by Sarah Thébaud and Amanda J. Sharkey
In 2010, the New York Times reported the story of Candace Fleming, a Harvard trained, HP executive who struck out in 2007 to found a new data analytics company. Fleming obtained funding from a venture firm that specializes in women-led companies, but only after being turned down by 30 conventional VCs. During this process, she experienced blatantly gendered comments and criticism. For example, one VC told her it didn’t matter what was on her business card, since all anyone would see is “Mom”. In trying to make sense of the these experiences, she mused, “…in risky times like the last couple years, some investors kind of retreat to investing via a template.” And [a company owned by a woman] “is just not the standard template.”
Is Fleming’s intuition that lenders rely more heavily on gender stereotypes during “risky times” correct? Prior research has offered mixed evidence of gender bias in lenders’ willingness to support entrepreneurs during normal macroeconomic conditions. But various theories do predict that gender bias is more likely to manifest when there is greater uncertainty and when decision-makers’ choices are under greater scrutiny from others—two hallmark features of the lending environment during the economic downturn. In fact, the small business investment market was particularly hard hit by the recession, with total investment contracting 18 percentage points between 2008 and 2011.
In a recent study, we took on this issue by examining data from the Kauffman Firm Survey, a panel study that followed financing strategies and outcomes for a single group of entrepreneurial ventures between 2007 and 2011.
In our analysis, we identified whether women-led firms were less likely to secure bank loans relative to men-led firms that were otherwise extremely similar to one another on characteristics that predict getting a loan, such as an entrepreneur’s credit score or the firm’s profits in the previous year. Then, we examined whether the size of this gender gap changed as the small-business lending market contracted for part of this five-year time frame.
We found that, whereas all firms had more difficulties in gaining financing following the recession, women-led firms were disproportionately more likely to be denied funding during this period. And this result did not emerge simply because lenders scrutinized all aspects of an entrepreneur’s loan application more carefully: whereas gender became a more widely used driver of funding decisions during this period, indicators of firm performance and human capital did not.
Our analysis further showed that women-led firms with a low credit score were particularly likely to be penalized in 2010. This finding suggests that, at least during one year of the recession, investors applied an especially strict standard of performance on women-led firms. This finding lends some credence the theoretical argument in the literature that women’s disadvantages in entrepreneurship may be driven, at least in part, by individuals’ tendency to (often unconsciously) doubt that women possess the competencies needed to successfully run a business.
Importantly, the women-led firms in our sample were not any less likely to apply for a loan after adjusting for other relevant characteristics. This pattern suggests that that the gender gap in credit we observe is largely a result of the behavior of investors rather than the possible self-defeating behaviors of women entrepreneurs. So this isn’t a case in which “women don’t ask”; women entrepreneurs ask for funding at rates equal to or greater than men, but when they do ask, they are denied at higher rates than men during hard times.
Together, our findings highlight the contextual nature of gendered disadvantages in the modern economy. Candace Fleming’s hunch does not appear to have been misguided: worsening macroeconomic conditions exacerbate the disadvantages in financing that women entrepreneurs have often been found to experience. Because a lack of financing can ultimately result in an increased likelihood of failure for small businesses, these findings have important implications not only for individual entrepreneurs but also for the economy overall. At the individual level, entrepreneurship may be a more viable avenue by which one may recover from job loss for men than for women during recessionary periods. At the macro-economic level, the possibility that viable businesses may fail simply due to funding barriers that stem from the gender of the owner should be disconcerting because it potentially reduces the level of innovation and economic growth overall.
Our results also reveal that the recession was not simply a “mancession,” in which male workers suffered disproportionately, as commentators suggested at the time. Although the majority of job losses were concentrated in traditionally white, male-dominated sectors like manufacturing and construction, the recession seems to have made space for gender biases in entrepreneurship, and possibly the old-fashioned stereotypes that buttress those biases, to rear their ugly head.
Despite all this, there is some encouraging news: we did not observe gender disparities in access to financing for in periods other than the 2009-10 timeframe in our data. While this is perhaps evidence of increasing equality in access to capital during normal times, our findings also indicate the importance of paying attention to new and different conditions under which biased outcomes may occur even in an environment that espouses meritocratic values and decision-making processes.
Sarah Thébaud is Assistant Professor of Sociology at the University of California, Santa Barbara. Amanda J. Sharkey is Associate Professor of Organizations and Strategy at the University of Chicago Booth School of Business. This article is based on “Unequal Hard Times: The Influence of the Great Recession on Gender Bias in Entrepreneurial Financing“ in Sociological Science.