Entrepreneurs in a Village Capital accelerator program in Africa.
Only 11% of seed funding in emerging markets goes to companies with a woman on the founding team. But if you assumed participation in a startup accelerator improves that record, you’d be wrong. Women founders in emerging markets startup accelerators also garner a lot less equity financing than their male counterparts, according to new research. In fact, participation in such programs actually seems to exacerbate the trend.
With that research in mind, the International Finance Corp (IFC), a member of the World Bank Group, recently announced a new program aimed at changing that outcome. Called ScaleX, it will offer incentives to emerging markets accelerators that successfully help female entrepreneurs raise equity funding.
“We hoped the funding gap would be reduced in accelerators, but we learned that doesn’t happen,” says Shruti Chandrasekhar, head of private equity and venture capital gender initiatives at IFC. “So we thought about what we could do to encourage accelerators to focus on how women entrepreneurs can get better access to investors.”
Equity Vs. Debt
The research, described in a report called Venture Capital and the Gender Financing Gap: The Role of Accelerators, studied a data set of more than 2,000 companies over a five-year period, supported by the Global Accelerator Learning Initiative. The report was produced by Women Entrepreneurs Finance Initiative (We-Fi), Village Capital and the World Bank Group Gender Innovation Lab, together with IFC.
The main findings: Taking part in an accelerator actually widens the gap in equity financing. Male-led startups, on average, increase the amount of equity raised post-acceleration 2.6 times as much as female-led startups. That’s despite the fact women lead half the startups in accelerators.
On the positive side, being in an accelerator helps women raise debt. Specifically, male-led startups boost the amount of debt they raise, regardless of whether they participate in an accelerator program. But female-led startups in a program increase the amount of debt they raise by nearly 2.5 times as much as female-led startups that did not participate in a program.
Why? Researchers identified no particular difference in such characteristics as education level of founders, geography or industry sector. As a result, they surmise the reason lies more in investors’ bias and perception of risk. That is, because they perceive female founders to be riskier bets than male entrepreneurs, investors are less likely to provide equity than debt. “Equity investors rely heavily on their perception of the team and its ability to realize a liquidity event,” says Heather Matranga, senior director of strategic innovation at Village Capital. In other words, investors have more confidence in male-led founding teams than female-led counterparts.
Incentives for Accelerators
To address this gap, IFC, in partnership with We-Fi, decided the best first step was to motivate accelerators to work more closely with female founders on equity fundraising. Thus, ScaleX will provide performance-based payments of $25,000 for every woman entrepreneur who raises $1 million from investors in startup and seed funding.
The theory, of course, is that the money will encourage accelerators to spend more time helping female founders attract equity. IFC and We-Fi will launch a pilot with funding of $1 million in bonuses to support 40 women-led companies in raising $1 million of equity funding each. “We’re super-charging the intermediaries in the ecosystem,” says Chandrasekhar. Any accelerator in markets in which IFC operates—it’s in 190 or so countries—can participate in the program.
Eventually, the goal is to target later-stage investors. “We’re tackling accelerator bias first,” says William Sonneborn, IFC’s senior director for disruptive technologies and funds. “Then we’ll move up the capital spectrum.”