Raising funding is a full-time job for most startup owners. For women, finding money to scale up a business can be overwhelming, noted Nicole Paolozzi, the Chagrin Falls-based creator of an app that matches families with in-home care professionals.
Paolozzi has secured $1.5 million in early-stage financing for her OndeCare platform, tapping individual backers as well as angel investment groups willing to provide money for the business.
The frustration for Paolozzi – not to mention for women entrepreneurs nationwide - is navigating a fundraising environment historically unfriendly to most anyone who isn’t white, male and Ivy League-educated. The International Finance Corporation, a Washington D.C.- based asset management organization, estimates a $300 billion financing gap for female-owned small businesses globally. The IFC further reported that 70% of women-owned small- and medium-sized enterprises have insufficient or no access to financial services.
Paolozzi knows these irritations well, as she’s had to meet twice as many investors as many of her male counterparts. Whereas men are asked about their hopes and achievements, Paolozzi is peppered with questions about keeping her company from failure, she said.
“Raising money is the hardest challenge, especially as an operator and not a tech founder or even a sales and marketing person,” said Paolozzi. “We’ve built the right solution, but raising money is hard.”
Stories like Paolozzi’s are not uncommon, said Lynn-Ann Gries, founder and principal of Gries Consulting, whose Northeast Ohio-based investment group finances female-founded startups. In the U.S., only 2% of startup investment goes to women-led ventures even though 38% of founders are women, according to research by the European Investment Bank.
Nor is it uncommon for female owners to receive negatively slanted investor questions, added Gries. According to the psychological theory of regulatory focus, many funders adopt a “promotion” orientation with male entrepreneurs where they ask about potential. With female founders, investors often embrace a “prevention” slant more concerned about safety and responsibility.
In practice, this might mean asking women how their company can go wrong, rather than the potential size of the market for their product or service.
“They don’t give women the chance to talk about the same kinds of things,” said Gries, previously co-founder of JumpStart, Inc. “That’s something female founders have been learning over the last five years. Women who are pitching have to turn a ‘prevention’ question into a ‘promotion’ answer.”
Looking back at lessons learned
The lack of women in venture capital is another tall hurdle in an already inequitable funding environment, said Gries. Today, only 4.9% of VC partners are female, and of that percentage, women of color comprise less than 1% of funders.
The divide is widened by “pattern matching,” a catch-all phrase for the gut feeling VCs rely upon to make investments. This long-standing bias in business results in what investor Richard Kerby calls a “mirrortocracy.” Put simply, a white male launching a software firm will get a longer look from investors than a woman in the same industry, said Gries.
“It feels to them like the (male-run startup) has success potential regardless of industry or the actual level of talent,” Gries said. “They are the look and feel of what a startup will be.”
OndeCare owner Nicole Paolozzi got funding from Gries’ group along with an investor fund led by Dr. Raymond Rackley, a surgeon at the Cleveland Clinic. Paolozzi also brought on a male chief technology officer, while bringing her husband to pitch meetings to tap into his expertise as a market strategist.
“It was amazing to both of us how the male investors kept looking at my husband rather than me for answers,” Paolozzi said. “Investors are looking for a reason to say no, and as a woman owner, they jump to conclusions faster in order to say no.”
When preparing a funding ask, Paolozzi does a deep dive into analysis and financial modeling. She learned her lesson years ago when she was unable to answer difficult queries from a California venture capital firm – a 45-minute call that ended with the investor suggesting she bone up on her numbers.
Even knowing her stuff can present a tricky balance, said Paolozzi.
“I have to stop myself from digging into details too soon, because then you lose the investor,” she said.
It pays to start small
Gries’ first piece of advice for would-be entrepreneurs is to brace themselves for a “long slog,” she said.
“Going forward, they should get into an incubator or accelerator program,” Gries said, noting that many of these groups are run by people with early-stage seed funding experience. “These connections are invaluable to their networks.”
Founders should be ready to present a lengthy pitch, a task made easier by the bevy of pitch videos available online. Although traditional equity capital is not the only option for entrepreneurs – for example, owners can attempt to crowdfund their startup – relying on investors is easier than asking a large audience to fund your business, said Gries.
“It pays to start small,” Gries said. “Start generating some revenue. That way you can sell your way to growth and fund yourself through your own sales. It would be different advice depending on the type of company you were trying to build.”
Alongside knowing their balance sheets to the last decimal point, female entrepreneurs should be actively connecting with like-minded peers, said Erika Hill, executive director in Cleveland of the Goldman Sachs 10,000 Small Businesses program. The Cleveland office has shepherded 900 founders through the program - approximately 43% are women primed to create jobs and economic opportunity in the region.
“These are people who have gone down the same path and are in need of similar funding,” said Hill. “Tapping into resources will let you ask key questions about how those steps of scaling a business are laid out.”
Paolozzi, the Chagrin Falls founder, wants more women in Northeast Ohio making investment decisions. In the meantime, she is willing to convene with other female founders working toward a better future.
“I’ll make time for someone who’s struggling even in the middle of my struggle,” said Paolozzi. “I’d tell them to know their model before they make the mistakes that I made. Know your model so more of us can succeed.”
