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OVERCOMING THE GENDER GAP: WOMEN ENTREPRENEURS AS ECONOMIC DRIVERS Lesa Mitchell Ewing Marion Kauffman Foundation September 2011 OVERCOMING THE GENDER GAP: WOMEN ENTREPRENEURS AS ECONOMIC DRIVERS Lesa Mitchell Ewing Marion Kauffman Foundation September 2011 © 2011 by the Ewing Marion Kauffman Foundation. All rights reserved. 1 OVERCOMING THE GENDER GAP: WOMEN ENTREPRENEURS AS ECONOMIC DRIVERS This paper explores the intersection of two issues that often are thought of separately: the need for sustained economic recovery in the United States, and the status of women’s entrepreneurship. Despite recent gains, women still lag behind men on key measures of startup activity, and their firms tend not to grow or prosper nearly as much. Typically, this is seen as a ―women’s‖ issue. It is framed as a problem to be dealt with for the benefit of women, in the interest of gender equality. In fact, it is an economic issue that affects everyone. Research has shown that startups, especially high-growth startups, are the keys to job creation and leadership in new industries. With nearly half of the workforce and more than half of our college students now being women, their lag in building high-growth firms has become a major economic deficit. The nation has fewer jobs—and less strength in emerging industries—than it could if women’s entrepreneurship were on par with men’s. Women capable of starting growth companies may well be our greatest under-utilized economic resource. And what would it take to develop the resource more fully? We at the Kauffman Foundation hope this paper will help to stimulate new thinking on the subject. The following themes run throughout: - While every entrepreneur, big or small, helps the economy, the emphasis here is on those who start high-growth companies, which help the most. - More women’s startups need to be aimed at growth targets far above the oftcited benchmark of $1 million in revenues. There is a particular need for innovative, transformative new firms that can grow to serve global markets. - Many (though not all) high-growth firms are built around new science and technology. With more women than ever entering these fields, the upside potential for women’s tech startups is huge. - What it takes to succeed in business is not necessarily the same as what it takes to succeed in starting a business. While women have made great strides in breaking through the proverbial ―glass ceiling‖ to advance to high rank within corporations, few have made similar strides in breaking out laterally—through what might be called the ―glass walls‖—to start their own high-growth firms. - ―What it will take‖ to have more high-impact women entrepreneurs includes all of the following: what women themselves might need to do, what men might do, and what might be done collectively in the way of public policies or private initiatives. - Finally, to reiterate the main point: It is essential to see women’s entrepreneurship as an economic issue, not a gender-equity issue. When new companies and industries flourish, everyone benefits. And the returns will increase when more women contribute to the process by bringing their ideas to market and building high-growth firms around them. 2 What follows is in five sections. We start with a closer look at a topic that may seem obvious: the role of jobs in a healthy economy. Next, we consider the new research that reveals why startup companies are central to job creation. From that basis, we then move directly into women’s entrepreneurship—documenting the current gender gap, debunking some common myths and misconceptions, and exploring what can be done to cultivate high-growth startups among women. WHY JOBS MATTER Job creation is only one measure of economic vitality, but it is crucial for several reasons. Jobs provide a living for people, and when there are not enough of them, as in recent years, the society and economy take multiple hits. The unemployed suffer. Demand for social-welfare payments goes up, putting an added strain on public budgets, while demand for goods and services in the marketplace goes down, putting a damper on growth. Conversely, when jobs are being created at a strong rate, these dynamics are reversed and we get an upward spiral. Also, since most job holders do useful work, job creation is tied to wealth creation—for the simple reason that when more people are put to work, more work gets done. This point requires a bit of explaining, as an exception comes to mind right away. Certainly it is possible for a given company to get more work done without adding jobs, or even while eliminating jobs. That is called raising productivity, and we as a society are constantly coming up with ways to raise productivity. For instance, this paper you are reading did not need to be clean-typed by a professional typist. The huge ―typing pools‖ once found in big companies now are gone because of personal computing. Nor is new technology the only source of productivity gain. Factories’ modern continuous-improvement methods may sometimes require automated equipment, but mostly they are grounded in re-thinking how to handle the flow of work, so as to cut down on wasted effort and mistakes. They’ve enabled many firms to produce more with fewer workers and supervisors. Older, larger firms in particular can raise both their earnings and their output while cutting jobs. One way is by trimming layers of bureaucracy that have accrued over the years. Some big companies grow by acquiring other companies, and they may seek economies of scale by consolidating the engineering or administrative staffs. Or, a big firm may exit a struggling line of business—an example would be an auto company dropping a brand or model that doesn’t sell strongly—in which case some of the division’s employees (but usually not all) are shifted into building up the company’s healthier lines. Job-reducing steps like these are common and necessary. Businesses that do not keep pace with rising productivity are liable to destroy jobs anyway by falling behind the field in cost and performance. But for a nation as a whole, the key is net job creation. The economy has to create more new jobs, overall, than it loses. Net job creation keeps the upward spiral going. People displaced by productivity gains can easily find work elsewhere. They are able to support themselves and contribute in new ways. (In fact, if they do innovative work, they might contribute ideas that raise 3 productivity even further!) Thus, the nation’s wealth increases, as it did in the United States during the 1800s. Over the course of that century, productivity gains in agriculture ―freed‖ millions of Americans from farm work. Most of them went on to prosper because emerging industries created millions more new jobs. Those leaving the farms included people like young Henry Ford, who was able to find work as a machinist—and then used that experience to start a company that triggered a new wave of rising productivity and prosperity in the early 1900s. Without net new jobs, however, the process is short-circuited. The painful results are most evident today in some European countries and in developing countries where an initial burst of technical-industrial growth has stagnated. In these situations, high unemployment has become so chronic that even many graduates of universities and technical schools cannot get a foothold in the workplace. The chance for these young people to develop their skills and contribute their ideas is deferred and, in many cases, lost. For every jobless graduate, the country gets no economic return on its investment in education. The downward spiral takes hold. In short, net job creation is essential. And, until recently, how it occurs has not been well understood. WHY STARTUPS MATTER America in modern times has generally enjoyed stronger job growth—prior to the recent recession—than have other advanced nations. Yet, confusion sets in when we try to pinpoint the source of this vitality, partly because we have tended to focus on ―where the jobs are‖ instead of how (and when) they are created and lost. Despite being few in number, large publicly traded firms employ the most people. These firms include major manufacturers, the established energy and IT companies, big financial firms and chain retailers, and more. Altogether, the so-called ―big business‖ sector employs slightly more than half of the U.S. workforce. Over the years, this has led to economic policies and job strategies built around big firms, along with backlash urging that ―small business‖ be given due attention as well. In fact, both views miss the dynamics of job creation. Not only are jobs always being created and destroyed nationwide, but any given firm, over its lifespan, can be both a net creator of jobs (when it starts or grows) and a net eliminator (when it restructures, loses business, or goes out of business). Recent economic studies funded by the Kauffman Foundation have shed light on these dynamics.i Using new datasets from the U.S. Census Bureau, researchers were able to track job creation vs. job loss across the economy, by firm age rather than firm size. The findings are remarkable. They show that, during most years, virtually all net new jobs in the United States are created by companies in their first five years of existence—or, according to the latest study, by startups in their very first year. It actually is not hard to see why this should be so. Since all startups are brand-new companies, all jobs they add are a net gain. (The average total was around 3 million jobs per year from 1992–2006.) Firms in their later years do plenty of hiring too, but as we 4 have seen, they also do plenty of cutting. The result, writes economist Tim Kane, is that, ―On balance, existing firms lose more jobs than they create.‖ Kane, the author of a 2010 Kauffman paper on the subject, then combed through the data to make another crucial point. Some of the job loss in existing firms is due to ―Deaths,‖ i.e., firms closing down. This ―Death‖ toll is especially high for younger firms, as many startups close within a few years of founding. Therefore, it is important that a fair number of the ―Survivor‖ startups keep on growing to help offset the losses—and, as Kane notes, ―Among Survivors, so-called gazelle firms [the kind that grow quickly to large size] are certainly more important still.‖ The statistical studies by Kane and others confirm what many of us already have observed. Countries and regions that rely on existing, mature industries eventually go into economic decline, with chronic net job loss. In some places, startups help to keep the economy afloat. And the countries and regions that truly thrive have more than high startup rates: They keep turning out gazelles, which grow to become the next large-scale employers as older companies level out or fade away. This was the formula behind America’s information-technology boom in the last half of the twentieth century. Not only did the country produce many more startups per capita than Europe or Japan did, it consistently produced startups that grew to flagship status: the now-defunct Digital Equipment Corp. in the 1950s, Intel and AMD in the 1960s, Microsoft, Apple and Oracle in the ’70s, Cisco Systems and Dell in the ’80s, and Amazon and Google in the ’90s, for example. In addition to such new giants, many other IT startups grew to be sizable niche firms, employing hundreds to thousands of people each and turning out needed items like specialty software and electronics. 5 Although some older companies, including IBM and Hewlett-Packard, played central parts in the emerging IT industries, no one imagines that these industries could have taken off as profusely as they did just from the existing corporate base. The ongoing series of new growth companies provided the highly adaptive economic infrastructure required. The question we now face is how to re-kindle economic expansion and job creation. With the rise of China, India, and other countries, innovation is becoming more globalized than ever. It is hard to predict what the next big emerging industries will be, but in order to have a significant share (let alone the lead) in any of them, each country, including ours, may have to do a better-than-ever job of mustering its capabilities for high-growth entrepreneurship. This is where women can help immensely. The infographic on the following page compiles data from several recent studies that illustrate the entrepreneurship gender gap.ii 6 The Entrepreneurship Gender Gap Room for Improvement Numerous statistical studies in the United States tell the same story: There is room for improvement in women’s entrepreneurship, with vastly more room as one goes up the scale into building growth companies. Here is quick summary of some major recent findings: WOMEN 0.24% MEN Entrepreneurial activity, by gender, as percentage of the working-age population involved in starting a business in a given month, on average 0.44% [Source: Kauffman Index of Entrepreneurial Activity] 35.3% 36% Share of total entrepreneurial activity [Source: Kauffman Index of Entrepreneurial Activity] Employer firms (those that create jobs for people other than the founder), as percentage of startups 64.7% 44% [Source: Kauffman Firm Survey] 19.8% Percentage of firms with more than $100,000 annual revenue, three years from starting 1.8% Percentage of firms with more than $1 million revenue 4.12 [Source: Kauffman Firm Survey] [Source: American Express OPEN Report] Significance of the published research by life science faculty of each gender (measured by “Journal Impact Factor,” where higher score = more significant) 32.8% 6.3% 4.06 [Source: Gender Differences in Patenting] 5.65% Percentage of above faculty of each gender who obtain patents on their research, often a first step to starting a firm 13% [Source: Gender Differences in Patenting] 6.5% Percentage of above faculty of each gender who are Science Advisory Board members of high-tech firms [Source: Gender Differences in Patenting] Source: Overcoming the Gender Gap: Women Entrepreneurs as Economic Drivers © 2011 by the Ewing Marion Kauffman Foundation 93.5% One difficulty in studying women-led startup companies is that a firm may have multiple founders or owners of both genders. Various research studies deal with the problem in different ways: They count women’s firms as those owned solely or ―primarily‖ by women; they break out the mixed-ownership firms separately (or exclude them); or, they track startup activity by individuals rather than by firms. The Kauffman Index of Entrepreneurial Activity (KIEA) tracks individuals, using data from the Current Population Survey of the U.S. Census and the Bureau of Labor Statistics. Figures from the KIEA, combined and put another way, tell us this: While women make up more than 50 percent of the U.S. adult population, and about 46 percent of the civilian workforce, they account for only about 35 percent of the people who get involved in starting businesses. (This number agrees fairly closely with other figures, not shown in the table above, which find that of all privately held firms in the U.S, about 29 percent are ―women-owned‖ and another 12 percent are ―equally owned‖ by women and men.) So women lag at the business of starting businesses overall, and the gender gap gets larger as we look at measures of growth. Most Americans who start businesses literally just go into business for themselves, as self-employed professionals or service providers of some type. Only a fraction have employer firms—companies that employ others—and that fraction is smaller for women. In a 2007 research paper for the SBA, Erin Kepler and Scott Shane found that 14 percent of the women entrepreneurs in their sample had employer firms, versus nearly 22 percent of the men. The Kauffman Firm Survey (KFS) found higher rates for both genders, perhaps because it is drawn from the Dun & Bradstreet database, which includes only young firms that are ―serious‖ enough to merit a credit report. But here again, a gap was found: Of the firms owned solely or primarily by women, 36 percent were employer firms, versus 44 percent for those owned solely or primarily by men. Most importantly, a shocking statistic from the U.S. Census Bureau found that the percentage of women-owned firms with paid employees only grew 7.6 percent from 1997-2007. When we look at growth measures by revenue, the gap begins to widen. In the latest Kauffman Firm Survey, which tracked new firms three years out from their startup dates, 19.8 percent of the women’s firms reported annual revenues more than $100,000 versus nearly 33 percent of the men’s firms. The average revenue of men’s firms was almost twice that of women’s, nearly $120,000 versus about $60,000. In this range, we are still dealing with extremely small startups. Many are made up of the owner plus a helper or two, and a sizable number appear to be part-time side businesses: About 17 percent of the entrepreneurs in the KFS (of both genders combined) reported working on their businesses less than twenty hours per week. Not all firms that are small in their third year are destined to remain small, however. There may be some with growth potential that are taking a while to develop scalable products and business models and to achieve consistent earnings. This may be especially likely to happen with innovative startups, since the innovation process is highly iterative: new software spends time in development and beta testing; a new physical product may evolve through a series of prototypes. Also, it is not uncommon for innovator/entrepreneurs to work on their early-stage ideas ―on the side‖ while holding 7 full-time jobs. So the question is: Are women starting a proportionate share of these types of firms, some of which will go on to have high economic impact? The available evidence suggests that they are not. Every five years, the Census Bureau conducts its nationwide Survey of Business Owners. The SBO samples privately held, nonfarm businesses of all ages, from recently founded to many years in existence. Using SBO data, the American Express OPEN report for 2011 found that just 1.8 percent of women-owned firms had revenues more than $1 million. The figure for men-owned firms was 6.3 percent In public perception, the $1 million threshold has become a sort of magic number. An article about the Amex OPEN report compared the mark to ―Heartbreak Hill,‖ the part of the Boston Marathon where many runners hit the wall, and urged women entrepreneurs to focus on ―getting over that $1 million hump.‖ Women who want help with the task can turn to the New York-based nonprofit called Make Mine A Million $ Business. In the grand scheme of things, however, even a million-dollar business is not particularly large. Many good regional businesses reach this mark, from home improvement contractors to small law firms. And though it is a worthy goal to have every business flourish as well as it can, our focus here is on startups that could go well beyond a million in annual revenues. These high-growth firms would, at the least, become prominent niche firms of the type described earlier. They would create jobs prolifically and serve global or national markets. Typically, they would be innovative firms, with new products and services that are widely useful—either in certain industries or in households. You might call them building-block firms because they provide new pieces that help to strengthen and expand economic capacity, feeding an upward spiral of growth all around. Many such firms are new technology companies, although they do not have to be. (FedEx, discount brokerages like Charles Schwab, and others are examples of late twentieth-century startups that have helped the nation do its business more effectively.) How many women build high-growth companies of this caliber? To date, there have not been comprehensive studies that isolate the ―true high-growth/high-impact‖ bracket with statistical rigor and allow for gender comparisons. But, in a sense, statistical studies are not really needed here. So few women are operating at the highest levels of entrepreneurship that one can get a feeling for how scarce they are by the informal exercise of sitting down and trying to name them. A list of America’s high-impact women entrepreneurs would usually begin with the widely known names in entertainment and news media: Oprah Winfrey, Arianna Huffington, Tina Brown. From there, most list-makers move to women who have founded womenserving firms in industries such as fashion and cosmetics—even reaching back into the past for names like Mary Kay Ash—or, they list founders of nonprofit organizations, like Wendy Kopp of Teach For America. That is not too bad a start. A knowledgeable person could also name a number of lesser-known women entrepreneurs in, say, the nonprofit sphere. These women are making a difference in the lives of many. But if we stick to the for-profit firms that drive job creation, growing the list becomes much harder. This is especially true in technical and scientific fields and in business services, where high-growth firms also can serve as economic building blocks. If we look 8