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This chapter is from the book

Private Equity—The Last Big Hurdle

Angel Investing

Entrepreneurs with really big ideas tap equity investors (informal investors called angels) and professional venture capitalists to provide additional financial support.[18] Because angels are informal investors, it is often a mystery: Who has the money? Where are they? How do you make contact? Most entrepreneurs start by reaching out to lawyers, accountants, friends, and distant contacts to identify investors who might have an interest in the business technology and its potential returns. The process requires developing a business plan and revising it countless times. Some entrepreneurs make numerous presentations to investors. Getting money from venture investors is extremely hard work, but for some, there are great rewards.

Venture Capital

Venture capitalists are to growing businesses what producers are to Broadway shows. They make the big hits possible. A recent study showed that businesses started between 1970 and 2000 that were funded by venture capital contributed more than $1.3 trillion to the U.S. economy in 2000 (more than 13% of gross domestic product) and employed more than 7.6 million people.[19] Between 1991 and 2000, investments by venture capital firms in growth businesses totaled over $234 billion. More than 33% of the initial public offerings (IPOs) of stock[20] made in the United States during the same period were venture capital funded—as were a total of more than 3,000 companies that went public between 1975 and 2000.[21] Only a very small percentage of entrepreneurs receive venture capital each year, but the impact on their businesses is extraordinary.

You might expect that, in spite of the fact that the total number of men and women who received growth capital was small, qualified women would receive funds in proportion to their entrepreneurial activity. However, this is not the case. Throughout the decade of the 1990s, women received less than 5% of all venture capital money invested. Of 1,200 companies that received venture funding in 1996, only 30 (2.5%) were women-led enterprises. During the 10-year period from 1988 to 1998, 290 (3.5%) of the total of 8,298 venture capital investments were made in women-led businesses. Even in the boom years of 1999 and 2000, women-led businesses participated in approximately 8% of venture capital deals and received less than 6% of capital invested.[22] Because growth capital is so important to expansion and development of significant enterprises, this lack of large-scale funding that venture capital money represents is a serious handicap to womenled firms. It prevents them from expanding and growing, and it limits their ability to create wealth. What is the cause of this disparity?

This mismatch between the number of women-led firms seeking investment capital and their actual receipt of the money might represent rational economic decision making or it might represent a significant market failure. This book investigates both possibilities. Either way, the reasons for the funding gap are rooted in widely held beliefs about women and their qualifications for leadership of high-growth, high-value enterprises; the businesses women choose to start; and their ability to tap into resource networks—their reputations and connections with key resource providers.

Women might be perceived as less qualified to run high-growth businesses due to their education, experience, or expertise. They might be stereotyped as less able to make tough decisions, to bring a management team together, or to manage finances. Women's businesses might be viewed as less unique and scalable and, therefore, less likely to achieve high growth.

If the suppliers of money, contacts, information, or influence doubt the commitment or the capability of the venture team, they will not provide the needed resources. Subjective opinions and especially misperceptions can raise the bar for women, making it more difficult for them to build high-potential ventures.

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