New KfW study on female entrepreneurship: Women are underrepresented in new business ventures

• Mobilising female entrepreneurs is a societal task and an economic opportunity
• Many barriers to female entrepreneurship culturally and socially rooted
• Venture capital market exhibits an entrenched gender funding gap

Lively entrepreneurial activity makes an economy fit for the future by strengthening its ability to adapt and compete. In Germany, however, entrepreneurial activity has slackened in the past 20 years. In order for it to regain higher momentum, women play an important role, as they are today structurally underrepresented in new business creation. Over the long-term average, they represent only 39% of new business founders and indeed only 19% of innovative, growth-oriented start-ups. KfW Research has completed a new in-depth study of the challenges facing female entrepreneurship in Germany. It shows that major barriers to female entrepreneurship are culturally and socially ingrained. Funding also plays a major role, however. Many business plans of both women and men remain unrealised for lack of funding. But female entrepreneurs, in particular, have significantly more difficulty accessing venture capital (VC) than their male counterparts. On average, female-headed innovative, growth-oriented start-ups are less likely to obtain VC, and the amounts they can secure are lower.

In Germany, 83% of VC deals is concluded with all-male founding teams, 11% with mixed-gender teams and only 5% with all-female teams. In the past five years, hardly anything changed in this distribution. With regard to deal volume, the gender gap has even widened. Out of each euro of VC invested in Germany in 2021, 91 cents went to all-male founding teams, 7 cents to mixed-gender teams and only 2 cents to start-ups headed only by women.

“It’s an inconvenient truth, but there is a pronounced gender funding gap in the German VC market. In what continues to be a male-dominated VC ecosystem, unconscious bias and established networks significantly hamper VC finance for female entrepreneurs. As a result, the incentives to start a business in the first place are lower for women”, concluded Dr Fritzi Köhler-Geib, Chief Economist of KfW. She added that investment funds will play a crucial role in increasing gender diversity in the VC industry, and that their investment teams need more gender diversity so that this will also translate into the portfolios. “Funds could actively address distortions from unconscious bias that influence financing decisions by shaping the investment process. Support and networking programmes also constitute important starting points. But the silver lining for female start-up entrepreneurs is that we are a step ahead in solving the problem. The start-up strategy of the German Federal Government published in July 2022 recently initiated measures aimed at improving their situation. This includes, for example, a new instrument of the Future Fund that supports management teams of VC funds who are new to the market and thus aims to make it easier for female investors to enter the market.”

If we look more broadly at all businesses founded in Germany in the past ten years, we see that female business founders are less likely to use capital than males (61% vs. 68%). Women who did employ capital on average used a good EUR 13,000, which was only half the EUR 26,000 employed by their male counterparts. The reasons for this are structural. Women are more likely to start part-time businesses, less likely to be in a team or have employees, more often in services and less likely to be interested in growth. These characteristics are all associated with a lower use of capital. In other words, the determining factor is not gender but the type of entrepreneurship selected. This also applies to access to borrowed funds. After adjusting the data for distorting features, there is no difference in credit access for female and male entrepreneurs. If abandoned start-up plans are included, however, it becomes apparent that the topic of finance definitely poses a more formidable barrier for women in the start-up process than for men. Factors that play a role here are mainly lack of own resources and a lower propensity of female entrepreneurs to apply for loans.

“Soft factors in particular, such as cultural conditions, influence entrepreneurial activity of men and women in different ways. The higher barriers for women can be removed only in a process of societal change that must take place in many areas such as upbringing, education and domestic division of labour and therefore requires patience and perseverance”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “From an economic viewpoint it makes sense to take a broader approach than just promote female entrepreneurship. As women are more likely to start businesses on a part-time basis and as sole traders and less likely with a view to technology and growth, female-headed businesses also have less significance for the economy as a whole. We therefore need to create more diversity in the types of new businesses founded. There appear to be four priorities for action to achieve this: First, increasing women’s entrepreneurial appetite. That means a cultural transformation must take place already during upbringing and in education. Second, encouraging female entrepreneurs to seek growth more often. Third, increasing female entrepreneurs’ technology and innovation focus. Here as well, we must address educational pathways and attract more young women to STEM subjects. In addition, successful female entrepreneur role models must be made more visible. Fourth and finally, female founders’ access to VC must be improved.”

The current study by KfW Research can be retrieved from
www.kfw.de/Über-die-KfW/KfW-Research/Female-Entrepreneurship

The dataset:
The study provides new findings on entrepreneurial activity of women in Germany on the basis of the KfW Entrepreneurship Monitor. The KfW Entrepreneurship Monitor is a representative telephone survey of the population. With some 50,000 persons surveyed annually, it is the largest population survey of entrepreneurial activity in Germany.
New analyses of the use of venture capital by founding teams were carried out for the study on the basis of transaction data from the provider Dealroom.co. This enabled an investigation of the role of women all across the VC ecosystem in Germany on the side of both start-ups and investors. Dealroom.co is a leading provider of transaction data in the private equity market.