Why Are Women-Owned Businesses So Small?

Women own 30 percent of privately owned businesses but generate just 11 percent of sales, according to federal statistics.

When Arabel Alva Rosales started her own technology consulting company, she had many advantages: a law degree from Chicago's DePaul University, experience working in state government, a family history of entrepreneurship, and business contacts eager to join her team. But statistically speaking, as a Hispanic woman she faced long odds.

Women now start businesses at higher rates than men do, and minority women start businesses at the highest rate of all. Yet women-owned businesses have fewer employees, lower sales, and less chance of survival than male-owned businesses, according to a 2010 Commerce Department report. The report found that women-owned businesses are smaller across every sector of the economy, from educational services to manufacturing.

Nobody is really sure why this dynamic exists, but Emilia DiMenco has a theory. "It really has to do with access to information, access to contacts, access to contracts, and to capital," says the head of the Women's Business Development Center, a Chicago-based nonprofit that has worked with Alva Rosales.

Of course not every entrepreneur has dreams of rocketing to the top of the S&P 500. Survey research suggests that women have lower growth expectations for their businesses and are more likely to use their positions as owners to carve out a work-life balance than men, says Alicia Robb, a senior fellow at the Ewing Marion Kauffman Foundation.

But some female entrepreneurs may be held back by circumstance, not by choice. Minority women, in particular, can struggle to find capital to invest in their businesses. Minority families tend to have a lower net worth than white families do. And minority-owned firms are less likely to receive loans than white-owned firms; when they do get loans, the amounts are lower and interest rates higher, a 2010 report from the Commerce Department's Minority Business Development Agency found.

In the start-up world, women find it more difficult to raise venture capital money. "Teams with women on the founding team are just getting significantly less money than all-male teams," says Susan Duffy, executive director of the Center for Women's Entrepreneurial Leadership at Babson College, which is study the fundraising gap. Part of the problem, Duffy says, is that there aren't many female venture capitalists.

In general, female entrepreneurs are more likely to grow their businesses organically, without relying on outside capital. That's true of Alva Rosales, who used her own money to get her company started. "Especially from a Latina background—we prefer not to have to borrow, I think," she says. The approach has worked for her business, but she's also learned to establish lines of credit—just in case—and to think critically about financing.

WBDC wants to make sure entrepreneurs have access to as many resources as possible. The organization gives out tiny loans, facilitates networking, and hosts events that walk participants through everything from establishing a business to navigating a merger. WBDC will also certify companies as "woman-owned," a label that can help businesses connect with government agencies and corporations that look for diverse suppliers.

In her work with Babson students, Duffy says she emphasizes the importance of having women's business ideas in the marketplace. She likes to talk about Care.com, a company that connects families with babysitters and other caregivers. The business grew out of a female founder's personal experience, and it went public earlier this year. DiMenco says that given America's changing demographics, there's a huge market for businesses aimed at diverse customers.

Next year, the U.S. Census Bureau will release its 2012 Survey of Business Owners, which will shed light on how all types of small businesses fared during the recession. "We're waiting with bated breath," says Alejandra Castillo, national director of the Commerce Department's Minority Business Development Agency. With the best available data now years out of date, it's even harder to identify the kind of support that women-owned businesses may find most useful to thrive and expand.

"I don't know what the numbers are. But I don't think people should underestimate us," Alva Rosales says of female entrepreneurs. "Because I think we as business owners are a force to be reckoned with." Today, she employs 25 people and her company brings in over $1 million each year. And she has a teenage daughter who—having grown up with the business—has become a savvy entrepreneurial thinker, too.