Dr. Jennifer Jennings discusses research by her colleagues on gender-related issues facing entrepreneurs who seek and attain funding from venture capitalists
In a prior Open Access Government article, Dr. Jennifer Jennings from the University of Alberta shared findings from her colleague’s research on women entrepreneurs in Ghana. Here, she summarizes two studies conducted by other colleagues on a very different topic: the existence and implications of any gender-based differences in how venture capitalists (VCs) affect start-ups founded by women versus men. As Professor Jennings elaborates below, the findings reveal important nuances that can help explain persistent gender gaps in new venture financing and performance.
Overall Nature of Study 1
The first study was conducted by Dr. Tony Briggs, an Executive Professor in the Alberta School of Business, in collaboration with researchers from the United States (Dr. Lakshmi Balachandra, Dr. Kim Eddleston, and Dr. Candida Brush). These scholars wanted to shed light on the earliest stages of financing that could influence the widely reported finding that women-founded ventures tend to secure only a very tiny fraction – a mere 3 percent – of venture capital funding.
To help explain this considerable gender gap, the researchers analyzed digital recordings from 185 early-stage technology entrepreneurs (38 women and 147 men) who had delivered a one-minute presentation to investors in a prestigious US-based Elevator Pitch Competition. The entrepreneurs were pitching early-stage investors to gain resources for their businesses. The majority of the participants possessed STEM backgrounds.
Each entrepreneur delivered their pitch to three active VCs who had provided funding to businesses in the same industry as the entrepreneur’s start-up. After listening to all of the pitches in their industry, the VCs collectively chose the two most promising to advance to the final round of competition. Just under 11 percent of the entrepreneurs from the various industries advanced to the final round.
Being selected as a finalist served as the study’s focal dependent variable. According to the researchers, this measure represented a reasonable proxy of a VC’s willingness to continue meeting with the entrepreneur. As such, it could be interpreted as signalling an interest in starting the due diligence process, which is a fundamental precursor to the investment decision.
Study 1 Research question and hypothesized predictors
Dr. Briggs and his co-authors were interested in determining whether the VCs who served as judges in the pitch competition would be less likely to choose the female entrepreneurs than the male entrepreneurs as finalists. If so, they also wanted to know whether this potential bias against the women founders was attributable to one or both of the following two explanations.
Their first hypothesized predictor focused on the entrepreneur’s biological sex. The researchers proposed that, on average, VCs would favour ventures pitched by male entrepreneurs over female entrepreneurs. Their underlying rationale was that the VCs were likely to possess the widely held belief that male founders are more ‘entrepreneurial’ and growth-oriented than female founders – as well as the widely held perception that women-led start-ups are less ‘legitimate’ and more risky than those led by men.
Their second hypothesized predictor called attention to the distinction between stereotypically masculine versus feminine behaviours, which arguably could be exhibited by entrepreneurs of either sex. The researchers expected that the VCs would be more likely to recommend (female or male) founders who exhibited greater masculine-typed behaviours, such as boldness, assertiveness and forcefulness, to the final round. Conversely, they further hypothesized that (female or male) founders who exhibited greater feminine-typed behaviors, such as warmth and sensitiveness, would be less likely to be selected as finalists.
Key Findings and inferences for Study 1
The first notable finding documented by Dr. Briggs and his co-authors showed that the VCs were just as likely to choose female contestants as male contestants for the final found. Accordingly, the researchers interpreted the non-significant effect of an entrepreneur’s biological sex as evidence that VCs investing in STEM ventures are not inherently biased against female entrepreneurs per se. Professor Jennings emphasizes that this finding is noteworthy because it runs counter to the prevailing belief that the decisions made by providers of entrepreneurial capital still reflect an inherent sex-based bias that disadvantages women.
The study’s second key finding is just as noteworthy, says Professor Jennings. This is because the researchers still found that the feminine-typed behaviours exhibited by the entrepreneurs – but not the masculine-typed behaviours – were related to the VCs’ finalist selection decisions. Their analysis revealed that founders who displayed more feminine-typed behaviours, regardless of their biological sex, were significantly less likely to be chosen to proceed to the final round. Accordingly, the researchers interpreted this finding as a basis for advising that entrepreneurs “don’t pitch like a girl” when seeking funding from VCs.
Although Professor Jennings acknowledges that this is a witty and apt inference, it unfortunately reinforces the prevailing stereotype that ‘girls’ don’t ‘naturally’ possess the skills that contribute to success in entrepreneurship (or baseball, for that matter). Moreover, it implies that (female or male) entrepreneurs with more ‘feminine’ presentation styles are the ones who must adjust – rather than the VCs who hold the gender-related biases. Professor Jennings finds it unfortunate that founders who exhibit characteristics such as a high level of warmth and sensitivity when they talk about their start- ups are punished for doing so by potential investors. These findings are all the more discouraging considering that the researchers’ statistical models controlled for the effects of any perceived differences in the market potential of the ventures as well as other presentation characteristics, such as the perceived attractiveness of the entrepreneurs.
A full version of the study by Dr. Tony Briggs and his co-authors can be found here.
Overall nature of Study 2
The second study related to gender and VC funding that Professor Jennings chose to feature in this article was conducted by Dr. Sahil Raina, an Associate Professor in the Finance Department at the Alberta School of Business. This study complements that summarized above by examining gender-related differences at a much later stage in the VC financing process.
In particular, Dr. Raina was interested in what happens to female-led versus male-led ventures after they have received VC funding. The following queries guided his empirical investigation:
- Are start-ups led by women less likely than those led by men to experience a ‘successful exit’ from VC financing?
- If so, how do VCs themselves contribute (if at all) to the observed gender gap in the likelihood of a ‘successful exit’?
In the finance literature, a ‘successful exit’ from VC funding refers to instances where a venture is subsequently acquired or issues an initial public offering (IPO).
Methodology and descriptive statistics for Study 2
Dr. Raina created a dataset to answer the above-noted research questions by combining information retrieved from two credible sources: Crunchbase and VentureXpert. From Crunchbase, he obtained data on the founders, financing rounds, and VC funding exits of 2,682 high-tech start-ups that had received an initial round of financing between 2005 and 2013 from at least one well-established VC. He deemed a VC to be well-established if it appeared in the list of top 50 VCs in the VentureXpert database. Dr. Raina included this criterion to help ensure that the focal start-ups had advanced beyond the ‘hobbyist’ or ‘garage project’ stage.
Of the 2,682 high-tech start-ups including in the sample, the vast majority – nearly 88 percent – had all-male founders. Only 3 percent were led by an all-female founding team, with the remaining 9 percent being founded by a mixed-sex team. These descriptive statistics alone provide vivid insight into the size of the gender gap in high-tech ventures backed by VC funding during the study period.
The descriptive statistics for the VCs are also revealing. Less than 1 percent of the VC financing syndicates had all-female lead General Partners. That being said, the proportion of syndicates with mixed-gender lead General Partners was above 60 percent on both the initial and second rounds of financing. This still meant, however, that sizeable proportions of the VC syndicates (32 and 37 percent on the first and second round respectively) were comprised by all-male lead General Partners.
Findings from Study 2 revealing a gender gap in successful exit from VC financing
The findings from Dr. Raina’s statistical analysis offer clear documentation of a substantial gender difference in the likelihood that a VC-funded start-up would have a successful exit from this form of financing. While 41 percent of the male-led ventures advanced to the acquisition or IPO stage, this was so for only 33 percent of the female-led ventures (i.e., those with one or more female founders). This gap was statistically significant.
Additional analyses by Dr. Raina showed that this gender-based differential widened in the presence of several controls variables, indicating that the female-led start-ups were 40 percent less likely than those led entirely by men to successfully exit from VC financing. Although this gap was even larger in the Biotechnology and Internet Services product markets, the analysis revealed two interesting exceptions.
In the product markets of Commerce and Shopping as well as Financial Services, the gender gap in successful exit from VC funding reversed in favour of the female-led ventures.
Given the evidence of a ‘gender gap reversal’ rather than simply a ‘gender gap disappearance’ in these contexts, Professor Jennings strongly encourages further exploration of this observation. Ideally, future research will shed light on such questions as why the female-led ventures had a higher likelihood of successful exit in these product markets; and, whether the reversed gender gap has persisted in these markets since the study’s end date of 2013 (or possibly even expanded to other contexts).
Findings from Study 2 showing how VCs contribute to the documented gender gap
Although Dr. Raina did not address the above- noted queries raised by Professor Jennings in his study, he was able to provide compelling evidence of how the VCs themselves contributed to the documented overall gender-based differential in the likelihood that a venture would advance to the acquisition or IPO stage. In particular, his analysis revealed the key role played by the gender distribution amongst the lead General Partners of the syndicate that provided the VC funding; specifically, whether the lead General Partners consisted solely of men or were comprised by at least one woman.
Consider the consequences for the start-ups that were initially financed by VC syndicates with all-male lead General Partners. In these instances, the findings from Dr. Raina’s study showed that the ventures founded by at least one woman were only one-third as likely as those founded by all men to subsequently experience a successful exit from VC financing.
The consequences were very different, however, for the start-ups that were initially financed by VC syndicates with at least one female lead General Partner. In these instances, no statistically significant differences were observable between the female-led versus male-led ventures in regards to their subsequent likelihood of either being acquired or issuing an IPO.
Indeed, when Dr. Raina restricted his analysis only to the start-ups led by at least one woman, he found that those initially funded by VC syndicates with at least one female lead General Partner were 2.1 to 2.5 times more likely to subsequently experience a successful exit than those initially funded by VC syndicates with no women amongst the lead General Partners.
But why did a female presence amongst the VC syndicate’s lead General Partners make a difference to a venture’s later likelihood of being acquired or issuing an IPO? Dr. Raina’s analysis sheds light on this query as well, showing that the women were better at evaluating the female-led start-ups. In particular, they were more selective about those they decided to fund, choosing female-led ventures that were intrinsically more valuable.
These findings are interesting, notes Professor Jennings, because they run counter to the popular belief that increasing the representation of women within VC firms will ‘naturally’ translate into a greater proportion of VC financing being invested in female-led ventures.
