New research demonstrates that female entrepreneurs attract far less venture capital funding than their male counterparts – so what can be done to remedy the imbalance?
There’s an inconvenient truth that female entrepreneurs will stumble across sooner or later: their gender will count against them when they come to seek investment. Yet a not-insignificant proportion are starting their own firms exactly because they’ve suffered gender discrimination in their careers.
The past decade has seen a 45 per cent growth in the number of women founding their own business in the UK. And, according to a survey in May of female founders and aspiring founders by Allbright, an investment platform and support network for female-founded businesses, 61 per cent of them did so to have more control over the direction of their careers and the type of work they take on. And 44 per cent did it to take advantage of flexible working conditions.
Having opted to create their own entrepreneurial future, female founders then struggle to get funding for their ventures because of their gender. The facts speak for themselves. In the US, female-founded firms make up nearly 40 per cent of all privately held companies but attracted only 2.17 per cent of the country’s venture capital in 2016, according to researcher PitchBook.
Globally, only 10 per cent of VC funds went to female founders between 2010 and 2015. And in the UK, PwC found that only 2.7 per cent of VC funding went to female-led businesses during 2016. Further research demonstrated that of the 160 venture capital firms in the UK, only 18 per cent per cent are investing in women.
Dana Kanze, a New York tech entrepreneur-turned-academic, decided to delve into this shocking state of affairs. She quit her career starting up businesses to investigate the discrimination she suspected she had experienced as a female co-founder.
Gender bias
In her recently published academic paper, We Ask Men to Win and Women Not to Lose, Kanze and her colleagues analysed video footage of venture capitalists interviewing entrepreneurs at TechCrunch Disrupt, one of the world’s most prestigious start-up competitions.
Only start-ups with a demonstrated need for venture capital are accepted into the competition, belying the claim that female entrepreneurs raise less money because they start businesses with lower capital needs.
What the researchers found was that start-ups led by men raised an average of $17.1 million per start-up, which was 5.14 times more that the average funds raised by female-led start-ups ($3.3 million).
They discovered that this extreme disparity came about because of a kind of bias that “is far more deeply ingrained and insidious than direct and explicit,” explains Kanze. It boils down to the types of questions venture capitalists asked of male and female founders.
While the questions put to female entrepreneurs tended to focus on the potential for financial loss – for example: ‘How do you prevent people from gaming your game?’ – questions for male entrepreneurs tended to focus on the potential for financial gain, such as ‘Where do you want to get to if everything is fine… What is your aspiration?’.
In other words, female entrepreneurs are being asked to prove they can execute a safe return for an investor (playing not to lose), while male entrepreneurs are instead expected to show that the opportunity can grow (playing to win).
The researchers go on to show that the latter (promotion) approach is far more attractive to potential investors than the former (prevention) approach, and can be, in part, to blame for the difference between men and women in attracting funding.
Promotion v prevention
This finding had been personally borne out by Kanze’s experience at TechCrunch 2009, where as co-founder of tech firm Blue Line Labs, she was constantly asked prevention questions while her male co-founder was asked promotion questions.
“We were sitting side by side, we both had the same finance background, and I had the title of CEO, so I should definitely have been asked the promotion questions,” says Kanze. “He had an operational title, so he should have been asked the prevention questions. It just became blatantly obvious after a while. I thought it was just unique to my start-up.”
The paper didn’t cover why women were asked more prevention rather than promotion questions but Kanze believes it comes down to implicit gender bias and stereotyping.
“In this particular context, women don’t embody the stereotypical characteristics of an entrepreneur, which is young, male, white and Stanford educated,” she says. “The stereotypical characteristics of women are incongruent with that of the archetypal successful entrepreneur – like Mark Zuckerberg. These widely held beliefs will manifest themselves in the types of questions directed towards men versus women, both by male and female investors.”
Felicia de Laat, a Partner at law firm Mourant Ozannes, thinks that this unconscious discrimination against female entrepreneurs is because “people tend to favour, develop and support people who are most like themselves”. In the male-dominated venture capital world – where only one in 10 decision-makers in British venture capital firms is a woman, while two-thirds have no female decision-maker at all – this means male VC partners investing in male founders.
“A lot of VC firms and private equity firms have very low levels of female partners in executive roles and, because of that, they tend to mirror themselves in the start-ups they invest in,” says de Laat.
“Generally, people understand that diversity is a good thing in the abstract. But when it comes to the crunch and you’re making a deal, you’re going to fit it into your model and your sweet spot and go for the deals that match those, and you might not have a diversity factor as part of that process.”
Levelling the playing field for female entrepreneurs therefore means getting more women into those roles, says de Laat. But you have to reach a critical mass of around one-third female partners in executive roles to make a significant difference to investing more in female-led start-ups. “You need a commitment from leadership in VC firms to gender diversity – you need to tie it to the top, to someone who has skin in the game,” she says.
Questions, questions
Kanze advises VC firms: “Create a playbook of their questions that are applied in the initial screening process regardless of candidate, that they should use instead of flying by the seat of their pants and asking adhoc questions to whoever shows up.”
This means asking questions that are balanced between prevention and promotion in order to improve their decision-making processes. “If there’s some irrational component, like implicit gender bias, then many firms are looking to correct that anyway as it’s going to maximise returns for them.”
Philip Salter is the founder of London-based thinktank The Entrepreneurs Network, which runs a Female Founders Forum. He says: “A more diverse investor base would go a long way to ensuring a greater number of female-led businesses are better funded. Part of this involves changes to venture capital firms’ employment practices, but it also requires more female entrepreneurs paying it forward.”
He cites entrepreneur Debbie Wosskow, who recently sold Love Home Swap for $53 million, and co-founded Allbright to fund and support female entrepreneurs.
However, he adds a note of caution: “Funds targeted at female founders will never be the whole solution, but I expect they will prove the economic case for challenging our biases.
“The market is coming up with other solutions. For example, on some crowdfunding platforms, female-led businesses are more likely to be funded than their male counterparts. Clearly, the investment base here is less concerned by the founder’s gender.”
De Laat suggests female founders find the VC firms that are more likely to invest in female-led start-ups, such as Astia, Merian Ventures, Female Founders Fund and Aspect Ventures, as well as finding a support network and mentor. Kanze says that if a fund does have a mandate to only invest in female-run businesses as an investment criteria then it neutralises the threat of implicit gender bias.
In the short term, when asking for funding from investors, Kanze suggests female founders attempt to identify the questions they are being asked as prevention or promotion types, and to redirect the dialogue to their advantage.
“Stay on topic while weaving promotion into your responses,” she says. Until things change in the long term, this is a useful tool in a female founder’s toolkit.