According to recent reports, startups led by women receive less than 3% of all VC investments. In response, many leaders are promoting getting women more involved in venture financing, as studies show that female investors are more likely than their male counterparts to invest in female founders. However, the authors’ new research suggests that support from female investors can be a mixed blessing, as it can make it more difficult for female founders to raise additional rounds. in financing. Through an analysis of more than 2,000 venture-backed startups, the authors found that women-led companies whose first rounds were raised only from female VCs were twice as likely the probability of raising the second round is low. This is due to an effect known as attribution bias: When people see that a female founder has received funding from a male investor, they think it is because she is competent and her startup is strong. . But if the same founder has female investors, then people are more likely to think that his success is due to his gender, rather than his ability. That said, the authors argue that while there are certainly benefits to raising capital from other women, female founders should consider the risks to their long-term success — and do what they can to ensure it. a more diverse cap table from the beginning.
In the end, venture capital in the early stages is a people thing, I bet you. People are more comfortable betting with someone who looks more like them, looks like them, talks like them, goes to the same school, eats the same food, goes to the same restaurant, drinks the same wine, goes to in the same country club. , all these little things. They are not blatantly racist or blatantly discriminatory, it’s just a relief. Ultimately it’s a matter of comfort.
— Interview with a male investor, August 2015
Venture capital is a man’s game. Women are underrepresented among venture-backed entrepreneurs and VC investors, with companies founded only by women receiving less than 3% of all venture capital investments and women reporting less than 15% of check-writers. It’s a vicious cycle: If VCs are more comfortable “betting on someone like them,” it’s no wonder that investors — who are mostly men — are more likely to bet on startups led by men .
In response to these depressing statistics, policy makers, business leadersand investor groups promotes the inclusion of more women in venture financing. The idea behind these efforts is that if men don’t invest in women, then women themselves will — and ultimately reap the benefits of investing in female talent that would otherwise be overlooked.
At first glance, this approach makes sense. Studies shows that female investors are actually more likely than male investors to invest in female entrepreneurs. But ours recent research suggests that support from female investors may be a mixed blessing, as it may be more difficult for female founders to raise additional rounds of financing.
We analyzed more than 2,000 venture-backed companies in the United States and found that women-led companies whose first round of VC funding raised only from female VC partners were twice as less than those whose first round included male partners who would eventually raise a second round. Regardless of the size of the initial funding round, industry, geographic location, or investor prestige, female founders are always less likely to close a second round if their first round included only women. In contrast, for companies led by men, the genders of early-stage investors had no effect on their ability to attract future investment.
What drives this difference? To find out, we conducted an experiment in which we asked more than 200 MBA students and investors to watch a fictional startup pitch narrated by “Laura” or “David.” The pitches themselves were identical, except that half of the participants were told that the startup had already received funding from an investor named “John,” while the other half were told that the funding was from “Katherine.” We then had the participants evaluate the quality of the pitch and the founder’s competence.
As expected, when the pitch was narrated by Laura and her funding from John, she was rated as high as David. But when Laura’s funding came from Katherine, both male and female participants evaluated the pitch less favorably, and rated Laura as less deserving.
This is due to an effect that psychologists call attribution bias: the tendency to think that a person’s identity or behavior, rather than external factors, is responsible for the situation they are in. maybe he got his investment because he’s capable, and he’s off to a strong start. But when people see that a female founder has a female investor, they attribute her investment success to her gender rather than her ability. As a result, new potential investors believe that a female founder is less qualified when they see that she is only supported by female investors – regardless of her actual qualifications.
Interestingly, the research found similar effects about affirmative action. When people are told that a female employee is an affirmative action hire, they view her as less competent than equally qualified men or women who are not affirmative action hires. Even if the two women have the same skill level, the knowledge that one was hired as part of an affirmative action program is enough to make her less competent.
So, what does this mean for female founders looking to raise capital?
We are not suggesting that women should not raise capital from other women. Female investors may be more receptive to female founders, and see more of their potential. Networking between women may also be more comfortable and less fraught, and a female founder may be more likely to establish a trusting mentorship relationship with a female VC, which can provide more long- term benefits of both.
However, this can be a risky strategy when it comes to long-term startup success. There are very few female investors, and they tend to be concentrated in funds that focus on investments at an earlier stage, where the risk is higher and the funds invested are smaller. Today, women VCs simply cannot control enough assets to continue to invest in women-led companies as they scale. This means female founders ultimately need to attract male investors to grow — and if you’re a woman, our research shows it’s easier to do if you raise even a small amount of capital from men. from the beginning. As a female founder we spoke to put it:
I think there is definitely a problem, if you are a female entrepreneur, supported by a female investor, and you want to get more capital, and now the only people around the table are two women. It seems, you want to do the hard thing first, and get some guys.
Of course, as with any unfair system, it is up to those who have been in positions of power to address the bias and ensure that the founders are scrutinized fairly. In particular, VCs have a responsibility to rethink how they evaluate investment opportunities and ensure that business metrics rather than implicit biases guiding early-stage funding decisions.
But for female founders facing fundraising in today’s imperfect world, our research suggests it may be worth the extra effort up front to cast a wider net and try to recruiting a diverse group of VCs in the first round. In fact, beyond the effects of future collection, first research suggests that mixed-gender coalitions tend to outperform single-gender ones in promoting gender equity. While there are legitimate reasons why female founders may have an easier by securing different sets of views on the cap table.
Similarly, while VC firms may encourage their female investors to identify and champion female entrepreneurs (perhaps out of a desire to support female-led startups), it that responsibility should not be placed solely on the shoulders of female VCs. Ultimately, investors and founders will benefit if male VCs work with their female counterparts to actively support female-led startups – and do what they can to ensure that the next generation of unicorns are more balanced.
