Do Women Entrepreneurs Get Less VC Funding? Wharton and Columbia Researchers Find a Large Gender Gap
Over the last few years, there has been a lot of talk about more women in business. From the promotion of organizations like the Forté Foundation—which seeks to enhance women in business—to CNBC claiming “the Golden Age for women entrepreneurs has finally begun,” enterprising women seem to be everywhere. Unfortunately, this doesn’t mean that the deck is stacked in their favor. In fact, researchers from Columbia Business School and The Wharton School found the opposite was true.
The Gender Gap in Startup Funding
In a paper published in the Academy of Management Journal titled, “We Ask Men to Win & Women Not to Lose: Closing the Gender Gap in Startup Funding,” researchers looked at how women fared compared to men when they were trying to get funding for their startups.
After reviewing footage from the TechCrunch Disrupt startup competition, the researchers found that women were asked entirely different types of questions about their companies compared to their male counterparts. Men received more questions about their project’s potential for growth, while women received questions on the opposite end, about their potential risks and losses. This difference in questioning had a measurable impact on the funding each startup received.
The research paper, written by Dana Kanze (a Columbia Business School Ph.D. student), Laura Huang (a Wharton School Professor), Mark A. Conley (a Columbia Psychology Ph.D.), and E. Tory Higgins (a Columbia Psychology Professor), sought to delve into the enormous gender gap revealed in venture capital funding. According to the paper, only 2 percent of VC funding goes to women entrepreneurs in spite of the fact that women own 38 percent of U.S. businesses and represent 7 percent of venture capital firms.
One of the keys to this drastic difference in funding was how VCs—both male and female—framed funding questions for women-created businesses. Kanze explained the thought process in a Forbes article.
“According to the psychological theory of regulatory focus, investors adopted what’s called a promotion orientation when quizzing male entrepreneurs, which means they focused on hopes, achievements, advancement, and ideals,” Kanze said. “Conversely, when questioning female entrepreneurs, they embraced a prevention orientation, which is concerned with safety, responsibility, security, and vigilance.”
Inside the Research
To study how this difference in questioning impacted women and men entrepreneurs, the research team reviewed the Q&A sessions of 189 startup entrepreneurs—12 percent of whom were women—held by 140 prominent venture capitalists—40 percent of whom were women. Using software to analyze each session, researchers discovered that 67 percent of questions posted to men were promotion-oriented while 66 percent of questions posted to women were prevention-oriented.
In the end, the study found that this difference in questioning led to a huge difference in VC funding. Among comparable companies, the research team found that businesses that were asked prevention-oriented questions raised (on average) $2.3 million in funds in 2017, while their promotion-focused counterparts raised $16.8 million—nearly seven times more.
“In fact, for every additional prevention question asked of an entrepreneur, the startup raised a staggering $3.8 million less, on average,” Kanze told Forbes. She continued, saying, “Controlling for factors that may influence funding outcomes—like measures of startups’ capital needs, quality, and age, as well as entrepreneurs’ past experience—we discovered that the prevalence of prevention questions completely explained the relationship between entrepreneur gender and startup funding.”
However, there was some good news. For female entrepreneurs who received prevention-focused questions but responded with promotion-type answers, they were able to raise $7.9 million, versus $563,000. This suggests that regardless of how VCs phrase their questions, entrepreneurs can recover much of their funding potential if they answer in the positive.
To test their findings, the research team conducted an experiment that recreated the TechCrunch Disrupt conditions with 194 VCs—30 percent of whom were women—and 106 entrepreneurs—47 percent of whom were women. After removing startup specific details, the team asked the VCs to allocate $400,000 to their chosen entrepreneur.
According to the Kanze in a Harvard Business Review article, the team found that: “Angel investors allocated an average of $81,113 to startups in the prevention question, promotion answer condition—1.6 times larger than the $52,369 average allocated to those in the prevention question, prevention answer condition. Similarly, ordinary investors gave an average of $96,321 to the prevention question, promotion answer condition—1.7 times larger than the $55,377 average given to the prevention question, prevention answer condition.”
Speaking with Professor Laura Huang
To gain additional insight into the results of the research paper, we spoke with Professor Laura Huang at the Wharton School. Here’s what she has to say.
- What was the most surprising result that came out of your study?
“It was surprising that both men and women investors were equally as likely to ask prevention-focused questions to women, as opposed to promotion-focused. It wasn’t that men were the only ones biased, but that both genders were equally as likely to be biased.”
- Do you have any advice for female entrepreneurs looking to raise venture capital?
“Stop it in its tracks. When you see something like this happening, stop it immediately and redirect the response so that you’re making yourself on equal footing. Don’t allow that train of thought to go through where you’re getting asked prevention-focused questions and investors are focused on the risk. Answer the question that’s asked but redirect your response toward possibilities and success.”
- How do you think VC funding can change for the future to close the gender gap?
“Part of it is an awareness on the investors’ side. It’s also up to the entrepreneurs to redirect each question toward the right focus. A lot of this gap is implicit. Investors don’t realize they’re asking prevention-focused questions of women; they just automatically ask certain questions to each gender. Awareness around the tendency toward prevention-focused questions for women entrepreneurs and a focus on redirection toward promotion is key.”
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