16 March 2018

The equity funding gap is more worrying than unequal pay

By Sophie Jarvis

Let’s stop talking about the gender pay gap. The equity funding gap is the one we should be discussing.

There’s been significant press coverage recently around the equity funding gap between male and female entrepreneurs. But the funding gap shouldn’t get bundled together with the gender pay gap: it is far wider and unlike the gender pay gap, we can’t yet pinpoint what’s causing it.

The gender pay gap is often an issue of choice – work-life balance, familial duties and interests. The most significant factor is the choice to work part-time after having children which, as Kate Andrews’ research has shown, has set women back in the labour market. For women aged 22-39, the gender pay gap is negligible, and across all ages only 5 per cent is due to men negotiating higher salaries.

A recent report from The Entrepreneurs Network, Barclays and Beauhurst has revealed that the equity investment gap dwarfs the gender pay gap. Between 2016 and 2017 the total amount of equity funding raised by male founders increased by 55 per cent, while the amount raised by female founders decreased by 0.1 per cent. At the same time, female founders’ share of total capital decreased from 14.9 per cent of the total to 8.7 per cent.

While we don’t know the exact causes and weighting of the funding gap, a number of studies into the venture capital industry suggest unconscious biases behind the investment process. A study by Columbia University and the Wharton School showed that men and women are asked different questions when seeking funding. When quizzed about projections, men are asked questions like: “What major milestones are you targeting for this year?” In contrast, women are asked questions such as: “How predictable are your future cash flows?”

A University of California and Harvard University study supports these findings. During a series of randomised controlled trials it was revealed that a female name, picture, or voice cut the odds of receiving investment. Michael Gazzaniga estimates that 98 per cent of brain activity occurs in our unconscious – so those making the investment decisions don’t need to be openly or actively misogynistic to create the significant gap.

Venture capital firms remain dominated by men. A recent report by Diversity VC highlights that only 13 per cent of investors are women, yet female investors are three times more likely to invest in companies with a female founder. Thus we need to encourage women into the venture capital industry, which should engage with the medical and legal industry to get advice on how to close the gap: in the UK 57 per cent of doctors are female and 27 per cent of partners at law firms are female – still low, but with over 50 per cent of law graduates now female this is expected to rise.

But as with the gender pay gap, we need to be careful to identify between choice and those differences we don’t need to solve. Women are on average more likely to set up so-called “lifestyle businesses,” and men are more likely to build high-growth tech companies, which tend to scale quickly and therefore require an injection of cash. Just five per cent of female early-stage activity is in the technology sector, compared with 12 per cent for men, according to a report by the European Commission.

Female representation in the tech sector is heavily influenced by low take-up and then the high drop-off rates of women taking STEM subjects at university. There might be a role for Government in collecting data on when the change happens and looking at our schools to see whether they’re unwittingly deterring girls with an appetite for and talent in these subjects.

The gender pay gap is largely explained by choices. The equity funding gap, however, still has a lot of unanswered questions. The Government has launched a review into the funding gap with the support of the British Business Bank, asking entrepreneurs to submit evidence. Before we consider intervening too closely, we need to know its underlying causes. The gender pay gap isn’t the injustice we all know and worry about – the equity funding gap may turn out to be of greater concern.

Sophie Jarvis is Programmes Director at The Entrepreneurs Network