Undercapitalization as a Contributing Factor to Business Failure for Women Entrepreneurs
New Research Finds Previous Industry Experience – not Start-up – has Greater Impact on Firm Survival
WASHINGTON, Aug. 31, 2015 — The National Women’s Business Council (NWBC) has released new research on women’s access to capital and the factors involved in business survival.
This study found that undercapitalization continues to be a factor in firm survival, but also found other factors that result in firm survival that potentially debunk previous findings. Specifically, previous industry experience—not startup experience—is strongly connected to firm survival, along with team ownership. This study is the third in a series on women’s access to capital and the findings build on previous Council research that found women still lack access to necessary capital to launch, sustain and grow their businesses.
“We had a hunch that women who had extensive industry experience were better positioned to start businesses, and now we have definitive proof that that is the case. Investors value startup experience – which is something women entrepreneurs don’t always have – and this research confirms there are other indicators for firm success, suggesting that perhaps investors are overvaluing startup experience in their decision-making process,” said Amanda Brown, Executive Director of National Women’s Business Council.
The study also found that team ownership leads to higher likelihood of firm survival, specifically that at least two owners are involved in the day-to-day operations of the business. Additionally, high cost capital and poor credit history negatively impacts a firm’s longevity. Finally, women-owned and women-led businesses are more likely to be undercapitalized than their non-women-owned/led counterparts. The study found that at start-up, women-owned and women-led firms are more likely to face liquidity constraints, which has long-term implications. As the Executive Summary states, “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.”
However, over the seven year duration of the study it was found that the number of women-owned and women-led companies that were undercapitalized decreased.
Survival rates for women-owned and women-led enterprises is still lower than for business overall. The survival rate in 2011 was 45 percent while for businesses overall the survival rate was 55 percent. This is consistent with prior NWBC research showing that the lower survival rates for women-owned firms is tied to access to capital challenges, as opposed to directly related to female ownership.
“This research confirms much of what we already knew about the impact of undercapitalization, but gives us much more context to give substantive direction to investors and women business owners,” said Amanda Brown, Executive Director of the National Women’s Business Council. “Specifically, women should consider teaming with partners that will complement their skills and gain them access to key resources, such as networks, expertise and capital, which they would otherwise not have. And when it comes to capital, the current climate – in which women are too often dependent on high cost capital, like credit cards —prevents women business owners from founding their firms on solid ground. This in turn decreases the likelihood of survival, let alone scaling their firms, precluding economic growth and job creation. It behooves us to support women entrepreneurs in expanding access to cheaper types of capital, such as bank loans.”
The full study and an executive summary can be found here: www.nwbc.gov/research/undercapitalization-contributing-factor-business-failure-women-entrepreneurs
ABOUT THE NWBC: The National Women’s Business Council (NWBC) is a non-partisan federal advisory council created to serve as an independent source of advice and counsel to the President, Congress, and the U.S. Small Business Administration on economic issues of importance to women business owners. Visit www.nwbc.gov for more information.