Women-Owned Businesses - Unintended Consequences Case Study

Since the 1990s and through the 2000s I have been hearing about how women are starting businesses at a faster rate than men. This was hailed as a triumph of changing gender roles and equality. I had my doubts about how the data was being interpreted which I'll outline below. Sophie Quinton explores a different aspect of female entrepreneurialism in Why Are Women-Owned Businesses So Small? .

Women now start businesses at higher rates than men do, and minority women start businesses at the highest rate of all. Yet women-owned businesses have fewer employees, lower sales, and less chance of survival than male-owned businesses, according to a 2010 Commerce Department report. The report found that women-owned businesses are smaller across every sector of the economy, from educational services to manufacturing.

Nobody is really sure why this dynamic exists, but Emilia DiMenco has a theory. "It really has to do with access to information, access to contacts, access to contracts, and to capital," says the head of the Women's Business Development Center, a Chicago-based nonprofit that has worked with Alva Rosales.

I think DiMenco's explanation, other than possibly the issue of access to capital, is pretty anemic and probably doesn't hold much water.

That other factors might be at least as important is signalled in this paragraph.

In general, female entrepreneurs are more likely to grow their businesses organically, without relying on outside capital. That's true of Alva Rosales, who used her own money to get her company started. "Especially from a Latina background—we prefer not to have to borrow, I think," she says. The approach has worked for her business, but she's also learned to establish lines of credit—just in case—and to think critically about financing.

Risk management and financial planning - yes, pretty critical.

My speculation in the 1990s and 2000s was that advocates were misinterpreting what was going on. Several observations, substantially anecdotal but I have not seen any data that rebuts them.

1) As a partner in a global consulting firm we were aggressively working to stem the outflow of talented women managers and senior managers (typically 25-35 years old). They had great educations and had built up ten or fifteen years of talent and then left the consulting industry. Obviously part of it is that consulting, with it endless hours, always on demand to clients, extensive travel, is relatively unconducive to the demands of parenting. But what I saw a lot of was former counsellees leaving to both start a family and start a business, usually in a very focused area of consulting and with a small client base. In that model, they were essentially working intermittently while spending the bulk of their time with their family. Not a bad model but it is, I think part of the explanation for increase in female entrepreneurship, and, pertinent to this article, a drag on average size of firm.

2) In that time period I was also seeing a lot of wives of successful businessmen in the generation just ahead of mine starting new businesses after their kids were grown and out of the house: cooking, real estate, businesses based on hobbies, etc. Where in past generations most of them might have become more involved in community or volunteer activities, it seemed like a greater proportion were starting small businesses. In most instances, these were not endeavours that had to actually make money or to grow. It seems disparaging to call them hobby businesses or vanity businesses, and I don't mean to disparage, but that was effectively what they were. Again likely to reduce the average size of the reported business as revealed in Quinton's article.

3) In the 1980s and 1990s there were a ton of Federal and State programs intended to encourage female in general and minority female in particular start-up businesses. Program set-asides, special access to subsidized loans, etc. I think some of this has slimmed down over the years but also suspect that the rudiments are probably sill in place. As with the housing crisis (where the Federal government loosened lending standards and pressured lenders to extend mortgages to otherwise unqualified borrowers leading to disproportionate forfeitures among minorities when the bubble burst), I suspect that the well-intentioned government programs had the unintentional consequence of bringing forward female business start-ups before they were ready to be founded.

Lets resort to Dr. Seuss' Sneetches to clarify. That population with Stars; those who are interested in starting their own business and are encouraged to so with cheap loans and set-asides to start a business. Presumably they have some experience, let's say five years. It is simple economics that if you make the cost of entry cheaper (subsidized loans) and the effort to sustain lower (guaranteed business through set-asides), then you will effectively move the normal distribution curve of capable candidates to the right. You will get more Sneetches with Stars starting businesses but you will also get a higher proportion that are less qualified.

All the rest, the Sneetches with no Stars on thars, face the normal hurdles, higher cost of starting and more competition to remain in business. Perhaps it takes ten years before they are able to start. Ten years of experience versus five. Five years older as well. The older you get, the more there is a premium to succeed (because your alternate opportunities narrow as you age). Once you are in a position to start a small business you are both more experienced in general, have had a longer experience of unprotected competition and you have a greater incentive to succeed.

So which group will have longer lasting businesses and larger businesses, those with Stars or those without. I suspect it is those without Stars.

These explanations are not an attempt to ignore that there are numerous women-owned businesses that match male-owned businesses in terms of motivation or experience or challenges. Rather, it is to highlight that, with subsidies, there are additional categories of business that don't match the levels of motivation, experience, or resilience to challenge, and that those subsidized businesses bring down the overall averages.

I suspect that these three factors; life-style businesses, vanity businesses, and subsidized businesses are probably the main explanation for the finding that these businesses are smaller. Motivated advocates always want to find that disparate outcomes are the result of evil intent or structural discrimination. My experience is that people are better than that, life is more complex than binary judgments and consequences are much more closely tied to individual choices than to abstract hypotheses.