earn more than $100,000 can invest up to 10 percent of their income.

The power of the crowd has demonstrably attracted women already. I recently polled the three preeminent crowdfunding websites: Kickstarter, Crowdrise and Indiegogo, to find out how many women-led projects their sites host. Crowdrise, a platform that raises money exclusively for charities, estimates that about half of its users are women. Kickstarter told me they don’t have the information. Indiegogo had more to say, pointing out that in 2010, 42 percent of its successfully funded ventures were led by women.

These online platforms offer “gifts” in return for their investments – things like, at Kickstarter, “a copy of what’s being made, a limited edition or a custom experience”. Investors under the new crowdfunding law will actually receive equity in the businesses they support.

While we cannot know if women entrepreneurs will also pursue support from the crowd until the JOBS Act is effective next year, there is evidence that they may be inclined to do so. The essence of crowdfunding — seeking financial support from a broad base of individuals — is inherent to nonprofit fundraising, a sector where women dominate. According to the Association of Fundraising Professionals, women make up 75 percent of all nonprofit fundraisers.

There is also evidence that women political candidates prefer to rely on the crowd to raise money for their campaigns. “Clean election” laws that have been enacted in numerous states throughout the country require candidates running for state office to raise $5 contributions from as many registered voters as possible to qualify for matching funds from their state. Those candidates who desire to circumvent the need for wealthy political donors have chosen this fundraising route. One study shows that women candidates opt into clean elections programs at higher rates than male candidates.

Funding a business is far different from a nonprofit or a campaign, and relying on the crowd is not immediately appealing to all women entrepreneurs. I spoke with one woman who expressed misgivings about taking on the burden of many people’s money. Gauri Manglik is the 24-year-old co-founder of Fondu, a mobile application that enables users to share short restaurant reviews with their friends via Facebook and Twitter. Manglik feels more secure pursuing funding from well respected VCs instead of opening the door to many lower-dollar funders.

“For a high-risk tech startup, crowdfunding seems strange to me,” she said. “Right now, I raise money from people I know and respect and have one-on-one relationships with. I still feel the pressure of taking on someone’s money, so it’s difficult to imagine taking many, many more people’s money to build my business.”

Manglik also points out that prominent VC firms offer value beyond just money, such as stewardship and, of course, their networks. “I’d be interested in knowing if anyone would pick crowdfunding over raising from VCs if they have both options.” she said.

Crowdfunding may have the potential to widen the network of potential investors so that being connected with elite VC networks may not be necessary. Authors Susan Coleman and Alicia Robb argue in their book, A Rising Tide: Financial Strategies for Women-Owned Firms, that the tight-knit and male-dominated nature of traditional VC and angel investment firms is a major contributor to the venture funding disparity. Scholar Lakshmi Balachandra of Babson College corroborates this theory, arguing that fewer women than men are plugged into the important networks where VCs operate.

For now, groups including the National Crowdfunding Association’s Women in Crowdfunding initiative and Women 2.0 have begun building awareness among women entrepreneurs about the crowdfunding law and its potential to help raise capital. The Securities and Exchange Commission is currently accepting public comments on the crowdfunding provision of the JOBS Act and in the next several months will issue rules specifying how crowdfunding will be implemented in practice in 2013. All entrepreneurs will need to think carefully about whether crowdfunding is the right strategy for their company based on the SEC’s final rules.

A happy side effect of the crowdfunding law could be that more women entrepreneurs are able to raise capital, although it is far too soon to tell. It is not possible to address age-old gender disparities without allowing the existing regulations to evolve.

PHOTO: Motorists crowd at a junction during rush hour in Taipei, October 29, 2009. REUTERS/Nicky Loh

Comments
2 comments so far | RSS Comments RSS

Interesting post on women entrepreneurs, crowdfunding and the VC scene.

The VC scene is definitely male dominated (just look at the Kleiner Perkins lawsuit), as such, innovative business models geared towards the opposite sex may not be viewed as favorably as geeky/techy (male dominated) businesses.

BTW, if the crowdfunding offering is structured correctly, there shouldn’t be any major issues with having a slew of additional investors in your business. In any case, cash is king for a business, whether it comes from a professional investor or a crowdfund, it’s still cash for the business.

In full disclosure, we run a new equities-based crowdfunding portal called Cielex (www.cielex.com).

Posted by JFierro | Report as abusive
 

I totally agree with the fact that women are less present in the entrepreneurship, crowdfunding and VC scene.
I think there should be more women trying to enter it.

Women should be determined and motivated to reach their goal.

And if the project is innovative and viable, I don’t see why not to invest in it when the co-founder is a woman. At least , it is how we think at MyMicroInvest (http://mymicroinvest.com/). We are a new equity-based crowdfunding platform and we don’t care if the entrepreneur is a woman or a man.

Posted by JulyM | Report as abusive
 

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