Crowdfunding: Gender and the Democratization of Small Business Finance

Crowdfunding is touted by its proponents as a model that can democratize and neutralize gender bias in the existing small business investment community, for both female investors and entrepreneurs. Crowdfunding proponents point toward the disproportionate number of middle-aged men who are angel investors or work in the venture capital industry. In 2007, 86 percent of angel investors were men. Crowdfunding proponents also point out that less than 10 percent of all companies that receive venture capital funding are run by women. Although equity crowdfunding for all is stilled delayed by the SEC, two recent academic research studies have found that reward-based crowdfunding in the U.S. and peer-to-peer (P2P) lending in Germany and the United States appear to be opening up opportunities for female entrepreneurs and investors.

In an article by Dan Marom, Alicia Robb and Orly Sade, the gender dynamics of crowdfunding were examined using platform data from Kickstarter, the most popular U.S. reward-based crowdfunding portal. The authors found that women comprised 35 percent of Kickstarter project leaders and 45 percent of investors, much higher than their representation in overall U.S. entrepreneurship and investing. The researchers concluded that there was a gender-based “taste based discrimination,” meaning that investors preferred projects started by people of their own gender. According to their findings, more than 40 percent of projects that women invested in had female project leads. In comparison, only 23 percent of projects that men invested in had female project leads. The report also indicates women enjoy higher rates of success in funding their projects. Read: Gender Dynamics in Crowdfunding (Kickstarter): Evidence on Entrepreneurs, Investors, Deals and Taste Based Discrimination…

In a recent academic article from Germany, Nataliya Barasinska and Dorthea Schafer explored whether gender discrimination occurs when crowd investors make P2P loans via two leading P2P websites: a German platform Smava and the American platform Prosper.com (Prosper). In their review of existing literature on gender dynamics in lending, the authors found gender discrimination leads to female entrepreneurs and small- and medium-sized businesses led by women were charged higher interest rates on both traditional banking lending and microfinance in several European countries and across the globe. They also found that women were less likely to be able to secure a loan from banking institutions than their male counterparts.

After examining platform data from Proposer and Smava, the authors found no statistical gender differences in the probability of funding success, meaning women were as likely to be funded as their male counterparts. These findings allowed the authors to conclude that gender discrimination does not take place on P2P lending platforms. In comparison to traditional bank lending and microfinance, the crowd appears to provide more opportunities for female entrepreneurs and female-led businesses to obtain capital at similar interest rates to their male counterparts. Read The impact of commercial peer-to-peer lending websites on the finance of small business ventures…

These two preliminary studies confirm the claims of crowdfunding advocates. In both articles, the authors concluded that crowdfunding appears to be opening up opportunities for female entrepreneurs and investors. In both studies, when compared to existing finance modes, women entrepreneurs were more likely to receive funding via a rewards-based donation platform (Kickstarter) and P2P lending sites. Future research still is needed to confirm the finding of these results and to examine the gender dynamics of equity crowdfunding before crowdfunding can be considered a viable alternative form of financing to angel and venture capital. These findings, however, do provide hope that the gender dynamics of both investing and entrepreneurship may change due to the crowd.