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Why do female founders receive less capital even though they deliver better results?

Posted by Kanika Sinha

August 31, 2021    |     3-minute read (721 words)

Businesses founded by women deliver higher returns on investment — more than twice as much per dollar invested and stronger cumulative revenues at nearly 10% more over a five-year period — than those led by men, according to BCG research. Nevertheless, they receive only a fraction of overall funding from investors. 

The COVID-19 crisis seems to be worsening this funding gap: The percentage of venture capital investment flowing to female founders dropped dramatically in 2020. Crunchbase reports that only a minuscule 2.3% of venture capital investment went to female founders last year. Additionally, the total amount of funding flowing to female-founded companies ebbed by 27% compared to the previous year.

Dig deeper

Nassim Abdi, the co-founder of Indiana-based firm Storybolt, which offers equity and diversity training, had a hard time attracting investors. But this had more to do with her being a female founder rather than anything lacking in her business model, according to research from Dana Kanze. 

Kanze, a professor of organizational behavior at London Business School, had undergone similar experiences as a serial entrepreneur, which prompted her to examine these gender distinctions among founders seeking investor funding.

By analyzing several pitch presentations from TechCrunch’s Disrupt Startup Battlefield, the world’s preeminent startup competition, Kanze found that women and men used similar degrees of promotion and prevention language in their actual pitches. But women founders weren’t given the same shot at funding as their male counterparts.

Kanze’s 2017 TED Talk, “The Real Reason Female Entrepreneurs Get Less Funding,” further elaborates on how male entrepreneurs were asked promotion-coded questions during pitches while female entrepreneurs were asked prevention-coded questions. A staggering 67% of questions posed to male entrepreneurs focused on a founder’s vision for growing the company. These numbers were reversed for female founders: 66% of questions posed to female founders were prevention focused. 

In general, prevention questions ask how an entrepreneur will prevent everything from going south, and promotion questions focus on how successful the venture could be.

Additionally, a “similarity bias” works against women founders to further limit chances of shining in front of investors, said Kanze.

All venture capitalists, regardless of gender, displayed the same implicit gender biases manifested in the focus of their questions. Female VCs asked male entrepreneurs mostly promotion questions and then turned around and probed female entrepreneurs with mostly prevention questions just like the male VCs did.

Silver lining

Stepping up her research, Kanze analyzed the entrepreneurs’ responses to questions during pitch meetings and found that promotion-driven answers led to better funding outcomes.

Generally, a prevention question begets a preventive reply. And such responses further trigger subsequently biased questions from investors, and these limiting questions and answers collectively fuel a cycle of bias that perpetuates the gender disparity. The only way out is responding with promotion answers.

Framing a response in promotional terms can help female entrepreneurs garner higher funding for their startups. Kanze’s research backed this up with data suggesting that plucky entrepreneurs who redirected the otherwise prevention-focused dialogue into the favorable domain of gains were able to raise 14 times more funding.

Suggestions

The most promising startups, regardless of whether they're led by men or women, should be given a fighting chance to grow and thrive. And there is something that every party involved in the process can contribute toward ending this gender funding bias. 

Female entrepreneurs should first recognize the question they’re being asked during pitches. Second, they should try to emit more confidence and frame their responses in promotional language for every prevention question asked by investors. 

Meanwhile, to correct funding outcomes, investors should change the way they approach female founders — everything from their questions to outreach. For instance, they can consider setting a minimum percentage of funds to be allocated for women-founded companies, conducting diversity training and reaching out to local, national and global organizations for female founders. 

Additionally, female investors should conduct more even-handed funding sessions. Flashing the same light on every startup's potential for gains and losses will help them enable all deserving firms, regardless of whether they are male- or female-founded. 

Finally, more women must step up as investors and claim seats at the table. Continuing to avoid the male-dominated venture capital world will only make women miss out on the power, wealth and influence that they could have investing in venture. 

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