The Funding Conundrum for Women-Oriented Businesses

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A few months after the online retailer Etsy made its initial public offering in April 2015, Emily Liner decided to buy a few shares of its stock. A capital markets policy advisor for Third Way who invests as a hobby, Liner enjoyed browsing Etsy for handmade goods and had purchased a few items from the small businesses that populate the platform. She thought the company was innovative and was interested in supporting it. When she told a male investor friend that she had bought some shares, his response was that he didn’t even know what Etsy was and didn’t understand why she would want to invest in the platform.

So in response, she tweeted: “Sexism in investing: If I had a nickel every time I said I have shares in $ETSY and a dude responds, ‘I buy stock in things I actually use.’”

Regardless of the fact that the male colleague hadn’t been tracking a booming ten-year-old B-corporation (a company that is environmentally and socially conscious and is subjected to rigorous standards of accountability and transparency), Liner felt confident in her choice. Made up of 80 percent female shoppers and shop owners, the company, which was founded by Chad Dickerson and Robert Kalin (Dickerson is now CEO), reported $200 million in revenue by the end of 2014. “I think everyone likes the idea of buying stock in something that they have a personal attachment to,” Liner says. “I liked Etsy’s business model, I liked that they were a B-corporation, so I bought a couple shares of stock, nothing too crazy.” From time to time, Liner would talk to male colleagues in the financial industry about their personal investments, and she’d mention she’d invested in Etsy. “Most of the time, they hadn’t heard of it, which is fine. But then they would tell me, ‘I only invest in things that I’ve heard of.’ It’s a weird thing to say to someone: Obviously, I’ve heard of Etsy if I’m investing in it.”

Enter the problem of taste-based discrimination in investing, be it stock trading, venture capital, or crowdfunding. At the biggest funds in the US, women are only a single digit number — 9 percent — when it comes to senior investing positions. Women who work at financial firms but aren’t at the top rarely get to “touch the money,” meaning they earn less and can’t give voice to matters that might enhance corporate performance.

Stash, a financial services platform geared toward millennials, recently commissioned a survey that found that 76 percent of millennial women think that investing is confusing and another 60 percent find it un-relatable. Young women “equate a typical investor to an old, white man.” It’s certainly no secret that Wall Street is “a specific culture of men,” to borrow words from business psychologist Sharon Horowitz in Margo Epprecht’s 2013 essay for The Atlantic. But this same mentality also exists with small business loans, crowdfunding, and hobbyist trading.

Liner isn’t the only woman to have experienced this type of subversion when it comes to investing, especially when female-run or -oriented businesses receive funding. More than a few women have said that men frequently discount their stock picks as “boring” or respond that they don’t invest in things they don’t understand, like the beauty industry. In another example of this type of taste-based discrimination, stock trader Tracey Ryniec delved into the success of Ulta Beauty and Salons, Inc. on Stocktwits, a platform for stock traders to talk about their picks in real time. To date, Ulta Beauty and Salons, Inc. have shown relatively stable growth. Ryniec was proud of her choice and was posting about it on Stocktwits. Not long after her posts, several male traders started to barrage her about how “dumb” a beauty company would be to invest in, and proclaimed that Ulta probably “cooked its books,” implying that it didn’t deserve its success.

In Ryniec’s case, however, a male investor admitted to missing out on buying into Ulta: “$ULTA Wish I'd invested in it ages ago. I look at it as a male and I think, ‘how can so much money be spent on all this nonsense?’”

The skepticism of male investors about female-oriented brands points to a requirement to quantify future returns. From a businesswoman’s standpoint, how do you quantify a business that’s generally trend-driven, such as the beauty industry? But that’s exactly it — every industry is trend-driven, from the latest tech startup to gadgets, automobiles, real estate, and fast food. It’s hard to get male investors on board even when business is going well. It’s even harder to get capital when a business is brand new, and the product is something a man wouldn’t use even when there’s a proven market need.

“It was really, really, really hard to raise money for Thinx,” says Miki Agrawal, co-founder and CEO of Thinx, a company that develops reusable absorbent underwear for menstruating women. “We sold $65,000 worth of products on Kickstarter, another $20,000 on Indiegogo, we won a cash prize of $25,000, and then launched a crappy website and sold another $25,000. We had about $130,000 to put into the world to get the first units made and prove the concept.” She compiled these successes and took them to angel investors, who gave her another $450,000. “These were investors who believed in me and our team, not so much the idea, because they didn’t get it.” In an effort to have a man “get it,” Agrawal made a potential male investor who she was friends with wear a sanitary napkin in his boxers for a day to understand what that feels like for women. “I only have three female investors, and they’ve each contributed about $25,000 to Thinx,” says Agrawal.

But don’t let modest investments make you believe that women are more risk-averse: Michael Liersch, the head of behavioral finance at Merrill Lynch Wealth Management, writes on the company website that “When you control for factors such as age and lifestyle goals, the risk-taking profiles of men and women aren't all that different.” Which means, if men and women are more or less the same when it comes to gambling, that what’s really happening is that women are most likely being discouraged from their investment choices.

Furthermore, even when a female entrepreneur has proven herself and her business and is in the process of seeking loans or venture capital, it’s still a long road from gaining confidence from the opposite sex. Seeing eye-to-eye on long-term prospects, even when the data shows how viable an operation can be, is a struggle.

“Obviously, fashion is a business, and when I meet with banks, I focus on our margins, our profitability, supply chain, manufacturing capabilities, our cash flow, and the other metrics that make our company an industry leader,” says Leota founder and CEO Sarah Carson. Leota, which manufactures its clothing in New York City and ensures good working conditions for its seamstresses, has been lauded as one of the “fastest-growing, women-led” businesses in the United States by Inc., growing by 1,200 percent between 2012 and 2015.

“Women’s fashion is a funny business because if you’ve ever tried to spend all day working in women’s clothes, you can attest to the fact that you really need to choose between comfort and fashion, you never get both,” says Carson. “After spending years dressed to the nines while working 100-hour weeks on Wall Street, I saw a big opening in the market for comfortable, polished clothes.”

But many of the men she speaks with when she seeks bank loans and investments undermine her business during the conversation by veering away from the matter at hand. “For example, recently after I explained our whole business model to a banker in a meeting about switching banks, he leaned back in his chair and smirked and said, ‘Well, I’ll have to ask my wife about this, wink wink.’” The banker, she says, implied that his bank wouldn’t fund the business unless his wife liked her line. “For some reason, the fact that millions of women around the world wear Leota mattered less to him in proving the market for my product than a dinnertime conversation,” says Carson. “I wondered if he were speaking to a male CEO, would the personal taste of his family members enter into the analysis of whether to fund the business?”

In a recent study from Dan Marom and Orly Sade from the Jerusalem School of Business at the Hebrew University of Jerusalem and Alicia Robb from University of California, Berkeley titled “Gender Dynamics in Crowdfunding (Kickstarter): Evidence on Entrepreneurs, Investors, Deals, and Taste-Based Discrimination,” the researchers point out that Kickstarter projects started by women are — surprise! — usually financed by women as well. Women also ask for less money than their male counterparts, even though they’re typically more successful in completing Kickstarter campaigns. That sounds great and all, but men are more likely to ask for more money, and overall, are usually are granted those sums.

But what happens when a female entrepreneur needs more capital, resources, or guidance than what a crowdfunding platform would allow? The question to potential investors then becomes whether she is “fit to run” her business and whether their wives or daughters would be interested as well. It seems appropriately lucky, then, that Bloomsbury press chairman Nigel Newton and then father to an eight-year-old girl, Alice, let his daughter read J.K. Rowling’s Harry Potter and the Philosopher’s Stone before he decided to publish it, months after receiving it and only after she “nagged” him to do so. Clearly, there was a market for the book.

In light of this, some women, understandably, decide to go it alone. Jessica Honegger, the founder and CEO of Noonday Collection, says she follows her father’s motto when it comes to running her business: Revenue is vanity, profit is sanity, cash is king. It’s a motto that’s propelled her artisan-made, direct-sales jewelry company to almost double in profit in the last two years, from $11 million in revenue in 2014 to what she says will be almost $15 million in profit in 2016. It’s also now the fastest growing company in Austin, Texas.

“When I had made about $100,000 in sales after my first year, I had proved myself a little bit, but I was not really making bank,” says Honneger. She began to reach out to the business community to show that there was a demand, and that it could be a smart business. “I had to organize my finances and the backend, and then I reached out to one person who could have been an investor, but instead he became my partner.” Honneger notes that he didn't provide monetary capital, but did provide financial expertise while living off his savings for a time. “He had operational knowledge that I needed — the business wouldn't be the same without him.”

Ironically, the process of building Noonday Collection and sourcing handmade jewelry from other countries has led Honneger and her partner to become investors in the artisans they represent. “Historically, these people have been left out of trade and left out of the economy. By selling their goods, we’re able to help out these small workshops with their budgets and supply purchases to keep their businesses going.”

Honneger says Noonday Collection doesn’t have a huge plan other than trying to drive growth organically, which means that it’s hard to give equity. “It doesn’t make sense to take on demanding investors, because we just want to be able to manage our own growth and make our own decisions.”

For future female investors and entrepreneurs, they understand an education will allow them to call the shots: In the next year or so, women will become the majority within the college-educated workforce, where they will “increase productivity, improve decision-making, and heighten [a firm’s] performance,” according to a report by the current Council of Economic Advisers. Even though the brief acknowledges that female business graduates still field unfair stereotypes about their gender, the path may be opening for bright young minds to receive help from female mentors and female-centered business initiatives that wouldn’t have been started had it not been for record numbers of graduates.

"The way the market was created and functions, it caters to the very wealthy, and information, guidance, and access have been reserved for those who could ‘afford’ it,” says Nicole Rabe, the spokesperson for Stash. Basically, think of the most privileged class of people in the US and you have your answer as to who could afford it. “The barriers were put in place to be confusing and create a level of frustration so you would need help.”