Undercapitalization as a Contributing Factor to Business Failure for Women Entrepreneurs
Premier Quantitative Consulting, Inc. for the National Women’s Business Council
First published January 2016
One of the Council’s key areas of research is on women’s access to capital, a continual challenge for women entrepreneurs. Two of the NWBC’s FY2013 research projects demonstrate that accessing sufficient capital is a problem even for high-growth women-owned businesses. We have learned that women-owned firms face unique challenges because there are significant differences in undercapitalization that exist between men-owned and women-owned firms. First, Robb and Coleman concluded that startup capital is a key indicator of business success. This research confirmed that women start their business with nearly half the amount of capital as men, and further that women entrepreneurs raise substantially less equity and debt throughout the business lifecycle. In a second study, conducted by PQC Consulting, Inc, we learned, that all else equal, undercapitalization negatively impacts business survival.
Undercapitalization limits enterprise growth by constraining business investments in key assets such as equipment, employees, or inventory necessary for growth; the business does not have the funds it needs to meet market demands. Since startup and expansion capital is critical for firm growth and success, one factor that will improve women-owned firm performance is to reduce the number of women-owned firms that experience undercapitalization. As the number of women-owned and women-led firms continues to grow in the United States, it is essential that the NWBC explore business failure as a result of undercapitalization as it likely costs the economy billions in receipts. For example, Babson College concluded the lack of sufficient capital funding for women entrepreneurs will cost the economy nearly six million jobs over the next five years. Thus addressing the access to capital gender gap has significant implications for the economy as a whole.
We commissioned this study in an effort to develop a more nuanced understanding of the impact that undercapitalization and capital structure have on the business outcomes of women-owned firms.
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