More than fifteen years ago, in 1998, as a second-year Harvard Business School student, I conducted a year-long field study on American women entrepreneurs’ access to equity capital — and in particular, venture capital. At that time, according to sources ranging from Venture One to the Small Business Administration, Women-Owned Businesses (WOBs) raised 2-2.5% of the venture capital financing in this country.1 This was a dismal state of affairs.

Fast forward to 2014 when The Diana Project at Babson College conducted a study finding that, from 2011 to 2013, only 3% of companies receiving venture capital had female CEOs.2 Despite varying measurement methodologies and different study definitions, year after year, the bottom line remains the same: WOBs receive only a small sliver of venture capital financing.

Though they secure only a small bite of the venture capital pie, American WOBs number 9.1 million, represent approximately 30% of all U.S. businesses, employ 7.9 million workers and generate $1.4 trillion in annual revenues, which is 11% of all private company revenues.3 Between 1997 and 2014, the number of WOBs grew at 150% of the national average.4

According to the Kauffman Foundation’s Firm Survey, the five-year survival and closure rates for ventures started by men and women in their sample group were not statistically different.5 Another study revealed that the average venture capital-backed woman-run business posts 12% higher revenues and uses an average of one-third less committed capital.6

So the question is: Why aren’t more WOBs receiving venture capital financing, the lifeblood of rapidly scaling entrepreneurial ventures?

Limited Eligibility

1. The majority of WOBs are small, sole proprietorships and are mainly service- or retail-based.7 These are not industry segments like software, biotech and IT that historically provide the growth rates and high investment returns required for venture capital. According to PricewaterhouseCoopers Moneytree, in 2014 through Q3, venture capital funding to business, financial and healthcare services and retail combined was just 5.7%.8

2. The percentage of women earning degrees in venture capital-optimal fields is decreasing. Although U.S. women currently earn more than 57% of bachelor’s, 63% of master’s and 53% of doctoral degrees, from 2002 to 2012, the percentage of women earning bachelor’s degrees in computer science dropped from 28% to 18%.9 Software alone accounts for 42% of all venture investing.10

3. Many women have motivations other than financial gain for starting businesses. According to the National Women’s Business Council, women entrepreneurs are “motivated by independence, flexibility, and work-family balance.”11 Still, it is worth noting that those women entrepreneurs in high-growth segments expressed more interest in accumulating wealth from their ventures,12 making them stronger candidates for venture capital.

Limited Access

1. Superior deal flow is of critical strategic importance to venture capitalists, but there is a sizable gender gap. Most business plans find their way to venture capitalists through networks of mostly male industry insiders (such as GPs of other VC firms, portfolio company CEOs, investment bankers, lawyers, etc.) to which female entrepreneurs may not have access.

2. The rules of the game (i.e. how deals are sourced and negotiated) are opaque, leading to a sometimes-sizable knowledge gap for women entrepreneurs in the area of venture capital financing.

3. There is a dearth of female venture capitalists. Venture firms with female partners were three times more likely to invest in companies led by women CEOs.13 But from 1999 to 2014, the percentage of women partners in venture firms dropped from 10% to 6%.14

Limited Solicitations

1. Anecdotal evidence indicates that female entrepreneurs often present more conservative financial projections. And studies show that women typically seek to raise smaller amounts of financing15 because they tend to be more realistic and pragmatic in their pro forma projections. That makes the investment opportunities proposed by women entrepreneurs appear less enticing.

2. Therefore, the increasing size of venture capital funds and the associated increasing average investment sum per deal ($10M average in 2014 through Q3)16may have negative implications for women entrepreneurs. There may be a significant mismatch between the average venture capital investment size and the scale of the financial need of WOBs, which is so often underestimated.

3. In general, but particularly in Silicon Valley, venture capitalists seek to invest in serial entrepreneurs with a track record of enterprise conception, growth and exit.17 Therein lies a chicken and egg problem. It may be particularly difficult for women entrepreneurs to raise venture capital if they have not demonstrated a history of success. And they may not have this track record because of impeded access to venture financing.

4. Most venture capitalists seek to exit their investment positions in a three-to-six year time frame, whereas many women entrepreneurs tend to run and grow their businesses over many years. It may be that WOBs need to seek out more “patient capital” than venture capital.

Untapped Opportunity

As we have seen, women entrepreneurs are disenfranchised from the cycle of venture capital financing nearly every step of the way. There are gaps in communication, knowledge, education, training and networking. For those women entrepreneurs who are less educated about private equity, the rules of the game can be opaque. Even for those women entrepreneurs who are more private investment-savvy, there are still perceptual biases and double standards that may prevent even the most seasoned businesswomen from securing venture capital financing. Indeed, a recent series of studies by professors at Harvard Business School, Wharton, and MIT Sloane found that even when the content of venture pitches are identical, investors tend to select male over female entrepreneurs.18

Given all this, there appears to be a market failure, with some strong, venture-appropriate WOBs going unfunded. As Dr. Candida Brush of Babson College contends, “There is an enormous untapped investment opportunity for venture capitalists smart enough to look at the numbers and fund women entrepreneurs.”19

There is good news on the horizon. A new movement called “Gender Lens Investing” focuses on products that serve women consumers, gender equity in the workplace and, most relevant to this discussion, access to capital for women entrepreneurs. In addition, there are a few venture funds targeting WOBs exclusively (e.g. Women’s Venture Capital Fund, Aspect Ventures), though such funds tend to be smaller scale. And there are a number of organizations serving WOBs, including accelerators, networking groups, resource centers and female angel groups (e.g. Springboard Enterprises, Astia, Women 2.0, Golden Seeds and Pipeline Fellowship).

But the biggest opportunity is for incumbent venture capital funds of mixed-gender investment leadership to screen, provide due diligence on and invest in deals in a gender-blind fashion. Market failures create opportunities for outsized returns. The time for investing in Women- Owned Businesses is now.

Fran Seegull is Chief Investment Officer and Managing Director of ImpactAssets. She is also Adjunct Professor of Entrepreneurship at USC’s Marshall School of Business.

1 Hilary, Stout, “This Investment Fund Pries Loose Some Cash for Female-Run Firms,” Wall Street Journal, November 28, 1997, section B, p. 1. Women’s Business Exclusive newsletter, January/February 1998, p. 6.

2 Professors Candida G. Brush, Patricia G. Greene, Lakshmi Balachandra, and Amy E. Davis, “Diana Report—Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital,” Arthur M. Blank Center for Entrepreneurship, Babson College, September 2014.

3 “The 2014 State of Women-Owned Businesses Report,” commissioned by American Express OPEN, 2014. Frequently Asked Questions. Small Business Administration, March 2014.

4 Ibid.5 Findings based on data analysis from the Kauffman Foundation Firm Study as referenced in: Frieswick, Kris, “The Surprising New Math of Startups,” Inc., October 2014.

5 Findings based on data analysis from the Kauffman Foundation Firm Study as referenced in: Frieswick, Kris, “The Surprising New Math of Startups,” Inc., October 2014.

6 Study quoted in: Padnos, Cindy, “High Performance Entrepreneurs: Women in High-Tech,” Illuminate Ventures, February 2010.

7Coleman,Susanand AliciaM.Robb,  ARising Tide—Financing Strategiesfor Women-OwnedFirms(StanfordUniversityPress,2012),p.147.

8“VentureCapitalInvesting2014ThroughQ3,”PricewaterhouseCoopers/NationalVentureCapitalAssociationMoneyTree™Report,2014;data:  Thomson Reuters.

9“Bachelor’sDegreesAwarded,BySexandField:2002–12,Women,Minorities,andPersonswithDisabilitiesinScienceandEngineering,”NationalScience Foundation.

10 “Venture Capital Investing2014 Through Q3,” op. cit.

11  “NewResearch:FactorsInfluencingtheGrowthofWomen-OwnedBusinesses–RiskTolerance,Motivations,Expectations,andCulture,” NationalWomen’s Business Council,October 2013.

12 Ibid.

13 Brush,op. cit.

14 Brush,op. cit.

15 Coleman, op. cit.

16 “Venture Capital Investing2014 Through Q3,” op. cit.

17 Coleman, op. cit.

18 Nobel, Carmen, “Venture Investors Prefer FundingHandsomeMen,” HBSWorking Knowledge, April 30,2014.

19 Brush, op. cit.