There is still a significant Gender Funding Gap. Is Revenue-Based Financing the Solution?
We live in a time when there is more innovation than ever, yet female bias is not out of the system. So what if Revenue-Based Financing is the solution?
The likes of technology, data and start-ups are changing the way we live daily. Over the last decade, the digital economy has become the centre of our daily lives, from different streaming platforms to communication and collaboration tools. Far more, society has also begun to idolise founders and entrepreneurship. Nevertheless, the tech and entrepreneurship scene still struggles with gender and racial inequality. In particular, I would like to focus on female founders' bias when raising funds.
According to the 2022 report by Pitchdrive, "The share for female founders of the overall amount raised by European start-ups dipped slightly in Q1 compared to 2021's annual figures, with female-only founded companies accounting for 0.8% of the total capital raised compared with 1.1% last year. Start-ups with only male founders increased their share of total capital raised from 2021's 85.2% to 86.7% in Q1 2022. They've also surpassed the last year's halfway mark for total capital raised. By contrast, start-ups with only female founders are well behind the pace of 2021, with their H1 2022 total raised equivalent to 37% of last year's capital."
While these challenges persist in the start-up world, we have seen a significant movement towards creating equal chances for people of all genders and races over the past few years. This issue has raised media attention and resulted in the establishment of support systems, from podcasts, blogs, and books to accelerators and venture capitals. These are positive developments. However, these are equally based on gender bias and do not tackle the issue at its core. For us to create a level playing field for female and male founders, a data-driven and result-oriented approach are necessary. So at the end of the day, the real question is what would be potential solutions for this problem.
Over the past year and a half, I have learned quite a bit about Revenue-Based Financing, which effectively funds companies with a predictable revenue stream by simply considering their historical data and current health.
This is particularly interesting as it addressed many female founders' problems when trying to raise funds. It considers essential metrics, such as company growth and financial data. It then determines the risk, which will impact how much the company can finance itself from the platform. RBF focuses solely on the company's data and can thus arguably be considered entirely objective. With the RBF model being based on data and clear eligibility criteria, it eliminates the possibility of human biases that might arise in the decision-making process or while reaching out or pitching.
Assuming a company is not eligible to get financing through the platform. In that case, the platform will usually inform the founder of which eligibility criteria they did not meet and which metric they need to achieve to qualify for the platform. Having this clear feedback on eligibility is revolutionary feedback for founders. This feedback also gives all founders equal possibilities to improve on the next quarter and be eligible for the financing.
To a certain degree, Revenue-Based Financing can be considered a game changer for founders of all genders and races in the recurring revenue industry, as it is non-biased, data-based and thus not subject to emotional decision-making. However, there still is a long way to go. This is one small step in the right direction to tackling biases in the entrepreneurship world at their core.