Why female entrepreneurs are missing out on funding

By Aine Doris and Olenka Kacperczyk

Entrepreneurship is one of the most dynamic features of modern economies and an important driver of growth. Yet significantly fewer women than men are founding new businesses today. And the gender gap is particularly evident in high-growth ventures. 

Research from London Business School’s Olenka Kacperczyk sheds light on this, and reveals a worrying gender bias across the entrepreneurial “process” that is stacking the odds unfairly against female entrepreneurs. 

Together with Jorge A. Guzman, Assistant Professor of Business at Columbia Business School, Kacperczyk has found that women are 63% less likely than their male counterparts to secure the venture capital funding they need to get their new businesses off the ground. 

And the problem is particularly acute at two inflection points in the entrepreneurial cycle: the orientation choices made by female entrepreneurs at the moment of founding; and at the funding-seeking stage, where inherent bias is shaping investor decisions.

Entrepreneurship: a pipeline with distinct phases

While previous research has focused almost exclusively on fund seeking, Kacperczyk and Guzman were interested in looking entrepreneurship as a pipeline or process with distinct phases. 

“Most studies into gender and entrepreneurship focus on early investment as the critical point of inflection, but entrepreneurship is a really a pipeline involving a number of stages, from founding a new venture to seeking capital to exit,” says Kacperczyk. 

“We wanted to know whether the gender gap was evident at different points in the process –particularly at the founding phase – and determine whether these disadvantages to women widened out further down the pipeline.”

Starting from the premise that a venture’s growth orientation ties directly to subsequent performance outcomes, Kacperczyk and Guzman wanted to test a hypothesis: were female founders’ business choices somehow less ambitious than men’s. And was this stymying their success in getting funding?

“New ventures vary enormously in their growth potential,” explains Kacperczyk. “Taking into account well documented factors like gender segregation and motherhood penalties in the workplace, we hypothesised that women might naturally incline to less growth-oriented types of start-up – lifestyle or service-based ventures as opposed to, say, trading.”

Then they were interested in establishing how successful women were in the funding phase. Specifically they wanted to know if persisting disparities between male and female founders were primarily linked to venture orientation and predicted growth, or whether gender bias might also be playing a role. 

“Investors are predominantly male so we were curious to build on what we know about the role of gender in decision-making where there is high risk or uncertainty. We hypothesised that investors might be relying on gender stereotypes when evaluating entrepreneurs’ competences. And whether male investors might also identify more closely with male entrepreneurs.”

Crunching the numbers

To explore these ideas in depth, Kacperczyk and Guzman conducted a wide-scale study of companies founded in the US between 1995 and 2011. Focusing on California and Massachusetts where entrepreneurial and venture capital activity are particularly prevalent, they examined all publicly available business registration records over the 16-year period. The resulting data set – covering all for-profit start-up corporations, limited liability companies and partnerships founded – was then analysed using algorithms to observe and measure venture orientation and growth predictions. 

Examination of the data revealed three striking findings. 

“First off we discovered that women are significantly less likely than men to start a new venture in the first place. Between 1995 and 2011 only 21% of all new businesses were registered by women,” Kacperczyk says.

Looking at backing data, she and Guzman found something more significant. 

Only 10% of all venture-funded start-ups were founded by women. And of those that achieved equity growth, a meagre 7% were female entrepreneurs. 

A good deal of this gender can be explained by venture orientation at launch, says Kacperczyk.

“Our second finding is that 65% of this gender gap in funding ties to the growth orientation of the business. We found differences between male and female-founded start-ups across dimensions like start-up name, industry, registration of patents or trademarks and types of organisation – corporation, LLC or partnership – which are all indicators of growth potential.”

But if 65% of the gender gap in funding can be accounted for by high or low growth predictions, what about the remaining 35%?

Here, says Kacperczyk, they found evidence of gender bias. 

“Once you’ve discounted growth predictions, the residual difference of 35% becomes a clear indicator of investor bias and gender stereotypes, especially when you compare like-for-like male and female-run ventures of similar growth orientation.”

The top one percent

They did find something a little more promising however.

With start-ups at the higher end of growth orientation, the gap in funding between male and female-founded businesses diminishes to just 16%, suggesting that investors are less inclined to rely on gender when assessing high-growth ventures. And it is here, in fact, at the top 1% of growth predicted distribution, that a significant 50% of all venture capital investment occurs. 

“So our findings reveal that the initial orientation of a new venture and gender bias from investors are indeed driving a gender gap in entrepreneurship,” says Kacperczyk. “But when stronger signals of growth for comparable female and male-led ventures are available to investors, the gender gap diminishes significantly.” 

They also note that when focal investors are more “sophisticated” in their thinking and methodology, they are significantly less inclined to let gender cloud their judgment in investment decision-making. 

“We measured for sophistication among VC investors using indicators like reputation scores based on successful IPOs,” explains Kacperczyk. “And we found that less sophisticated or less capable evaluators are indeed more likely to rely on gender stereotypes when inferring the value of a new business.”

All this has strong implications for policy-makers, she believes.

“Entrepreneurship is a huge driver of growth, and bringing more female founders into the equation is good for the economy, good for diversity, good for job creation and good for enterprising women. We would welcome policies that target the entire entrepreneurship cycle from founding to funding. For female founders measures like improving technological education, mentoring, re-thinking career aspirations and better support mechanisms can empower women to create higher potential firms with a better chance of securing funding.”

The same policies must also target cultural biases prevalent among investors, Kacperczyk warns.

“The education component in particular should target the entrepreneurial gender gap where less capable investors are allowing biases to creep into their decision-making, and very possibly missing out on solid opportunities, while keeping female-led ventures stalled.”

This article was originally published on London Business School’s website.

Entrepreneurial financeEntrepreneurshipVenture capitalWomen