FinDev Blog

It’s Time to Address the Financing Gap for Female Tech Entrepreneurs in Africa

How can we get more investment to women-led companies and more women in the investment pipeline?
Photo by Christina @ wocintechchat.com on Unsplash

Only 2 percent.

Of the $725.6 million in venture capital (VC) funding that was invested across the African continent in 2018, only 2 percent went to women-owned or -led businesses. While this figure masks some variations among countries, the funding that female tech entrepreneurs receive is usually a single digit percentage. In South Africa, one of Africa’s largest tech hubs, Ventureburn estimates that since 2018, the percentage of angel and VC funding that has gone to South African tech startups founded by women is as little as 4.5 percent. In 2019, out of 98 African startups which raised over $1 million, only 13 were co-founded by women. Of the 13, only four had women-led teams.

This financing gap has major consequences on female tech entrepreneurs’ ability to grow and scale their businesses, as access to appropriate financing is one of the most critical factors for a growing company. Twitter logo

The gender gap is not just in the tech sector. The African Development Bank estimates the funding gap for women entrepreneurs across business value chains in Africa to be $42 billion. Women form the backbone of African economies, accounting for a majority of small- and medium-sized businesses. There is therefore an economic imperative to supporting their growth. It also makes business sense. Research shows that if women are able to unlock the constraints that inhibit the growth of their businesses and gain access to finance, they achieve more in terms of capital utilization, generating higher revenues and a better return on investment.

Why is there a persistent funding gap for female tech entrepreneurs?

There are multiple reasons for this funding gap. For one, female tech entrepreneurs have fewer networking (and ultimately fundraising) opportunities. There is also a higher perceived risk of lending to women entrepreneurs and unconscious bias in investor decision-making towards female entrepreneurs.

Take the pitching process in the fundraising world for instance. Besides it being dependent on personal networks, it is also highly susceptible to unconscious bias. Research by the Harvard Business Review in 2017 found that women were asked different questions than men when pitching to venture capitalists. Men were asked more promotion questions (focusing on potential gains) while women were asked more prevention questions (focusing on potential losses or risk). This bias places a much higher burden on female entrepreneurs to prove the validity of their idea, and has a direct effect on the funding outcomes. Entrepreneurs who addressed promotion questions raised at least six times more money than those who were asked prevention questions.

Lack of gender diversity on investment boards is also contributing to the funding gap. Men dominate the venture capital world, with women holding only 10 percent of all senior positions in private equity and venture capital firms globally. There is a direct correlation between the number of female investors and that of female investees. The familiarity principle posits that people tend to gravitate to what is familiar or that which they identify with, so men end up investing in other men.

Inadequate business management skills and a lack of support from enterprise support organizations are further obstacles for female tech entrepreneurs. Recent research by IFC indicates that accelerators - entities designed to train and support the development of start-ups to become investment-ready - actually seem to increase the gender-financing gap for female entrepreneurs.

What can be done?

To address the supply-side constraints of funding, we need initiatives that incentivize financial institutions, accelerators and venture capital funds to increase their outreach to female tech entrepreneurs. Twitter logo On the investee side, we need initiatives that enhance the technical capacity of female tech entrepreneurs to help build a pipeline of investor-ready companies led by women.

In the medium to long term, these ecosystem-wide interventions will be key:

  1. Address underlying barriers among incubators, accelerators and investors related to risk perception, closed networks or unconscious bias at institutional, strategic, programmatic and process levels. For instance, companies can review their internal investment identification and decision-making systems for potential biases against women.

  2. Advocate for greater gender diversity in investment boards and encourage more women to get into the investment space, especially at decision-making levels.
  3. Increase the pipeline of female talent in tech entrepreneurship. To do this, we must make tech entrepreneurship more attractive and relevant for women and girls, provide mentors and support networks for aspiring female entrepreneurs, increase the visibility of female role models (as entrepreneurs and investors) and host more “women in tech” roundtables with female tech founders who have successfully raised funding to share their experiences.
  4. Be bold in our actions and ambitions to change social norms and attitudes about women’s and girls’ participation in male-dominated or technical roles.

These actions will help level the playing field for female tech entrepreneurs and encourage their participation in the sector - ensuring they are provided with the resources and opportunities to contribute equally to job creation, poverty reduction and economic growth.

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