According to recent reports, women-led startups receive less than 3% of all venture capital investments. In response, many leaders have called for greater participation of women in venture financing, as studies have shown that female investors are more likely than their male counterparts to invest in foundations. However, new research by the authors suggests that support from female investors may actually be both a blessing and a curse, as it can make it difficult for female founders to raise additional rounds of funding. By analyzing more than 2,000 venture-backed startups, the authors found that women-led companies whose first round originated exclusively from female venture capital were twice as likely to raise a second round. This is due to an effect known as attribution bias: when people see that an organization has received funding from a male investor, they assume it is because it is competent and its startup is strong. But if the founder herself only has female investors, people are more likely to assume her success is due to her gender rather than to her competence. As such, the authors argue that while there are certainly benefits to raising capital from other women, founders should consider the risks to their long-term success—and do what they can to ensure a more diversified schedule from the get-go.
In the end, early stage venture capital is about people, and I’m betting on you. People feel more comfortable betting on someone who looks like them, looks like them, talks like them, goes to the same schools, eats the same food, goes to the same restaurant, drinks the same wine, goes to the same country club, all those little things. They’re not overtly racist or overtly discriminatory, it’s just a convenience. In the end, it’s a comfortable thing.
– An interview with an investor, August 2015
Venture capital is a man’s game. Women are significantly underrepresented among both venture-backed entrepreneurs and venture investors, as companies are founded only by women. less than 3% For all venture capital investments and women account less than 15% From the check book. It’s a vicious cycle: If venture capitalists are more comfortable “betting on someone who looks like themselves,” it’s not surprising that investors—mostly males—bet on startups led by men.
In response to these disappointing stats, policy makersAnd Business leadersAnd investor groups She called for more women to be involved in financing projects. The idea behind these efforts is that if men don’t invest in women, women will do so themselves—and ultimately reap the benefits of investing in female talent that might otherwise be overlooked.
At first glance, this approach makes sense. Studies have shown that female investors are indeed more likely than male investors to invest in female entrepreneurs. But we have Recent research She notes that support from female investors could be a mixed blessing, as it could make it difficult for founders to raise additional rounds of funding.
We analyzed more than 2,000 venture-backed companies in the United States and found that women-led firms whose first round of VC funding was raised exclusively from female VC partners were twice as likely to end up as those whose first round included male partners. Round two. Regardless of the size of the initial funding round, industry, geographic location, or prestige of the investor, women founders were always less likely to close the second round if their first round included women only. Conversely, for companies led by men, the gender of the first-round investors had no effect on their ability to attract investment in the future.
What drives this disparity? To find out, we ran an experiment in which we asked more than 200 MBA students and investors to watch a fictional startup presentation narrated by Laura or David. The promotions 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 had come from “Katherine”. We then asked the participants to rate the quality of the offer and the competence of the founder.
Predictably, when Laura narrated the show and her funding came from John, she was rated as highly as David. But when Laura’s funding came from Katherine, both male and female participants rated the pitch less positively, rating Laura as less competent.
This is due to an effect psychologists call attribution bias: the tendency to assume that someone’s identity or personality, rather than external factors, is responsible for the situation they’re in. When people see that the founder has a male investor, they assume she must have received his investment because she is competent, and her startup is solid. But when people see that the founder has an investor, they attribute her investment success to her gender, not to her competence. As a result, potential new investors assume a founder is less competent if they see her being supported only by female investors – regardless of her actual qualifications.
Interestingly, the research has identified Similar effects Regarding affirmative action. When people are told that a female employee was an affirmative action hiring, they see her as less competent than the equally qualified men or women who were not hired for affirmative action. Even if two women have objectively identical levels of competence, simply knowing that one of them has been hired as part of an affirmative action program is enough to make her appear less competent.
So, what does this mean for female founders looking to raise capital?
We are not suggesting that women should not collect capital from other women. Female investors may be more responsive to enterprises, and better able to see their potential. Communication between women can also be more relaxed and less risky, and the founder may be more likely to establish a confident mentorship relationship with a female VC, which can bring significant long-term benefits to both.
However, this can be a risky strategy when it comes to a startup’s long-term success. There are still very few female investors, and they tend to be concentrated In funds focused on early-stage investments, where the risks are higher and the money invested is smaller. Today, women in venture capitalists simply do not control enough assets to continue investing in women-led companies as they expand. This means that female founders will eventually need to attract male investors in order to grow — and if you’re a woman, our research shows it’s a lot easier to do that if you raise at least some male capital from the start. As one organization we talked about:
I think there’s definitely a problem, if you’re a business woman, you’re a back-up investor, you want to get more capital, and now the only people around the table are these two women. It’s almost like you want to do the hard thing first, and bring in a few guys.
Of course, as with any systemic injustice, it’s about who’s actually in positions of power to address bias and ensure founders are evaluated fairly. In particular, VC has a responsibility to rethink how they assess and secure investment opportunities work metrics Rather than implicit biases, it guides early-stage financing decisions.
But for female founders facing fundraising in today’s imperfect world, our research suggests that it may be worth the extra effort up front to build a broader network and try to recruit a diverse team of venture capitalists in the first round. Indeed, beyond the effects on future fundraising, Advance search It indicates that mixed-gender coalitions tend to outperform single-gender coalitions in advocating for gender equality. While there are legitimate reasons why female founders have an easier time attracting venture capital and reaping more benefits from those relationships, there is also a lot to be gained by ensuring a diverse range of viewpoints at the cover table.
Similarly, while VC firms may encourage their investors to identify and endorse women entrepreneurs (perhaps motivated by a desire to support startups led by women), this responsibility should not fall solely on women. Ultimately, investors and founders alike would benefit if male VCs work alongside their female counterparts to proactively support female-led startups — and do what they can to ensure that the next generation of unicorns is a little more balanced.