Examining Gender Bias in VC Funding

Firms founded by women make up 38 percent of privately-held companies in the U.S., but just two percent of American venture capital (VC) financing goes to women founders. Wharton School professor Laura Huang, a New Jersey native, teamed with three other researchers from Columbia Business School for a new approach to studying this gap.

Is it the result of gender bias? Yes. But as Huang and her co-authors (Dana Kanze, Mark Conley, and Tory Higgins) helped to discover, that bias is operating in unexpected ways—and it might be simple to correct.

There were plenty of existing answers for the gap: Women do not ask for as much funding as men do; women are more likely than men to start small-scale or “lifestyle”-type businesses that require less capital; majority-male VC panels are more likely to award funds to their fellow men; or, as Professor Huang has heard in the course of her own research, “What if all the women just had worse ideas?”

Huang and her co-authors weren’t satisfied, and to dig in further, they focused on part of the VC vetting process that, until now, has gotten little academic attention. Instead of studying the pitch portion of the VC contest, they undertook a rigorous study of the language of the post-pitch Q&A between entrepreneurs and prospective funders, through the lens of Regulatory Focus Theory (RFT).

RFT says that people striving for a goal can have one of two mindsets: “promotion” or “prevention.” A promotion motivation is about making gains. A prevention motivation is about maintaining the status quo.

The study found that VC panels tend to ask men promotion-centered questions, while women get prevention-centered questions.

“Female entrepreneurs are implicitly expected to prove they can execute a safe return for the investor, whereas male entrepreneurs are instead expected to show the opportunity can grow,” says the study, titled “We Ask Men to Win & Women Not to Lose: Closing the Gender Gap in Startup Funding.”

This means men get questions like, “How will you grow your customer base?”, while women get questions like, “How will you retain your customers?” Given either a promotion- or prevention-based question, entrepreneurs tend to answer in the same vein, and the difference matters.

According to the study, entrepreneurs, “raised an average of $16.8 million when investors asked predominately promotion questions, 7.21 times more funding than the average $2.3 million raised by [entrepreneurs who were] asked predominantly prevention questions.”

Huang and her colleagues got their field data from transcriptions of the Q&A portions of every TechCrunch Disrupt Startup Battlefield competition since its 2007 inception. Taking Q&As from this prestigious industry-standard event ensured that questions about whether women were asking for less, or pitching smaller-scale or lower-quality ideas, were eliminated: every startup in the competition met the same baseline criteria for viability and funding needs regardless of the entrepreneurs’ gender. The researchers combed the language of the Q&As using a combination of specialized software and carefully  controlled manual study, and found a clear landslide of promotion-type questions for men, and prevention-type questions for women, with corresponding disparities in funding.

The researchers then were able to replicate these disparities in their own designed survey, which presented controlled Q&A scenarios (based on the TechCrunch sessions) to funders, who tended to award more money to promotion-focused Q&As.

And it wasn’t just male VC funders who displayed this bias, indicating that the answer to this gap is not simply better representation of women among funders. According to the study, “both male and female venture capitalists display implicit bias,” meaning that women entrepreneurs got prevention-focused questions from men and women alike on the funding panels.

“This was one of the more surprising findings,” Huang said. “It suggests that disadvantage may not always be a malicious thing—it often is implicit… More representation [of women] is not going to hurt—but it can’t be the silver bullet.”

But there is a silver lining. The study also found that entrepreneurs who received prevention-focused questions but gave promotion-focused answers boosted their bottom line significantly: Those who switched focus raised about 14 times more money than those who didn’t.

In other words, with the right command of the language of RFT, women entrepreneurs can blunt this gender disadvantage.

That’s exciting news for the industry: “I’ve had investors tell me that they should frame and hang in their conference rooms the graphic of questions that men are asked vs. women,” Huang said. “These types of reactions have been awesome.” And she’s working to incorporate this knowledge into her own workshops and curriculum, readying students to even the playing field.   

With such a large chunk of U.S. businesses founded by women, improving their funding outlook is integral to national macroeconomic issues like GDP and employment rates. Which means the gender gap in VC funding affects everyone. 

“This has numerous implications, not just for women entrepreneurs. These are huge trickle-down effects and this needs to part of the conversation,” Huang finished.