The funding gap

People’s tendency to like people who look, and act like, or remind them of themselves is referred to as homophily. Such homophily frequently manifests itself in the venture funding world, where the overwhelming majority of investors are male (with 70% of these being white males). Indicatively, only
about 12% of decision-makers at US venture capital firms are women. Among UK VC investment teams, women hold 13% of senior roles. Female representation in emerging markets, excluding China, is only about 8%. China is a notable exception, with 15% female representation, which is above the percentage for developed countries.

VCs in general tend to be relatively homogeneous, with hires having quite similar backgrounds, such as similar educational degrees (economics, business or finance, MBAs) and work experience (investment banking, consulting, or large technology companies). Notably, among Black investors, who overall make up about 3% of VCs, over 50% attended Harvard or Stanford. In addition to a substantial gender gap, VCs suffer from a significant racial gap. Based on The Information’s VC Diversity Index, among 100 women surveyed at the 102 largest US venture capital firms, there was only one Hispanic female partner, one Native American female partner, and no African-American female partners.

There is evidence that women tend not to ask for financing as often as their male counterparts, and that they would, in general, rather ask in cases where they believe they have a high chance of approval. This in turn creates a vicious circle, as women expect the funding process to be onerous, the reality being that it frequently is, and they are faced with far greater rejection than their male counterparts. Furthermore, if women are not confident about their financial acumen, they will tend to refrain from asking. Therefore, self-perception and confidence are important parameters that affect how many women will pursue the journey of becoming entrepreneurs.

Furthermore, women typically feel less comfortable voicing their ambitions than men. As a result, it can be inferred that women are potentially more cautious in expressing their and their company’s ambitions, and therefore may lower their initial demands or expectations. Another factor that may affect investors’ perception is the motivation behind starting a company. Women, more than men, may be driven to build companies as a means of achieving greater control over their work/life balance, or after hitting a “glass ceiling” in their previous careers. Furthermore, women often set up companies with the objective of achieving positive social impact. This motivation may be viewed as less profit motivated and therefore less likely to be benefit from VC funding.

The majority of successful CEOs of start-ups are white men. Due to this representative bias, investors may perceive men to be more capable entrepreneurs, as male entrepreneurs are more similar to, and representative of, the existing pool of successful entrepreneurs. As a result, women entrepreneurs are often perceived as different and possibly less capable than their male counterparts. Therefore, investing in companies led by women may be perceived as riskier and restrict access to funding, despite otherwise similar and sometimes better risk/return profiles of ventures led by women. 

Existing gender stereotypes may also lead to biases that affect female entrepreneurs’ chances of obtaining funding. Based on wider gender role expectations, women, on average, are expected to display certain feminine behaviors, such as warmth,
emotional expressiveness and sensitivity. Similarly, men are expected to display assertiveness and dominance. Research suggests that demonstrating stereotypical feminine behavior during a pitch affects the outcome, as it negatively impacts the entrepreneur’s perceived business competence, preparedness and leadership.

In the context of obtaining VC financing, which observations could be taken that could help women navigate the pitching process more successfully?

An important consideration is, whether in an entrepreneurial context, women who do not conform to their gender-associated behavior are penalized. Some research suggests that gender role congruity may be more complex in entrepreneurship, and that there seems to be no penalty for women who display more masculine traits and therefore act inconsistently with their gender stereotype. Instead, both men and women who display more feminine stereotyped behaviors during the interview processes seem to have been penalized.

Ahead of the funding rounds, fundraisers should prepare thoroughly, search for resources through their contacts, arm themselves with as much knowledge as possible on the funding process, and optimize their way of communicating the company’s potential and responses to questions.

While individual women can try their best to manoeuvre the funding process in their favor, it would be more powerful and impactful if the entrepreneurial ecosystem played its part in narrowing the gap.

As mentioned earlier, the existence of a robust social network is a key determinant of future success. Gaining access to strong networks and networking opportunities, as well as having the chance to build relationships beyond conversations around financing is vital to the success of a venture. Formal events and networking platforms can facilitate the development of relationships and social networks that could support women entrepreneurs. 

Such support networks could help guide and motivate women who require finance to do so and help them work on delivering their ideas. Education around the financing process could potentially help reduce the bias and financing gap women often face. Equally, boosting women’s understanding of how they may be perceived, and what they can do to improve that perception, are key ingredients to success. Relevant know-how and tips can be shared within a network even more effectively so via formal events and mentorships. Last but not least, on the evidence presented, investors would benefit greatly from reviewing and debiasing their decision making processes, for example, by ensuring that they ask an equal amount of ‘growth’ compared with ‘prevention’
questions to all founders, irrespective of their gender, or through evaluating pitch decks through “blindfold” processes. In addition, it is useful to provide constructive, actionable feedback to founders.

Traditionally, venture capitalists have calculated that about two in 10 investments will generate most of a fund’s profits. If a fund hopes to achieve a 20% return, then those two in 10 winning investments must generate or return between 20-30 times the money invested into them. Investors in these companies eventually require an exit, to allow for monetization, either via an IPO or through a trade sale. Not all target companies fit this accelerated growth path. VC funding is appropriate for certain, but not all companies, as many of these do not fit this specific high-growth profile.

It is therefore worthwhile looking at how women founders and leaders of SMEs grow their companies. Research suggests that female founders often start their ventures with less capital and seek small and/or alternative sources of funding, which often comes at a greater cost.

They usually rely more heavily on family financing, which hurts those who come from low-income backgrounds. But even in cases where financing is obtained from family and friends, women face greater scrutiny than men. This also highlights that gender biases appear as well within family and friends’ circles. Raising traditional debt financing for start-ups is often challenging, given these typically neither have a previous track record, generate steady cashflow, nor own adequate collateral. Nevertheless, on occasion, advance customer cash payments can provide the necessary liquidity for growth and debt financing.
A further option sometimes used by start-ups is to monetize the value of the receivables from their customers, thereby allowing them to generate incremental liquidity. These alternative sources of funding have historically proven successful for entrepreneurs who choose to build their business
slowly and steadily.

Crowdfunding is another alternative source of funding that shows potential. Research indicates that women have better access to crowdfunding because they are viewed as more trustworthy than men. Furthermore, women investors seem to support and prefer women-led projects in an effort to support
their fellow entrepreneurs who face similar challenges.