Female Entrepreneurs Funded By Female VCs Face Difficulties Obtaining Future Funds

For decades, women have been encouraged to help other women. Madeleine Albright often quipped, “There is a special place in hell for women who don’t help each other.” But now, new research suggests some unintended consequences when women help other women, especially female entrepreneurs.

Female entrepreneurs have a tough time raising funds. Women-led startups received just 2.3% of venture capital funding in 2020. Some have suggested that female founders have better outcomes if they seek investments from female venture capitalists (VCs). Indeed, female VCs are twice as likely as their male counterparts to fund women-run businesses.

However, new research suggests that funding from female VCs may be a double-edged sword for female founders. Although investments from women may be slightly easier for female founders to obtain, these investments can lead to assumptions that the female entrepreneur received special treatment because of her gender. As a result, early investment from female investors can make it more difficult for female founders to obtain future funding.

The research published in Organization Science examined 2,136 startups tracked by the Crunchbase database, a data source for startups and investment activity. The researchers found that female-founded firms that received funding from female VCs had more difficulty getting funding in the future. In fact, women-founded businesses that received funding from female VCs were two times less likely to raise additional funding than women founders who were funded by male VCs. For male-founded firms, there was no such effect. The male founders were equally likely to receive future funding regardless of whether their first-round funding came from male or female VCs.

To hone in on this bias, the researchers conducted an experiment. To obtain funding, it is common for entrepreneurs to present business pitches to VCs, so the researchers created four business pitches and asked MBA students to evaluate them. The slide deck and narration presented in the four pitches were identical, with two exceptions. Some MBA students saw a man’s name for the founder and narrator, David Anderson, while others saw a woman’s name, Laura Anderson. The name and the picture of the VC investor providing early-stage financing also varied between John and Katherine Clark. Other than varying the gender of the founder and the financer, the four pitches were exactly the same.

MORE FOR YOU

After watching the pitch, the MBA students were asked to evaluate the quality of the pitch as well as the competence of the founder. Female (but not male) entrepreneurs were evaluated less favorably when they received early support from a female rather than a male investor. The female founders who had female VC support were also perceived as less competent. Recall, that all the business plans were exactly the same, so the only explanation for the less favorable rating is gender bias. The researchers concluded, “when women receive support from other women, observers may implicitly believe that the relationship was motivated by considerations other than merit, which leads to a discount in perceptions of competence.”

The women were likely perceived to have received funding, not because it was well-deserved, but because female VCs wanted to help out other women who wouldn’t have been able to secure funding elsewhere. Previous research indicates that people similarly tend to question a woman’s competence when they believe she was hired because of her gender or due to affirmative action initiatives. The researchers summarize, “When seeking to make sense of events, observers are often tempted to dismiss the contribution of a woman’s own capabilities to her success, automatically assuming that some external factor, such as luck or affirmative action, must have played a part.”

This certainly doesn’t suggest that women should stop helping other women. There’s substantial research evidence that women can benefit from the support of female mentors, particularly in male-dominated professions. This support can make women feel included and increases the likelihood that women will succeed in male-dominated careers. But, when it comes to obtaining capital, to eliminate any questions regarding their competence, this research suggests that women may benefit most from gender-diverse investment teams.

This puts female entrepreneurs in a double bind. If they rely solely on funding from men, they are less likely to receive any funding. Alternatively, if female founders rely on funding from other women, then they are less likely to receive future funding. It’s a no-win situation.

Fortunately, the researchers offer a potential way out. They suggest that as the number of female investors grows, gender may be less likely to be perceived as the motivating force behind decisions to invest in women. Currently, only about 12% of decision-makers at VC firms are women, so substantially more women would need to enter this field to bring about this change.

Another benefit to having more female VCs is they could continue to fund women’s projects. The researchers explain, “Currently, female VCs are involved primarily in early-stage fundraising rounds, where the amount invested is lowest but the uncertainty, and risk, are highest. If more women were successful in raising large funds, our results could change, as later-stage female investors carry forward the baton from early-stage female investors and provide female entrepreneurs with the follow-on capital they require. But we should also ask ourselves whether this type of gender-segregated investment environment is really something to aspire to.”

Source

More

Related Posts

Hippo Sighting Report

Help us out, we really appreciate it.

Help contribute to our research, and let us know if you have seen similar situations that we may have missed. Our team will review the details you provide and add to our main list once we verify the information.

stay informed

Subscribe and get the updated Hippo List.

Get notified when we release our updated lists by email.

Make a Donation

Thank you for subscribing!

We will send you an email to confirm your details.  Welcome aboard!

Thanks for sending us your report.

We will review your information, and publish in on our list once we validate the details.