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Financing Your Business
by Victoria Colligan and Beth Schoenfeldt

It is vitally important for women to be educated about all their choices when embarking on a business enterprise, and there is room for women in general to be better educated about finance.

There has been a lot of research lately that implies that women have little access to capital, meaning that they have been excluded from the so-called old boy's network and the millions and billions of dollars that go toward funding male-owned businesses. This lack of access is touted as the reason that while there are close to 11 million women-owned businesses in the United States today, only a fraction have revenues of $1 million or more according to the Center for Women's Business Research, only 6.6 percent of the U.S. Businesses with more than $1 million in annual sales are owned by women. The 2004 report from the Ewing Marion Kauffman Foundation States that less than 5 percent of venture capital investments have historically gone to women. We wonder if it is because women have been excluded from the traditional networks and have less access to capital, or if there are other forces at work. These questions come to mind: first, why are women expanding their businesses at slower rates than men? Second, why is the media and society so quick to assume that this is a problem? And third, if given the choice, would women do things differently? Could it be that the high-growth, quick-exit strategies that are prerequisite of traditional venture capitalists just don't work for women, causing them to turn away from these opportunities rather than embrace them? Could it be that women want their businesses to grow more slowly, with steady increases and long-term growth, because that's what fits into their lifestyle? Before we explore answers to these questions, let's take a look at how venture capital works.

Traditionally, if you are not going to self-finance or borrow from a bank, there have been two kinds of investments that businesses have used to get started and take them to the next level: seed or "angel" money and venture capital. Typically, seed money is used as start-up funding. It is a small amount invested by individuals or groups of individuals who are also referred to as "angels." These people are usually friends, acquaintances, or people who simply think you've got a damn good idea and want to be part of the action from the get-go. Venture capital is comprised of larger funds, typically invested using a more formal financing structure and designed to take a promising business to the next level. Venture capitalists usually become interested in a company once it is somewhat established, has prove its ability to produce revenue, operates effectively, and shows a platform for substantial growth. Venture capitalists invest money in exchange for a percentage of shares in the company and are mainly interested in high-growth companies that will ultimately give investors a high return on their money in a relatively short time frame (five years or less) by selling the company or taking it public. You're doing something right if a venture capitalist is checkin' you out! But venture capitalists will require some sort of exit strategy so that they can get their money out. This may not bode will for you if your business is what fulfills you deeply and gives you purpose at your core. You would be giving up a part of yourself!

The conflict is pretty obvious. Venture capitalists want a return on their money (translation, you sell your company and bring in millions for both you the VCs), and many women don't have a plan to ever sell their company (bad news for VCs)! Many women may plan to run their business until it no longer provides financial or emotional benefits and then wind it down in due time. Women are less likely to sell because women are emotionally attached to their businesses and don't necessarily start them in order to turn them over for a sum. They treat their businesses like their offspring. The very idea of selling their businesses or "getting out" is against their nature. While selling can be a good option for some women, and there are plenty of scenarios where women are interested in selling, conditions have to be optimal. More than the financials have to line up for a woman to say yes to selling.

When a woman pours her passion into something she loves and is very fulfilled doing, she has to think long and hard about what her next endeavor might be (and if she wants another one right away) before she can even consider selling. For example: imagine you had a home that you loved and adored and had spent months decorating. It has a perfect view, great neighbors, the antique claw-foot tub you always wanted, state-of-the-art appliances, a wraparound porch with an ideal view, and elegant fixtures. All custom-made to your specifications. Imagine someone coming along who really wanted to buy it. It's going to take a whole lot more to get you to sell it than it would if you hated the place or needed to move. For women, business are like homes they've spent a lot of time, energy, and love decorating; why sell?

So, how are women starting their businesses if it is not through the traditional models of venture capital? Many women are self-financing, borrowing from friends and family and growing organically. women instinctively bootstrap when starting a new venture. Bootstrapping is a means of financing a small firm without raising equity from traditional sources or borrowing money from a bank. It is doing as much as possible with as little as possible, kind of like turning a really pretty scarf into a skirt, or making dinner with only what you've got on hand. Bootstrapping relies heavily on the entrepreneurs's personal fund and equity These could include credit cards, second mortgages, personally guaranteed loans, family sources, and customer advances. Bootstrapping reduces the need for expensive external capital and limits downside risk while maintaining upside potential. While bootstrapping positions an entrepreneurial firm to seed outside equity after having proven the viability and potential of the business, the downside is that it may slow down business growth, lead to a loss of opportunity, or even put you at personal financial risk.

An excerpt from Ladies Who Launch by Victoria Colligan and Beth Schoenfeldt.

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