by Baylor University. Gry Agnete Alsos Espen John Isaksen Elisabet Ljunggren

Transcription

1 by Baylor University E T& P New Venture Financing and Subsequent Business Growth in Men- and Women-Led Businesses Gry Agnete Alsos Espen John Isaksen Elisabet Ljunggren This study investigates the possible funding gap for women-owned compared with menowned new businesses. With longitudinal data from new businesses in Norway, gender differences in funding perceptions and behaviors, as well as in actually obtained amounts of funding, are explored. While there are few detected gender differences with respect to funding perceptions and behavior, women obtain significantly less financial capital to develop their new businesses. Moreover, the results indicate that the lower levels of financial capital that women business founders achieve are associated with lower early business growth compared with their male counterparts. Introduction Entrepreneurship is still a male-dominated activity in the twenty-first century. In spite of growing rates of participation in new venture creation among women, particularly in North America, women remain substantially underrepresented among entrepreneurs in Western countries (Reynolds, Bygrave, Autio, Cox, & Hay, 2003). In the Nordic countries, the share of women entrepreneurs has been stable and low (about 25%) for the last decade (Kolvereid, Alsos, & Åmo, 2004; Ljunggren, 1998). Norway, though often portrayed as a country where equality between the genders is well developed, exposes the same tendencies. Not only do women start businesses to a lesser degree than men, but the few who take this step seem to achieve less growth in their businesses than their male counterparts (Cliff, 1998). Research on potential differences between women and men entrepreneurs look for explanations of these differences (see, e.g., Alsos & Ljunggren, 1998; Cliff, 1998; Miskin & Rose, 1990; Rosa & Hamilton, 1994; Sonfield, Lussier, Corman, & McKinney, 2001). Results have been various, but in total, there seem to be more similarities than Please send correspondence to: Gry Agnete Alsos, tel.: ; Gry.Alsos@nforsk.no. September,

2 differences between the genders when it comes to motivations, risk aversions, start-up activities, and so forth. In the early stages of a business, the possibility for funding can be crucial both for business survival and growth. Brush, Carter, Gatewood, Greene, and Hart (2004) assert that a funding gap hinders the growth of women-led businesses. Moreover, undercapitalization has been identified as a major source of lower growth and poorer performance of women-owned businesses (Carter, 2000; Carter & Rosa, 1998; Marlow & Patton, 2005). It has been suggested that women and men differ when it comes to their strategies and perceptions of business funding (Carter & Rosa, 1998; Verheul & Thurik, 2001). Further, there has been some research on the business owners gender and access to debt capital (Buttner & Rosen, 1992; Carter, Shaw, Wilson, & Lam, 2006; Fabowale, Orser, & Riding, 1995; Riding & Swift, 1990), but little related to gender and access to external equity funding (Carter, Brush, Greene, Gatewood, & Hart, 2003). Several researchers point to the need for more research on the demand side of business funding (Brush, Carter, Gatewood, Greene, & Hart, 2002; Mason & Harrison, 1999). Most previous studies have been conducted on businesses that have passed the early growth stage. The knowledge on business funding in the start-up phase and early business growth is scarce, especially when gender is focused upon. This study seeks to contribute to knowledge on gender, business funding, and business growth by examining gender differences in total financial capital resources at start-up and during the early phases of fledging new businesses, as well as consequences for early business growth. In particular, we investigate possible gender differences in perceptions and behaviors to access business funding and their relation to achieved funding and subsequent growth. A model on the effects of gender on business financing and early business growth is developed and tested with longitudinal data from newly registered firms. We examine the proposed funding gap for women-founded businesses compared with men-founded businesses. Further, we look into whether the potential funding gap is associated with early business growth. The sample frame consists of all new businesses in Norway registered during a period of 4 weeks in Data were collected immediately after registration and were followed up after 19 months. With this research design, we are able to uncover the funding needs and how much funding the businesses actually receive. This study looks into the gender aspects of the demand side of new business funding. In what way is the gender of the business founder associated with the strategies used to fund the business and the amount of financial resources that they are able to obtain for business development? Further, we investigate if possible differences in access to funding are associated with the level of early growth of their new businesses. More knowledge in this area can help us understand how we can work to be able to release the underutilized potential of high-growth women ventures, which may be important for long-term wealth creation. To be able to unleash the growth potential of womenowned businesses is important to further develop the Norwegian economy. However, this is also an equality issue, as the uneven distribution of men and women business owners of growing businesses has impact on the distribution of power, wealth, and income. The Norwegian Context Norway is generally perceived as a country where differences between men and women are small. It is, among other things, characterized by high participation of women in the labor force and by a high level of education among women. However, the gender difference between the private and public sectors is marked with a high proportion of women employed in the relatively large public sector, while men dominate the private 668 ENTREPRENEURSHIP THEORY and PRACTICE

3 sector (Foss & Ljunggren, 2006). Although the proportion of women among political members of the national and regional governments is above 40%, less than 10% of top managers in companies with more than 10 employees are women (Spilling, 2004). Women constitute 24% of self-employed, and 26% of new business registrations are women led (Spilling, 2002, 2004). In Norway, as in most Western countries, funding for new business start-up can be achieved through four main sources: personal savings (including family and friends), debt financing, soft loans or grants supported by government, and equity funding from venture capital institutions or informal investors (Borch et al., 2002; Foss & Ljunggren, 2006; Jarvis, 2000). The government-supported funding is mainly offered through Innovation Norway, a central government-owned institution that supports business and industry development. The Norwegian venture capital industry is growing, but still underdeveloped compared to, for instance, the United States. Norway has a large number of business angels, but they invest relatively small amounts each (Kolvereid et al., 2004). According to Borch et al. (2002), the need for external capital in business start-ups is scarce; most new business ventures are financed by own and family funding. Knowing that Norwegian women have lower income and less wealth than men (Jensen, 2005), they can be expected to have less personal savings to invest in their own business compared with men (Carter & Kolvereid, 1997). Theoretical Framework The acquisition of resources is a central element in starting a new business (Aldrich, 1999; Brush & Chaganti, 1999; Cooper & Dunkelberg, 1986; Landström & Johannisson, 2001). The entrepreneur s ability to collect the necessary resources and combine these in a new business may be crucial for whether the new firm will come into existence, and whether the degree of subsequent growth will be achieved. Financial resources are vital in this respect. This is the most basic and flexible type of resources as it can be transferred into other resources when needed. Financial capital can also act as a buffer to possible challenges due to changing environments, wrong decisions, and so forth (Cooper, Gimeno-Gascon, & Woo, 1994). By securing resources from different sources, considerable risk is shifted from the entrepreneur to the stakeholders (Venkataraman, 1997). Sufficient access to funding is associated with growth in small businesses (Storey, 1994; Wiklund, 1998). Women-owned businesses are often presented as performing less on indicators such as revenues, income level, business size, and rates of growth. Findings from Canada indicate that businesses led by women grow slower than men-led businesses (Jennings & Cash, 2006). The Diana team suggested that one reason for the lack of growth in women-owned businesses may be a funding gap for women entrepreneurs (Brush et al., 2004). An overall model for the demand and supply side of women s access to financial capital is suggested by Gatewood, Carter, Brush, Greene, and Hart (2003). On the demand side, the model highlights human, social, and financial capital as well as personal cognitions/goals as important factors affecting the strategic choices of the entrepreneurs seeking funding. The strategic choices regarding industry, product-market segment, location, competitive positioning, and growth rate affect their ability to get access to external funding. As a part of these strategies, entrepreneurs preferences and actions when it comes to funding may affect the amount of financial capital that they obtain (Gatewood et al., 2003). In this study, we focus specifically on preferences or perceptions and September,

4 behavior strategies of business funding when investigating a potential funding gap for women entrepreneurs. Greene, Brush, Hart, and Saparito (2001) suggested that women s difficulties in raising equity capital could be understood by three factors: (1) Women experience structural barriers when trying to acquire equity capital; (2) women do not want to use this type of capital (strategic choice); and (3) women do not possess the necessary knowledge and capabilities to acquire equity capital (human capital). Brush, Carter, Gatewood, Greene, and Hart (2001) also claimed that women start businesses in sectors not attractive for external equity providers. While these arguments are put forward related to equity financing, we suggest that they are also relevant for other types of funding, for instance debt funding. Thus, the total financial capital that women (and men) raise to start or grow their businesses is both dependent upon their own wishes, perceptions, and behaviors, as well as upon structural factors in the capital market. Reasons for potential differences in the level of financial capital in women- and men-owned new businesses may thus be related to differences in perceptions and behaviors toward funding and business growth, and/or to differences in structural barriers. Gender and Access to Financial Capital Previous research show somewhat contradictory results regarding the association between gender and funding of new ventures (Marlow & Patton, 2005). There is evidence that women entrepreneurs start firms with lower levels of funding than men entrepreneurs (Carter & Rosa, 1998; Watson, 2002). However, research has hitherto not been able to explain the reasons for such differences. Several studies on discrimination against women in access to capital and credit have been carried out (Buttner & Rosen, 1992; Fabowale et al., 1995; Fay & Williams, 1993; Riding & Swift, 1990). The findings are inconsistent. In a more recent U.K. study, another methodological approach has been applied: Carter et al. s (2006) results indicate that gender is an important but hidden aspect in the acquisition of business finance. Even though it is difficult to explicitly point at gender discrimination, gender matters. These findings are in accordance with results from a Norwegian study (Alsos, Ljunggren, & Pettersen, 2002). Here, loan and grant officers were found to perceive female entrepreneurs as different from male entrepreneurs, and also as different from the ideal entrepreneur. Access to external financing in the form of debts is dependent on proprietorship. A recent study indicates that ownership of capital and real property is unevenly distributed among men and women in Norway (Jensen, 2005). Consequently, women have lesser possibility to mortgage and thereby to acquire debt capital for the firm. This is not a unique situation for Norway, as indicated by a report covering four of the European Union (EU) nations (Innovation Norway, 2005). In addition, the fact that women, on average, have lower income than men, has the consequence that women are able to invest less of their own money into their businesses (Carter & Kolvereid, 1997; Marlow, 2002; Marlow & Patton, 2005). Moreover, these differences can make women less attractive as borrowers. Access to funding might also be dependent of the venture capital industry structure. Evidence from Norway (Ljunggren & Foss, 2004) indicates that firms receiving capital from private investors typically represent industries where women entrepreneurs are particularly weakly represented. Further, the management and know-how in the venture capital industry is gender biased; the management (decision) positions are almost without exceptions possessed by men, and the homogeneity in management is apparent in an educational and professional background. 670 ENTREPRENEURSHIP THEORY and PRACTICE

5 As a whole, prior research in this area leads us to expect that women entrepreneurs will start their new businesses with less financial capital than men. Hence, the following hypothesis is suggested: Hypothesis 1: Women entrepreneurs raise less financial capital for their new businesses than men. Funding Perceptions and Behavior Previously, we have pointed to the supply-side issues as well as the demand-side issues related to structural factors in order to explain the expected lower levels of funding of women-owned businesses. We now discuss demand-side issues related to the perceptions, choices, and behavior of entrepreneurs related to access to funding for their new ventures. First, there is a relation between the structural factors and entrepreneurs perceptions of funding opportunities, since their perceptions are formed in relation to how they see these opportunities. For instance, entrepreneurs with low wealth and low income, and hence not attractive customers to the bank, will be more likely to perceive the bank as having high demands. Since, as previously argued, this situation is more usual for women than for men, we can expect women entrepreneurs to a larger extent than men, to perceive financiers as making strict demands. Also, they may perceive the funding opportunities in the environment to be fewer. Second, there may be differences between the genders relating to funding behaviors and perceptions due to different approaches to entrepreneurship. Calls have been made to explore the reasons and motivations for the funding decisions and strategies of male and female small firm owners (Marlow & Patton, 2005). For instance, Marlow (1997) found indications that self-employed women were less likely to apply for bank loans than men. Moreover, Cliff (1998) argued that women may value the retention of control higher than men. They may therefore be less likely to seek external equity capital. Taking a feminist deconstruction perspective, Bird & Brush (2002) argued that there are both feminine and masculine sides of entrepreneurship. Further, they identified feminine perspectives on the entrepreneurial process, such as less focused and more diffuse concepts of venturing and organizing, more emotional and cooperative interaction, shared power, focus on relationships and caring, as well as an orientation toward time, which implies more focus on the present than on the future. If women entrepreneurs more than men take a feminine approach, their focus on what happens now instead of in the future may imply that they have more difficulties writing a business plan with longer time horizon and negotiation terms of loans etc. (Bird & Brush, 2002). Further, Bird and Brush argued that feminine ventures are more likely to be self- or family funded, and with the individual entrepreneur taking more risk and deeper commitment to the business. The entrepreneurs dominated by a more feminine approach will more likely be orientated toward internal factors such as employees, and they can therefore be expected to be less oriented toward external investors or financiers. The previous discussion leads us to hypothesize that women and men will differ regarding how they perceive funding options and which actions they take to raise funding. Further, we expect that such differences will partly explain differences in the amount of financial capital achieved: Hypothesis 2a: Women and men differ in their funding perceptions and behaviors. Hypothesis 2b: The relationship between gender and the raised amount of financial capital is mediated by the entrepreneur s funding perceptions and behavior. September,

6 Business Growth Welter (2001) found that German nascent women entrepreneurs seemed less interested in growing their businesses than their men counterparts. This is also in accordance with findings from Norway (Isaksen & Kolvereid, 2005). However, there are some variations within the genders; nascent women entrepreneurs with higher education state a larger interest in growing their enterprise (Welter, 2006). In a survey among entrepreneurs in Norway, Kolvereid (1992) concluded that growth aspirations are related to motivation, education, industry, and a number of organizational variables including previous growth in turnover and in the number of employees. Evidence from Canada suggest that men and women seem equally likely to desire business growth, but that women entrepreneurs are more likely to establish maximum business size thresholds, which they do not want to exceed (Cliff, 1998). Moreover, these thresholds seem to be lower than those of their male counterparts. Cliff suggests that these thresholds keep the businesses in a size that the entrepreneurs are comfortable with, enables them to maintain control over the business, balancing time and energy, and/or balancing work and personal life. She does not, however, link different gender roles to the explanation of these differences. The facts that men and women assign different amounts of time to domestic work, have different educational backgrounds, and that men and women are embraced with different social constructions of gender (Ahl, 2002; Berg, 1997; Foss & Ljunggren, 2006) are important when these differences are to be explained and understood. Even though Norwegian women s participation in the labor force is high compared with other countries (84% in Norway compared with 75% in European Union/European Free Trade Association [EU/EFTA]), this participation is marked by a high degree of part-time involvement (38% in Norway compared with 32% in EU/EFTA). Among men in Norway, the share of part-time workers is 5.5% (Bø, 2004). This work pattern is suggested to be brought forward when women enter self-employment and could be one of the reasons why women-owned businesses are small and stay small. Some women start a business creating part-time self-employment. In these cases, their maximum business size thresholds are particularly low, which lead to low growth ambitions. It is also argued that nascent entrepreneurs as well as small business owners are reluctant to grow, because they perceive themselves as lacking competence or because they do not perceive business growth as realistic when judging the environment/market (Isaksen, 2003). Isaksen and Kolvereid (2005) found that women business founders have lower growth ambitions than men. Cliff (1998) argued that if women have fewer resources than men due to structural variations, they may perceive that they have inadequate resources to pursue business growth. Cliff s analysis included human capital resources only, but this argument is also applicable to financial resources. Welter (2006) suggests that the gender difference in growth ambitions might indicate a gender gap in access to external resources especially financial resources. Marlow and Patton (2005) argued that gendered characterizations of women entrepreneurs impact negatively upon their process of locating, accessing, and managing finance (see also Bird & Brush, 2002). Further, they claimed that this may lead to undercapitalization during business formation and development, which again may lead to underperformance of the firm in a longer perspective. As a result, the business potential of women s businesses will not be fully realized. The findings of Watson (2002) partly support this claim. In a comparison of men- and women-controlled businesses, he found that women had lower total assets and lower levels of equity in their businesses compared with men. When controlling for lower level of resource input, there were no significant 672 ENTREPRENEURSHIP THEORY and PRACTICE

7 Figure 1 Research Model and Hypotheses Gender Hypothesis 1 Hypothesis 3a Hypothesis 2a Funding perceptions and behavior Hypothesis 2b Achieved funding Hypothesis 3b Early growth differences between the men- and women-controlled businesses when it came to profits or total sales turnover. With the previous discussion, the following hypotheses have been developed: Hypothesis 3a: Women entrepreneurs experience less early growth in their new businesses compared to men. Hypothesis 3b: The relationship between gender and early business growth is mediated by the level of financial capital. The hypotheses are summarized in the research model in Figure 1. Gender is assumed to have an impact on funding perceptions and behaviors of the entrepreneur, the level of funding achieved, as well as the early growth of the new business. Further, the association between gender and achieved funding is assumed to be mediated by the perceptions and behaviors related to funding. Finally, the association between gender and early business growth is assumed to be mediated by the level of business funding raised. Method In this study, two rounds of data collection were carried out at two different points in time. In a mail survey in 2002, we gathered information (collected from the new business founders) on the independent and control variables. Approximately 19 months later, telephone interviews were conducted concerning information about the dependent variables, invested financial capital, and sales turnover. In the first round of data collection, the sampling frame consisted of entries in a Norwegian business register, the Norwegian Central Coordinating Register for Legal Entities. This is a comprehensive register that coordinates information existing in other government registers, including (1) the register of employers, (2) the register of business enterprises, and (3) the value added tax register. Four legal forms were included in the sampling frame: sole proprietorships, partnerships with mutual responsibility, partnerships with shared responsibility, and unlisted limited liability companies. According to Statistics Norway (2004), 98.6% of the businesses enrolled in the register in 2002 chose one of these four legal forms. All new businesses that entered the business register during weeks 21 24, 2002 (time 1) were approached. The business register provided lists containing information regarding the new businesses. These lists were received in four rounds 1 week after the businesses had registered. A structured questionnaire was sent to the September,

8 businesses within 1 week after we received the lists. The questionnaire consisted mainly of closed statements/questions and regarding format; 7-point scales were mostly applied. In total, it consisted of 16 pages, and a test (using a sample of seven entrepreneurs) indicated that the respondents would be able to answer the questionnaire in approximately half an hour. In total, 3,121 businesses were approached; 126 of the mailings were returned as unreachable. Of the remaining 2,995 questionnaires, we received 1,048, a response rate of 35%. A response bias test revealed no significant differences between the 1,048 respondents and the nonrespondents with respect to legal form and geographical location (county). Moreover, the sample did not differ significantly from the entire cohort of businesses started in Norway in 2002 with regard to legal status or localization. The follow-up interviews were carried out approximately 19 months after the initial mailings (i.e., weeks 5 8, 2004, time 2). With respect to the telephone interview, which was concerned with business outcomes, a short questionnaire was constructed (14 questions). It was tested by colleagues, and the results of the test indicated that it should not take more than 3 minutes to answer the questions. A professional survey agency attempted to contact 980 of the 1,048 businesses that responded to the mail survey. The businesses, which (1) had extensive missing data in the mail questionnaire, (2) had deregistered from the business register, or (3) where the contact person was not listed in any of the available telephone directories were all excluded 68 in total. Among the 980 respondents, 275 persons were inaccessible, and 54 refused to participate, reducing the sample to a total of 651 businesses. Hence, valid responses constituted 66.4% of the 980 businesses contacted. Further, businesses were excluded from the sample if (1) the respondent reported as not being the founder of the business and/or (2) the businesses were not in operation in In addition, complete data sets were used as a requirement, leaving 360 businesses for the analysis of invested financial capital and 327 businesses for the analysis of sales turnover. With regard to the sample of 360 respondents, 21.9% of the businesses were founded by women (i.e., 79 women and 281 men). The business founder s average age in 2002 was 38.2 years for women and 39 years for men. With regard to education level, 41% of the women had at least 4 years at a university/college. The corresponding proportion of men was 26%. Thus, this indicates that the women business founders seem generally to be more likely to have attained high education, compared with men. In order to check for the possibility of response bias, several tests were performed on all 12 independent and control variables, as well as legal form and geographical location (county). 1 Only two significant differences (p.01) between those included in the final sample and nonrespondents were detected. Businesses in the final sample were slightly more often team starts and had invested slightly more financial capital at registration. This is probably due to the exclusion of failed businesses in the final sample. This might indicate some bias in the final sample, but the magnitude of this problem does not seem serious. Measures Early Business Growth. Sales turnover in the Norwegian currency (Norwegian krone [NOK]) 2 was measured at the second round of data collection (time 2) and was used as 1. With regard to categorical variables, cross tabulation and chi-square tests were employed. With regard to continuous variables, t-tests as well as nonparametric Mann Whitney U-tests were employed NOK = $ ENTREPRENEURSHIP THEORY and PRACTICE

9 the measure for early business growth. The variable was highly skewed. Therefore, it was transformed by taking the logarithm of each response after adding a constant of Financial Capital. The respondents were at both times of data collection asked to state the amount of currently invested financial capital (debt + equity) in the new business (NOK). Adding these constitute the measures of total financial capital at times 1 (at registration) and 2 (19 months after). Both variables were highly skewed. They were transformed by taking the logarithm of each response after adding a constant of Control Aversion. This was measured using three items inspired by Berggren, Olofson, and Silver (2000): New owners are favorable for the business ; new owners renew and develop the business ; and the business prefers debts to external equity. The items were measured using a 7-point Likert scale where 1 = strongly disagree, 4 = neither agree nor disagree, and 7 = strongly agree. The scores on the two first variables were reversed. The three items were then averaged. Cronbach s alpha =.622. Perceived Requirements Funding. This was measured using nine items, the four first items dealing with perceived requirements from banks, and the remaining five items concerning requirements from equity suppliers: Banks and other lenders make too strict demands regarding security in form of mortgage/guarantees ; banks and other lenders make too strict judgments regarding risk ; banks and other lenders demand too high rates of interest ; banks and other lenders make too strong demands regarding equity rate ; equity suppliers make too strict judgments regarding risk ; equity suppliers make too strict demands regarding profitability ; equity suppliers focus too strongly on future sales opportunities for equity shares ; equity suppliers make too high demands for dividend ; and equity suppliers make too high demands regarding owners share in proportion to invested capital. The items were measured using a 7-point Likert scale where 1 = strongly disagree, 4 = neither agree nor disagree, and 7 = strongly agree. The nine items were averaged. Cronbach s alpha =.895. Initiating Investors Relationships. These were measured using four items: be able to obtain sufficient funds for the founding, develop and maintain favorable relationships with potential investors, develop relationships with key people who are connected to capital sources, and identify potential sources of funding for investments. The latter three were adapted from De Noble, Jung, and Ehrlich (1999), while the first is new. Respondents were asked to indicate their degree of confidence in performing the tasks successfully on an 11-point scale, where 0 = no confidence at all, 5 = some confidence, and 10 = complete confidence. Cronbach s alpha =.912. Perceived Environmental Munificence. This was measured using four items: The business industry may in general be characterized by high growth ; banks and other suppliers of loan capital are generally very interested in financing businesses like mine ; investors are generally very interested in financing businesses like mine ; and in general, investors would quite easily understand the technology used in my business. The first three were constructed based on Brown and Kirchhoff (1997), while the fourth is new. The items were measured using a 7-point Likert scale where 1 = strongly disagree, 4 = neither agree nor disagree, and 7 = strongly agree. The four items were averaged. Cronbach s alpha =.734. September,

10 Applied Funding. This was measured using two items. The respondents were asked to state the number of sources they had tried to raise debts and external equity, respectively. Possible responses for both variables were 0 10 and more than 10. Responses on the two questions were added, and since the variable was skewed, it was transformed by calculating the square root of each value. Control Variables. Capital need, de novo start-up, start-up team, perceived environmental dynamism, and industry (service) were used as control variables. To measure capital need, the respondents were asked to state the amount of capital needed in the development of the business during the first year after registration. The variable was highly skewed. Therefore, it was transformed by taking the logarithm of each response after adding a constant of The respondents were asked to state whether the business was started from scratch (value 1), or whether it was acquired, inherited, or otherwise a continuance of a prior business (value 0) to indicate de novo businesses. The respondents were asked to state whether they alone were responsible for the founding of the business (value 0), or whether they started it with other partners (value 1), to measure the existence of a start-up team. Perceived environmental dynamism was measured using four items: The rate at which products/services are getting obsolete in the industry is very slow ; actions of competitors are quite easy to predict ; demand and consumer s tastes are fairly easy to forecast ; and the product/service technology is not subject to very much change and is well established. The items were adopted from Miller and Friesen (1982). The items were measured using a 7-point Likert scale where 1 = strongly disagree, 4 = neither agree nor disagree, and 7 = strongly agree. The four items were reversed and averaged. Cronbach s alpha =.623. Industry was operationalized as a dummy variable where businesses in the service sector were denoted a value of 1 otherwise 0. In Table 1, descriptive statistics, correlations, and Variance Inflation Factor values (VIF values) for the included variables are shown. Although the VIF values do not indicate that multicollinearity will seriously distort the regression model, inspection of the correlation matrix reveals that capital at registration is positively and significantly associated with capital at time 2 (r =.71, statistically significant at the.01 level). Hence, this potential problem needs to be considered when testing hypothesis 3b. Results Bivariate t-tests were used to explore potential differences between male and female entrepreneurs when it comes to funding perceptions and behavior (Table 2). No statistically significant differences were detected related to men and women s perception of environmental dynamism, control aversion, perception of the requirements of banks and equity suppliers, their investor relations, nor their perception of entrepreneurial munificence in the environment. Moreover, there were no significant differences between the genders regarding the extent to which they applied for loans or external equity. However, the results in Table 2 show that there are statistically significant differences between the amount of financial capital female and male entrepreneurs use at start-up. Women have achieved significantly lower amounts of total financial capital both at the time of registration (time 1) and 19 months later (time 2). These results appear in spite of no significant difference when it comes to the amount of financial capital they report that they need to develop the business. These results support hypothesis 1. However, there is no support for hypothesis 2a. 676 ENTREPRENEURSHIP THEORY and PRACTICE

11 Table 1 Descriptive Statistics: Mean, Standard Deviation, Correlations, and Variance Inflation Factor Values (VIF Values) Mean SD VIF 1 VIF 2 1 Capital need (ln) De novo Start-up team * Perceived environmental dynamism 5 Industry (service) * -.135* Gender (women) ** Control aversion * -.251**.188** Perceived requirements funding * * * Investor relationships * * Perceived environmental * * ** ** munificence 11 Applied funding (square ** -.177**.292** **.137* root) 12 Capital at registration ** -.311**.325** ** -.177**.271**.152**.136*.151**.560** (ln) 13 Capital time 2 (ln) ** -.233**.253** ** -.210**.225** *.117*.451**.714** Turnover time 2 (ln) **.267** ** -.178**.243** **.480**.580** N = 310, 251 men and 59 women. * p.05, ** p.01. SD, standard deviation. September,

12 Table 2 Differences between Means and t-value Men Women t-value Capital need (ln) Perceived environmental dynamism Control aversion Perceived requirements funding Investor relationships Perceived environmental munificence Applied funding (square root) Capital at registration (ln) ** Capital time 2 (ln) ** Turnover time 2 (ln) ** N = 318, 257 men and 61 women. ** p.01. Nonparametric (Mann Whitney U) tests were also performed regarding the same variables. The results obtained from this analysis were practically identical. A linear regression model was used to test hypothesis 2b, which suggested that the relationship between gender and the raised amount of financial capital is mediated by the entrepreneur s funding perceptions and behavior (Table 3). Model 1 includes control variables and gender to explain the amount of financial capital raised at time 2. The model is statistically significant with an adjusted R 2 of.197. The perceived environmental dynamism variable was not significantly associated with the dependent variable. Reported capital need, de novo businesses, the presence of a start-up team, and industry are all statistically significant in the model, indicating as expected that higher amounts of capital are raised by acquisitive entries, team starts, in situations where the capital need is higher, and in industries other than the service sector. Further, women raise significantly lower amounts of financial capital than men. In model 2, the measures of funding perceptions and behavior were included, increasing the adjusted R 2 to.280. The only additional variable, which showed a significant effect in the model, was the extent to which the entrepreneurs had applied for funding (loans and equity). The number of applications for loans and equity is associated with the amount of capital obtained, indicating that a higher level of activity in funding pays off. Nevertheless, gender is still strongly significant in the model. The result that women are able to obtain less financial capital than men holds also when controlling for funding perceptions and behavior. These results give no support for our hypothesis 2b, while hypothesis 1 receives support also in the multivariate analysis. Are differences in obtained financial capital associated with differences in early business growth? A hierarchical linear regression procedure was used to test hypotheses 3a and 3b. The results are reported in Table 4. Model 1 includes control variables and gender as independent variables, and sales turnover 19 months after registration (ln) as the dependent variable, resulting in a significant model with an adjusted R 2 of.152. All control variables except perceived environmental dynamism are statistically significant in the model, however, with capital need and industry only at the.1 level. Higher capital need, acquisitive entries, team starts, and 678 ENTREPRENEURSHIP THEORY and PRACTICE

13 Table 3 Hierarchical Linear Regression: Financial Capital at Time 2 (ln) as Dependent Variable Model 1 Model 2 Control variables Capital need.254***.129*** De novo -.182*** -.124*** Start-up team.178***.088* Perceived environmental dynamism Industry (service) -.162*** -.140*** Gender Women -.127*** -.151*** Funding perceptions and behaviour Control aversion.036 Perceived requirements.000 funding Investor relationships.034 Perceived environmental munificence Applied funding.336*** Model characteristics F-value *** *** R Adjusted R D R D F-value 9.094*** N = 360, 281 men and 79 women. * p.10, *** p.01. businesses in sectors other than service are associated with higher early business growth. Moreover, women s businesses obtain significantly lower sales turnover than men s businesses. In the second model, we included the amount of financial capital obtained by the time of registration, increasing the adjusted R 2 to.264. The amount of financial capital at the time of business registration is strongly associated with sales turnover 19 months later. Moreover, the inclusion of this variable reduces the impact of gender in the model. In the third model, the amount of obtained capital at time 2 is added to the model, increasing the adjusted R 2 to.368. This variable is highly significant in the model, which strengthens the finding from model 2. Because of correlation between the amounts of financial capital at the two points in time, the impact of financial capital at time of registration is weakened in this model. Interestingly, the impact of gender is no longer significant in this model. 3 These findings indicate that when controlling for the level of 3. As noted earlier, the correlation between financial capital at the time of registration and financial capital at time 2 is high (r = 0.71). In order to explore whether collinearity distorts the results, a regression analysis was performed in which the variable financial capital at time of registration was excluded from the analysis. While not reported in Table 4, the results obtained from the analysis were practically identical with those reported in model 3. The only differences with regard to statistical significance levels refer to the control September,

14 Table 4 Hierarchical Linear Regression: Turnover Time 2 (ln) as Dependent Variable Model 1 Model 2 Model 3 Control variables Capital need.092* De novo -.226*** -.121** -.113** Start-up team.192***.101**.092* Perceived environmental dynamism Industry (service) -.098* Gender Women -.130** -.088* Received financial capital Financial capital at registration.393***.092 Financial capital time 2.478*** Model characteristics F-value *** *** *** R Adjusted R D R D F-value *** *** N = 327, 263 men and 64 women. * p.10, ** p.05, *** p.01. financial capital achieved, there is no statistical significant differences between men and women founders with respect to the early growth in sales turnover for their new businesses. Hence, hypotheses 3a and 3b are both supported from our findings. Discussion and Conclusions Several studies have provided evidence that women-led ventures grow less than men-led ventures (Chaganti & Parasuraman, 1996; Cliff, 1998). This is also supported by this study. The Diana group asserted that There is a substantial funding gap that limits women s opportunities to grow their ventures aggressively and to lead high-value firms (Brush et al., 2002, p. 1). This study has investigated funding behavior and obtained funding among men and women business founders, and how this is associated with early growth of newly founded businesses. The results support the Diana group s claim. The findings indicate that gender makes an important difference when it comes to the amount of loan and equity capital raised to develop the new business. The effect of gender remains strong also when controlled for potential differences in funding perceptions and behavior. In fact, we detect few differences between men and women when it comes to their variables. That is, the control variable de novo reached a 0.01 level of statistical significance, and the variable start-up team reached a 0.05 level of statistical significance. 680 ENTREPRENEURSHIP THEORY and PRACTICE

15 perceptions and behaviors related to obtaining financial resources for developing their businesses. Further, this study investigates whether the differences in achieved funding have consequences for early growth of the new businesses. While women are found to grow their businesses less during the first 19 months after registration, the gender difference disappear when controlling for the amount of financial capital invested in their new businesses. This finding indicates that the higher amount of financial capital men procure is one important reason why men-led ventures grow more than women-led ventures. There seem to be a funding gap for women restricting the growth of women s new businesses. The fact that women raise smaller amounts of funding for their new businesses than their male counterparts may have different and partially overlapping explanations. Some studies have found that women have lower ambitions when it comes to business growth than men (Cliff, 1998; Isaksen & Kolvereid, 2005). One could therefore expect differences in the need for funding. Further, the capital need of new ventures clearly differs between industries. As women more often than men start their businesses within service industries, they may need less financial capital to get started. Some studies have asserted that women and men, due to different education, work experience, and life experiences, enter entrepreneurship in different ways. It is suggested that women are more careful when they start new businesses, starting small and developing their businesses slowly. Also women s attachment to the labor market, marked by part-time employment, could be brought forward into self-employment, implying that women start part-time businesses and therefore start small and stay small. Nevertheless, the findings in this study remain strong even when controlling for the perceived level of financial capital needed to develop the business and for industry. This indicates that there are other reasons for the differences in obtained funding than variations in capital requirements. Similar to the Diana Project, studies in Norway have found that very few women occupy decision-making positions in the venture capital industry (Foss & Ljunggren, 2006). The dominance of men in the supply side of the finance market may have consequences for profiles, strategies, and means of this sector, including the industries and types of businesses that are pursued, criteria for project evaluation, information strategies, and so forth. Even if gender discrimination is difficult to prove explicitly, gender (as social construction) has undoubtedly an impact (Carter et al., 2006). Last, but not least the fact that women in general possess less wealth and achieve less income than men will impact on their possibility to raise capital for business start-up and growth. In a study from Sweden, Nykvist (2005) found that lack of liquid assets is an important constraint hindering people to become entrepreneurs. As financial wealth is unevenly distributed among the genders, this constraint will concern women more than men. Supply-side as well as demand-side issues should be explored in order to investigate the underlying factors leading to the apparent funding gap for women entrepreneurs. This study has investigated financial capital and business growth in an early stage of a business life cycle from business registration to 19 months after. It remains to be seen whether the detected differences will continue also at later stages. Further, in a representative sample of new business start-ups as utilized here, only a few of the cases will ever become high-growth businesses. Future studies should explore whether there are similar differences, for instance, among new businesses in high-growth industries. Moreover, industry specific studies could bring more detailed understanding to the processes underlying the gender differences with respect to new business funding. In spite of its limitations, the results from this study have several important implications. For researchers, these results indicate that there is a gender issue of new business financing that cannot necessarily be explained by differences in funding perceptions and September,

16 behaviors. Structural barriers have to be taken into consideration; also, the theoretical perspectives applied regarding gender will probably influence the understanding of which structural barriers are present. Further studies are needed into the gendered processes of new business financing. Moreover, the results point toward the importance of increasing our knowledge about these processes, since restrictions in financial capital seem to limit the early growth of women s businesses. The study aimed at developing and testing a model regarding business financing, undercapitalization, growth, and gender on a representative longitudinal sample. A refinement of the model to separate between different types of funding as well as combinations of these will further increase our knowledge. According to Myer s Pecking-Order hypothesis, different types of funding are related in a certain pattern. Financing of business projects will be undertaken first by using internal resources, then debt, and finally, external equity (Verheul & Thurik, 2001). When women have less access to internal resources, i.e., personal financial capital, than men, this may have an impact on their ability to raise debt and external equity as the next steps. Future research should investigate to which extent the funding gap of women entrepreneurs is a result of lower personal wealth. There is a need for studies on business funding including structural issues related to the gender division of labor, gender division of industries, as well as gender differences when it comes to salaries, part-time employment, and domestic responsibilities. Even though Norway is often considered one of the leading countries when it comes to gender equality, marked gender differences are found related to new business finance. Further, the results of this study indicate that this has consequences for new business growth of men- and women-led ventures. These results are consistent with findings from Scotland (Carter & Rosa, 1998), Australia (Watson, 2002), and the Netherlands (Verheul & Thurik, 2001). Future studies in other national contexts are needed to explore, for instance, the impact of national equality strategies on these issues. While Norwegian and Scandinavian equality policies have a strong focus on revaluing traditional womendominated spheres such as domestic work and child care, equality policies in, for instance, the United States have put more attention to increasing the number of women in management positions and securing equality in bank funding (OECD, 2004). Such strategies may give different results when it comes to new business financing and growth in menand women-led ventures. Research on the relationship between national equality policies and achievements in the area of women entrepreneurship is warranted. For policy makers the findings give important insights into the hindrances of growth of women-led ventures. Efforts to ease women founders access to financial capital seem to be important in this aspect. Bankers, venture capitalists, and others on the supply side of business funding should be particularly aware of the gender aspects of their activities, since they might miss out on potential good business projects as they, to a lesser extent, finance new businesses put forward by women than those put forward by men. They may need to screen specifically for women-owned businesses with a growth potential, and to evaluate the financial capital need in these businesses. Support schemes directed toward growth in women-led businesses may be needed to unleash the growth potential in these businesses. Governmental support agencies should prioritize women-owned businesses when giving financial support. Further, policy makers should consider putting stronger demands on private as well as governmental finance institutions with regard to reporting the share of women-owned businesses they finance. This may raise the consciousness on this issue. For women entrepreneurs, the findings point to the need to pay special attention to acquiring sufficient financial resources to their businesses to be able to reach desired levels of business growth. It may seem that women need to put in even more efforts on this issue than men. 682 ENTREPRENEURSHIP THEORY and PRACTICE

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20 Spilling, O.R. (2002). Kjønn, entreprenørskap og foretaksledelse i norsk næringsliv. In N.G. Berg & L. Foss (Eds.), Entreprenørskap. Kjønn, livsløp og sted (pp ). Oslo, Norway: Abstrakt. Spilling, O.R. (2004). Women entrepreneurship, management and ownership in Norway 2004: A statistical update. Oslo, Norway: NIFU STEP. Statistics Norway. (2004). Available at Cited 15 March 2005 Storey, D.J. (1994). Understanding the small business sector. London: Routledge. Venkataraman, S. (1997). The distinct domain of entrepreneurship research. In J.A. Katz (Ed.), Advances in entrepreneurship research: Firm emergence and growth (pp ). Greenwich, CT: JAI Press. Verheul, I. & Thurik, R. (2001). Start-up capital: Does gender matter? Small Business Economics, 16(4), Watson, J. (2002). Comparing the performance of male and female controlled businesses: Relating outputs to inputs. Entrepreneurship Theory and Practice, 26(3), Welter, F. (2001). Who wants to grow? Growth intentions and growth profiles of (nascent) entrepreneurs in Germany. In W.D. Bygrave, E. Autio, C.G. Brush, P. Davidsson, P.G. Greene, P.D. Reynolds, & H.J. Sapienza (Eds.), Frontiers of entrepreneurship research (pp ). Wellesley, MA: Babson College. Welter, F. (2006). Women entrepreneurship in Germany: State of the art, progress and open questions. In C.G. Brush, N.M. Carter, E.J. Gatewood, P.G. Greene, & M.M. Hart (Eds.), Growth-oriented women entrepreneurs and their businesses A global research perspective (pp ). Cheltenham, UK: Edward Elgar. Wiklund, J. (1998). Small firm growth and performance. PhD dissertation, Jönköping University (JIBS Dissertation Series No. 003), Jönköping. Gry Agnete Alsos is senior researcher at the Nordland Research Institute, N-8049 Bodø, Norway. Espen John Isaksen is associate professor at the Bodø Graduate School of Business, N-8049 Bodø, Norway. Elisabet Ljunggren is senior researcher at the Nordland Research Institute, N-8049 Bodø, Norway An earlier version was presented at the 2005 Babson Kauffman Entrepreneurship Research Conference and appears in Frontiers of Entrepreneurship Research We acknowledge constructive and helpful comments from two blind reviewers as well as the special issue editors. 686 ENTREPRENEURSHIP THEORY and PRACTICE