A column from Scientific American explores the sizable discrepancy between the venture capital raised by women and men pitching startups. Although women own a large and growing percentage of businesses in the country, they account for only a tiny fraction of venture financing, and a lot of it has to do with preconceptions about men and women heading the companies being pitched—and inequalities in how the pitching exchange takes place because of those preconceptions. Investors, who are already swayed by first impressions, tend to expect—and look for—resilience and potential in a male founder, whereas they project obstacles and the need to overcome them for female founders.
Researchers found that the huge gap in venture capital raised between men and women isn’t attributable only to a pipeline issue, but can also be traced to the assumptions investors make, the questions they ask, and the qualities they value in men and women. Click through to read more about how you might be “led” into this inequality by biased questioning—and how to avoid taking the bait.
By Laura Huang
When investors are deciding who to allocate capital to, they of course look at “hard data”—things like company financials, product or service quality, the size of the market opportunity, and other indicators of business viability—but, research shows, they also draw heavily from their perceptions of the entrepreneur and the founding team. Though they want to be investing in a great product, it is perhaps even more important that when a founder faces adversity (as inevitably happens), they have the wherewithal to persevere. In fact, investors will overwhelmingly finance entrepreneurs for whom they hold positive sentiments, regardless of their assessments of the business. One investor said: He had a good business, but what really got me to sign the [investment] check was when [the entrepreneur] said to me: ‘I was sitting outside one day, thinking that I was three months behind in our house payment, I had three employees I couldn’t pay, and I ought to get a real job . . . but then I thought, No, this is your dream. Get back to work.’ That’s when I knew I couldn’t not invest in this guy.
In this way, funding is very emotional, and it is very psychological. And as a result, it invites bias. There is a widespread disparity in funding—a disparity most notably observed through differences in the capital-raising experiences of male founders versus female founders whereby women are less likely to be given funding for their business. For female entrepreneurs, the numbers are clear: they own 38% of all businesses in the United States, yet they are only receive 2% of all venture financing. And even when they are able to raise money, female entrepreneurs find that it is in amounts much lower than their male counterparts. There are debates about why such staggering outcomes and statistics exist. Some argue that it is about the quality of companies that are being formed by women versus men. Others assert that it is because there is a relative dearth of female financiers and role models from whom women can turn to for support and resources. Still others claim that it is a pipeline issue.
But in recent research my colleagues and I conducted, we find that it may be the quality of the interaction between an entrepreneur and an investor that is driving the disparity. Our findings suggests that investors (both male and female investors) are more likely to approach men with questions about how they will “win”, whereas female entrepreneurs are approached with questions on how they will “avoid losing.” Men are more likely to be seen as the glamorous entrepreneurs who found companies that will become the likes of the Amazon, Google, or Uber. Women, on the other hand, are imagined as the heads of companies which manage to keep their doors open—small businesses and lifestyle companies whose names are not recognizable.
Image credit: Sam Edwards Getty Images
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