Why are only 18% of U.S. Startups Founded By Women?

Why are only 18% of U.S. Startups Founded By Women?
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2015 has been an exciting year in technology. Google created a contact lens to monitor blood sugar in diabetics, a DNA startup is allowing customers to tinker with the genetic codes of plants and animals, and self-driving cars are now driving through our streets. And yet according to research, a mere 3% of tech startups in Silicon Valley are founded by women.

Yes, that’s right – 3%. If we take a look at startups overall, those that are founded by women account for only 18% of the total in 2014. This stunning gap may be difficult to comprehend considering that a female earn more than half of all the bachelor’s, master’s, and doctorate degrees in the country and make up about 47% of the U.S. workforce. Yet statistics continue to illustrate a discouraging reality for female tech entrepreneurs, particularly those in the STEM (Science, Technology, Engineering, and Mathematics) fields. If advances in technology offer us a trajectory to the future, it is the archaic barriers women face when attempting to develop such technology that threaten to hold us all back.

The Hostility of the Climate

Those who have heard of (or experienced firsthand) the fabled “frat culture” of Silicon Valley may not find it surprising to hear that not one of the top five tech firms in the city boasts a female senior partner, or that women make up less than 40% of employees at tech giants like Google, Facebook, and Yahoo!.

Some argue that since women do not earn as many engineering and computer science degrees as men, this is a pipeline issue where there are simply less employable women in the sector. However, this reasoning fails to take into account that female retention rates in Silicon Valley and the tech industry as a whole are staggering as well, with 41% of women leaving their careers in tech, compared to 17% of men. Many attribute the low retention rate to a general workplace environment that isn’t friendly towards women, but the one consistently cited factor for this disparity is the industry’s archaic approach to motherhood.

67% of women surveyed who had left the tech industry cited motherhood as a factor in their resignation but only 5% said they wanted or planned to be stay-at-home moms, pointing to begrudging maternity-leave policies (or a total lack thereof) as areas in need of dire improvement. The survey also revealed that many women were expected to work during their leave, were pressured to return to work within a few weeks, and that their offices were not equipped with facilities for nursing.

In addition, a number of respondents agreed that motherhood was an amplifier of an industry that fails to accommodate women in many different ways. 27% of those surveyed cited discomfort due to discrimination as their reason for leaving the industry. With so many women ending their tech careers so soon, it is no wonder that very few go on to begin their own startups as their male peers do.

A Lack of Mentors

A 2014 study by L’Oreal and UNESCO used data from 14 countries to illustrate that women who receive degrees in science do not experience the same upwards trajectory as men in the same field. The problem with this phenomenon is that it means there are less female mentors who are available to other women hoping to break into the field. “We need more role models. Young women look around and say, ‘How can I do this?’” says Laurie Glimcher, dean of the Weill Cornell Medical College. “We need more role models of women who are at the highest echelons of leadership as concrete examples for these girls and women.”

This problem extends beyond just entering the world of tech. The Kaufmann foundation released a study of 350 female CEOs, presidents, chief technology officers, and leading technologists of tech startups founded between 2002 and 2012, in which it was found that a lack of available mentors was one of their top challenges in achieving success and reaching leadership positions. Without women to look to at the top, many women in STEM fields get discouraged and leave the workforce.

Difficulty Accessing Funds

The most serious and direct cause for the lack of female-led tech startups is the difficulty they face when accessing capital. Reports indicate that female entrepreneurs raise significantly less external capital than men and are more likely to use personal funds to finance their ventures. The low rate at which women are able to obtain outside funding stands as the single most cited challenge among female entrepreneurs, with over 72% of respondents in the Kauffman study listing access to capital as a critical challenge and almost 80% using personal savings as their top funding source.

It’s not that women aren’t pitching to investors – they are. The issue is that in the absence of blatant sexism, many studies illustrate that a subconscious bias against women in business exists among both sexes. According to a 2014 MIT study, angel investors and venture capitalists were found to repeatedly favor a business pitch by an attractive man more highly than the same exact pitch presented by women of varying attractiveness. This implicit bias translates directly into less available funds for female entrepreneurs; of the 6,517 companies that received venture funding from 2011 to 2013, only 2.7% had women CEOs.

Procuring traditional loans has also proven more difficult for women than men. The U.S. Senate Committee on Small Business and Entrepreneurship found that female entrepreneurs received fewer loans and were given less favorable terms than men.

This lack of confidence in investing in female entrepreneurs is puzzling since research shows that they are rated by their peers and bosses as better leaders at every level than their male counterparts. Although one angel investor infamously told Kathryn Tucker the (now very successful) entrepreneur behind RedRover that he wasn’t offering her funds because “[women] haven’t mastered linear thinking”, studies indicate women score higher in 12 of the 16 competencies considered necessary for outstanding leadership. Two of the traits in which women scored much higher than men— taking initiative and driving for results — were once identified as masculine attributes.

The Winds of Change

Though the current state is not ideal, there are encouraging signs that suggest a shift. Thanks to emerging studies that show successful female-owned startups are bringing in 12% more revenue and becoming profitable more quickly than similar businesses started by males, venture capitalists and investors are more open to invest in them.

Furthermore, women are turning to alternative lending and crowdfunding platforms as creative and lucrative sources of capital. Women-led projects on Kickstarter have attained a 65% funding rate compared to men’s 35% and are nine times more likely to receive funding on from banks on private equity platform CircleUp.

In addition, an increasing number of tech firms are attempting to become more female friendly by making their gender composition transparent, spearheading initiatives to seek out qualified women, and creating more accommodating workplaces. Google increased paid maternity leave from 12 to 18 weeks last year and saw the number of new moms quitting the company drop by 50%.

Even the problem of the lack of mentors is being creatively addressed, with entrepreneurs such as Eileen Carey and Lauren Mosenthal of Glassbreakers matching women in the tech industry with peer mentors through their platform.

These cases suggest that investors and firms alike are catching on to necessity and advantages of opening up the tech industry to females. “I think it’s our fault — ‘our’ meaning the whole tech community,” says Tim Cook, CEO of Apple. “I think in general we haven’t done enough to reach out and show young women that it’s cool to do it and how much fun it can be… But it’s also not an unsolvable issue. It’s readily solvable. I’m convinced we’re going to move the dial.”