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Executive Summary: Undercapitalization as a Contributing Factor to Business Failure for Women Entrepreneurs


One of the Council’s key areas of research is on access to capital, which continues to be a challenge for women-owned businesses. Two of the NWBC’s FY2013 research projects demonstrate that accessing sufficient capital is a problem even for high-growth women-owned businesses. Women-owned firms face unique challenges because there are significant differences in undercapitalization that exist between men-owned and women-owned firms. First, Robb and Coleman illustrated that on average, women start their business with nearly half the amount of capital as men; startup capital is a key indicator of business success. Women entrepreneurs also raise substantially less equity and debt throughout the business lifecycle. The study by PQC Consulting, Inc. shows that all else equal, undercapitalization is statistically related to business closure.                                                               

Undercapitalization limits enterprise growth by constraining business investments in key assets such as equipment, employees, or inventory necessary for growth; the business does not have the funds it needs to meet market demands.[1] Since startup and expansion capital are critical for firm growth and success, one factor that will improve women-owned firm performance is to reduce the number of women-owned firms that experience undercapitalization. As the number of women-owned and women-led firms continues to grow in the United States, it is essential that the NWBC explore business failure as a result of undercapitalization as it likely costs the economy billions in receipts. For example, Babson College concluded the lack of sufficient capital funding for women entrepreneurs will cost the economy nearly six million jobs over the next five years.[2] Thus addressing the access to capital gender gap has significant implications for the economy as a whole.  This study aims to develop a more nuanced understanding of the impact that undercapitalization and capital structure have on the business outcomes of women-owned firms.

Key Terms:

  • Women-owned businesses (WOB): Firms with women owning 50% or more were classified as women-owned.
  • Women-led businesses (WLB): Firms in which women owners worked more than 30 percent of the total hours worked by all owners. This accounts for firms in which women play a prominent leadership role but may not meet the 50% ownership threshold.
  • Non-Women-owned/women-led (non-WOB/WLB): Firms where women did not own at least 50% or work 30% of the total hours worked by all owners.
  • Undercapitalization is the lack of sufficient capital to conduct normal business operations and to service debts.
  • Current RatioA firm was considered undercapitalized if its current ratio was less than one, e.g., its current assets were less than its current liabilities. The current ratio measures a company’s ability to meet its short-term financial obligations.
  • High Cost Capital Ratio:  A firm was considered undercapitalized if it relied on high cost capital for more than 20 percent of its total capital (ex. credit cards).
  • Liabilities to Equity (Debt to Equity) RatioA firm was considered undercapitalized if its liabilities to equity ratio were greater than one, e.g., liabilities exceed equity.
  • Proprietary Ratio: Shareholders’ Equity / Total Assets: The proprietary ratio provides an estimate of the capitalization used to support a business.  A high ratio indicates sufficient capital to support business operations.
  • Return on Equity: Profit / Shareholders’ Equity: The return on equity measures profitability by determining how much profit the company generates using the equity shareholders have invested.
  • Return on Assets: Profit / Total Assets: The return on assets estimates how efficiently a company employs its assets to generate profit.


The research design focuses on nascent entrepreneurs and uses confidential panel survey microdata from the Kauffman Firm Survey (KFS).  In 2004, the Ewing Marion Kauffman Foundation sponsored a panel study that tracked the same businesses over a series of seven annual follow-up surveys over 2004-2011. Notably, this dataset captures changes during the recent recession. The survey contains data on business formation, the characteristics of strategy, the financial and organizational arrangements of these businesses, and the characteristics of business owners and operators.[3] The baseline (2004) sample included 4,928 businesses, and by the seventh follow-up, the survey included 2,966 eligible respondents and 2,007 “completes.”[4]

In order to evaluate whether a firm was undercapitalized, the researchers constructed a year-end balance sheet for each firm that reported to the KFS in a given survey year.  These balance sheets included information on the assets and liabilities. Current assets, long-term assets, and total assets were incorporated in the balance sheets as well as current liabilities, long-term liabilities and total liabilities of each firm.

The study utilizes univariate and multivariate regression analyses to determine the effect of undercapitalization as a contributor to nascent entrepreneur business failure.

Key Findings:

Key Similarities between Men-Owned and Women-Owned Businesses

Regardless of the gender of the owner, the following variables have a positive effect on firm profitability. 

  • Firms with team ownership or owners active in day-to-day operations are less likely to be undercapitalized.
  • Firms with owners that have previous industry experience and higher education are less likely to be undercapitalized.

Undercapitalization and the use of high cost capital have a negative effect on the likelihood that a firm will remain in business. The use of high cost capital, undercapitalization by equity to liabilities, increased age, and having risky credit have negative effects on a firm’s survival rate.  

Having risky credit is linked to lower levels of profitability at startup year and negatively affects firm survival.  Firms with poor credit are more likely to face access to capital issues and liquidity constraints. Having risky credit also increases interest rates paid on loans.

Incorporation status matters when starting a new firm with employees.  Operating as an S or C corporation positively influences the number of employees a firm has. 

Throughout the research period, the proportion of firms using excessive amounts of high-cost capital approximately equalizes among the gender groups.  Further, the total number of undercapitalized surviving firms decreased with each year, indicating that surviving firms shifted their capital mix away from high cost sources, such as credit cards.

At startup, approximately 65 percent of WOB/WLBs’ and approximately 32 percent of non-WOB/WLBs’ liabilities exceeded equities.  This is an important distinction as it indicates that women entrepreneurs are more likely to access necessary capital as debt in the startup year.

Key Differences between Men-Owned and Women-Owned Businesses

WOB/WLBs are more likely to be undercapitalized than their non-WOB/WLB counterparts.  At startup, WOB/WLBs are more likely than non-WOB/WLBs to face liquidity constraints. Over time (2004-2011), the share of WOB/WLB firms that are undercapitalized declines to about 39 percent. This results in a smaller share of WOB/WLBs that are undercapitalized than non-WOBS/WLBs. This shows that WOB/WLBs optimize their funding mix as time continues or that firms who did not face liquidity concerns at the onset were more likely to survive year after year.

Survival rates for WOB/WLBs were lower than survival rates for businesses overall.  The survival rate to 2011 of WOB/WLBs is 45 percent while for businesses overall the survival rate is 55 percent. This is consistent with prior NWBC research showing that the lower survival rates for women-owned firms is related to access to capital challenges, as opposed to directly related to female ownership.[5]

Other Insights

Increased owner industry experience has a positive effect on firm’s survival; previous startup experience does not affect survival rates. In regards to survival, a woman entrepreneur’s industry experience is an important indicator of survival; her amount of prior startup experience—or lack thereof—is not. This is an important finding because women tend to have less startup experience; however, outside funders, both debt and equity, tend to value prior startup experience highly.

Increased owner industry experience and owner education positively affect the propensity to remain in business.  Prior owner startup experience has no effect on firm survival. Although unexpected, the owner startup experience variable had negative and statistically significant coefficients in three years, two of which were during the Great Recession.  This shows that prior business ownership is not a determinant of a successful and profitable firm.

Policy Implications:               

This research has identified several policy implications that the NWBC will take into account as it creates its recommendations for 2016.


  • Pursue effective networking in order to assemble teams that address gaps, given the positive effect of industry experience and education on firm survival, profitability, and employment.


  • Consider previous industry experience rather than startup experience when betting on an entrepreneur. Industry experience, not startup experience, is associated with firm survival. The owner’s startup experience is currently overvalued when determining if a business is investment-worthy.
  • Increase women’s access to low cost capital because dependence on high cost capital can have a snowball effect that negatively affects cash and credit management. This may involve more outreach and more education on creating a strong loan application package.

Support Organizations:

  • Educate women entrepreneurs about the importance of their capital structure and sources regardless of total amount, by developing a toolkit to assist women entrepreneurs with analyzing the cost, structure, and sources of their capital on a regular basis. 
  • Educate through gender-mixed groups and seminars that will provide a forum for entrepreneurs to discuss what works, what does not, and how to handle challenges.
  • Increase research related to examining the regulatory environment for lending to determine how this may have an effect on women and men-owned businesses. Since women receive a significant amount of their capital from bank loans, it’s important to make sure that women can access this capital as a means to grow their businesses.


[1] Undercapitalization.

[2] Geri Stengel.

[3] DesRoches, David, et al.

[4] DesRoches (2013) p. 20.

[5] See Coleman, Susan and Alicia Robb.“Access to Capital by High-Growth Women-Owned Businesses.” National Women’s Business Council. (2014).