To Fuel the Post-Pandemic Economy, Bet on Women Startups
By Julie Norwell
It’s well known that the Covid-19 pandemic pitched working women under a bus. Industries favored by women saw heavy job losses. Women also shouldered a disproportionate burden of caring for children and elders when the world shut down. Whether women’s careers would ever recover was anyone’s guess.
Now, in a surprising turn of events, women appear to be the drivers of the U.S. labor market’s post-pandemic recovery. “Women now outpace men in the return to the labor force,” reads the title of a compelling graph in the Washington Post, illustrating the phenomenal comeback of women workers since 2020.
According to government data, labor force participation rates for women between the prime working ages of 25 and 54 have recovered their pre-pandemic level of 76.9%. Women with college degrees and younger children, in particular, have been returning to the work force. In fact, women now represent a majority of the college-educated labor force in the U.S., according to Pew Research. Men of prime working age, by contrast, have not yet recovered the participation rates they enjoyed in January 2020.
Vaccines and widespread school openings in the fall of 2021 fueled the trend. They gave women confidence that they could rededicate time to work without frequent disruptions. But that’s not all. Expanded opportunities to work remotely and flexibly ushered in by the pandemic have been a game changer. Add in historically low unemployment, and it’s clear that women have had great incentives to dive back into work.
This is excellent news to kick off March, a month dedicated to studying the contributions of women to history and the unique challenges they face in work. To be sure, there is much more to do to correct longstanding inequities facing women in the work force. But the time to do it is ripe.
Evidence abounds showing that increased participation by women in work, especially in leadership roles, can unlock great benefits to employers, fellow workers, and the economy. But the potential of women remains woefully untapped. One arena, in particular, promises an outsize impact: startups.
In the post-pandemic economy, with the threat of recession still looming, it’s time to bet on women entrepreneurs.
Untapped Potential of Women Entrepreneurs
When it comes to taking risks, the best bets are women. That’s what U.S.-based First Round Capital found. First Round Capital is a venture capital (VC) firm specializing in seed-stage funding to technology companies. After ten years of investing, it found that “companies with a female founder performed 63% better” than investments in all-male founding teams.
Boston Consulting Group (BCG) cites even better returns in its research. According to BCG, women-owned businesses deliver more than twice as much per dollar invested in men’s businesses.
Ironically, however, women new-business owners receive significantly less funding than men when they pitch their ideas to investors for early-stage capital. That’s a problem – not just for women but for investors. In addition to delivering higher revenue, women-led businesses are more likely to be successful. (BCG theorizes that higher barriers to entry force women to create better and stronger business plans and to develop adaptability and resilience – two valuable characteristics for entrepreneurs.)
It’s also a problem for society. Some argue that women-led businesses are better, in general, because they tend to focus on “filling a societal need” and provide an increasing number of jobs over time. They also cultivate work cultures “that empower employees” and encourage career development.
Perhaps the most compelling reason is BCG’s analysis showing that “if women and men participated equally as entrepreneurs, global GDP could rise by approximately 3% to 6%, boosting the global economy by $2.5 trillion to $5 trillion.” Talk about a win-win!
Women Are Driving an Entrepreneurship Boom
The reason why the time is ripe to highlight the potential of women entrepreneurs is that the pandemic has created an American entrepreneurship boom. Americans filed 5.1 million new business applications in 2022. That figure is the second highest on record – second only to 2021 when 5.4 million businesses were created.
And guess who is driving that trend?
The spike is driven by women and entrepreneurs of color, according to HR-management firm, Gusto. “In 2021, 49% of new business owners were women, up from 29% before the pandemic,” writes Gusto economist, Luke Purdue. “The share of entrepreneurs who identify as Black or African American has increased from 3% in 2019 to 9% in 2021.”
This information is even more interesting when you consider that venture capital (VC) fundraising has also surged in recent years. The pandemic precipitated record-breaking capital raised.
Incredibly, despite this tsunami of available funding, female-founded teams garnered a meager 2% of total capital invested in U.S. venture-backed startups in 2022. (Female founders in Europe fared even worse at 0.9%.) And that figure was the lowest since 2016! In short, female founders got an even smaller share of a larger pie.
Companies with mixed-gender teams did better, capturing 16.5% of total capital invested. But at every investment stage, male-only companies commanded 80% or more of venture capital funding.
Such paltry numbers prove a short-sighted reality: Venture capitalists are blind to the value that women entrepreneurs bring. Why?
Diversity Needed in VC Leadership
It seems that VCs today think that investing in women is risky, especially during times of economic uncertainty. It’s a mindset that needs changing. Not only is it wrong, but it also makes for poor investments. So, how to change it?
An effective catalyst would be to put more women in decision-making roles as investors. The number of female check-writers has increased since 2019, but women still hold only 15.4% of general partner positions at venture capital firms. Just as diversification is the rule of thumb in sage investing, so is diversity good practice in leadership. Diversity in leadership increases diversity in investments.
“When you don’t have diversity in [VC] leadership, it’s a real risk area. You’re not getting a huge portion of the quality deals that are out there,” said Julie Castro Abrams to Forbes. Abrams is managing partner at How Women Invest, a venture capital fund that focuses on supporting women-led companies.
Waverly Deutsch, clinical professor of entrepreneurship at the University of Chicago, observes that VCs invest in people who look like themselves. Investors with diverse backgrounds, therefore, see value where others may not. Deutsch points to studies at Harvard showing that “VCs that increase their proportion of female-partner hires by 10% saw, on average, a 1.5% improvement in annual fund returns and a nearly 10% increase in profitable exits.”
Kauffman Fellows Research Center, an incubator for future venture capitalists, which cites similar findings, explains, “We believe the reasons for this increased investment may include women having personal experiences that male investors would not, which in turn helps them identify overlooked problems and understand their market size.”
And diversity begets diversity. Kauffman Fellows found that female VCs invest in up to twice as many female-founded startups. They also found that U.S. startups with at least one female founder go on to hire 2.5 times more women than startups with all-male founders.
It’s Time to Bet on Women
Women entrepreneurs have been historically overlooked, but that must change. One BCG article boldly concludes, “[W] omen’s entrepreneurship has the power to change the world – and the benefits go far beyond boosting global GDP. Closing the gender gap in entrepreneurship and fueling the growth of women-owned enterprises will unleash new ideas, services, and products into our markets. And ultimately, those forces may redefine the future.
When data show that women-led companies are more successful than male-led companies and yield higher returns. When they show that female venture capitalists are dramatically increasing the chance that women-led startups get necessary funding to take a shot at building successful companies. And when they show that women are more likely to support women at every step. It’s clear that there is an opportunity for the taking for both women and men. It’s time to bet on women.