One of the challenges all entrepreneurs and founders face is raising funds, especially women founders. This is particularly true when it comes to venture capital (VC), which has historically been a boys’ club and a tough place for women to break the glass ceiling. Women make up only 13 percent of investing partners at VC firms in the United States and two thirds of VC firms have no female partners at the table. Compounding these challenges in new research showing that women helping women may end up hurting women founders.
This means that female founders end up pitching to male investors –usually with little success. In 2022, only three percent of VC funds went to female-led startups, while female entrepreneurs are 63 percent less likely than men to obtain venture capital financing. Many investors invest in companies that resemble the ones they have funded in the past, which usually means companies led by men.
Some have suggested that to break into the club, female founders should reach out to female investors. Indeed, research shows that women venture capitalists are twice as likely to fund female-led start-ups compared to male venture capitalists.
However, recent research by INSEAD Knowledge shows that seeking funding exclusively from female investors may make it harder to raise additional funding in the future. While female founders might have better success securing funding from female investors, some VC firms can view this backing as a token gesture and not as a serious strategic investment – which might hurt their chances going forward.
San Francisco-based INSEAD analyzed data from 2,136 US start-ups based that received first round funding, 71.2 percent of which went on to receive at least a second round of investment. They distinguished between female-founded and male-founded firms, and whether first round investors included female VC partners, male VC partners, or both. The research found that female-founded firms backed by female investors in their first funding round were two times less likely to raise further investment compared with those backed by male investors.
To further understand this bias, INSEAD conducted a lab experiment showing participants a start-up pitch video presentation with the pitch deck and narration presented in the four cases being identical, with two exceptions. They created founder pseudonyms to infer their gender, with participants seeing either David or Laura Anderson. They also varied the name of the investor so that participants saw either John or Katherine Clark. Each participant watched one of the four versions and were asked to rate both the business idea and the competence of the entrepreneur.
When the pitch was delivered by a female entrepreneur backed by a female investor, her pitch was rated less favorably, and shockingly she was also perceived as less competent.
This research seems to show that individuals considering investing in individual start-ups tend to assume that a female-led start up receives funding due to the founder’s gender, rather than on her own merits. When a female investor funds a female-led start-up, other investors may assume that they only did so because of her gender, dismissing the possibility that the entrepreneur possesses the competence needed to lead a successful start-up. The fact that a woman and her backer share the same gender is used as an excuse to “explain away” a woman’s achievements. As a result, future investment becomes more difficult to obtain.
INSEAD suggests that VC firms should think twice before assigning partners to support start-ups based on gender. Pairing female VC partners with female-led start-ups, could actually be damaging the chances of that company receiving further funding.
These biases could also arise when it comes to minority VCs investing in other minority founders. What can seem like a positive solution can hold underrepresented minority founders back.
A positive takeaway in the research found that female entrepreneurs who received backing from both female and male investors suffered no penalty when it came to future investment.
Female and minority entrepreneurs may therefore benefit from a multicultural mix of male and female investors working together to support their start-up’s growth.
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