According to recent reports, women-led startups receive less than 3% of all VC investments. In response, many leaders have advocated for getting women more involved in venture financing, since studies have shown that female investors are more likely than their male counterparts to invest in female founders. However, the authors’ new research suggests that support from female investors may actually be a mixed blessing, because it can make it harder for female founders to raise additional rounds of financing. Through an analysis of more than 2,000 venture-backed startups, the authors found that women-led firms whose first round was raised exclusively from female VCs were two times less likely to raise a second round. This is because of an effect known as attribution bias: When people see that a female founder received funding from a male investor, they assume it’s because she is competent and her startup is strong. But if the same founder only has female investors, then people are more likely to assume that her success is due to her gender, rather than her competence. As such, the authors argue that while there are certainly benefits to raising capital from other women, female founders should consider the risks to their long-term success — and do what they can to ensure a more diverse cap table from the start.
Ultimately, venture capital at the early stages is a people thing, I’m betting on you. People are just more comfortable betting on somebody that is more like them, looks like them, talks like them, went to the same schools, eats the same food, goes to the same restaurant, drinks the same wine, goes to the same country club, all these little things. They’re not overtly racist or overtly discriminatory, it’s just comfort. Ultimately it’s a comfort thing.
— Interview with a male investor, August 2015
Venture capital is a man’s game. Women are massively under-represented among both venture-backed entrepreneurs and VC investors, with companies founded solely by women receiving less than 3% of all venture capital investments and women accounting for less than 15% of check-writers. It’s a vicious cycle: If VCs are more comfortable “betting on somebody that looks like them,” it’s hardly surprising that investors — who are majority male — are much more likely to bet on startups led by men.
In response to these disheartening statistics, policy makers, business leaders, and investor groups have advocated for getting more women involved in venture financing. The idea behind these efforts is that if men won’t invest in women, then women will do it themselves — and will ultimately reap the benefits of investing in female talent that would otherwise have been overlooked.
At first glance, this approach makes sense. Studies have shown that female investors are indeed more likely than male investors to invest in female entrepreneurs. But our recent research suggests that support from female investors may be a mixed blessing, because it may actually make it harder for female founders to raise additional rounds of financing.
We analyzed more than 2,000 venture-backed firms in the United States and found that women-led firms whose first round of VC funding was raised exclusively from female VC partners were two times less likely than those whose first round included male partners to eventually raise a second round. No matter the size of the initial funding round, the industry, the geographic location, or the prestige of the investor, female founders were consistently less likely to close a second round if their first round only included women. Conversely, for male-led firms, the genders of the first-round investors had no impact on their ability to attract future investment.
What drives this disparity? To find out, we conducted an experiment in which we asked more than 200 MBA students and investors to watch a fictional startup pitch narrated by either “Laura” or “David.” The pitches themselves were identical, except that half of the participants were told that the startup had already received funding from an investor named “John,” while the other half were told the funding had come from “Katherine.” We then had the participants evaluate the quality of the pitch and the competence of the founder.
As expected, when the pitch was narrated by Laura and her funding came from John, she was rated just as highly as David was. But when Laura’s funding came from Katherine, both male and female participants evaluated the pitch less favorably, and rated Laura as less competent.
This is because of an effect psychologists call attribution bias: the tendency to assume that someone’s identity or character, rather than outside factors, are responsible for the situation they’re in. When people see that a female founder has a male investor, they assume she must have received his investment because she is competent, and her startup is strong. But when people see that a female founder has a female investor, they attribute her investment success to her gender rather than her competence. As a result, new potential investors assume that a female founder is less competent if they see that she has only been backed by female investors — regardless of her actual qualifications.
Interestingly, research has identified similar effects with respect to affirmative action. When people are told that a female employee was an affirmative action hire, they perceive her as less competent than equally qualified men or women who were not affirmative action hires. Even if two women have objectively identical levels of competence, just the knowledge that one was hired as part of an affirmative action program is enough to make her seem less competent.
So, what does this mean for female founders looking to raise capital?
We are not suggesting that women should never raise capital from other women. Female investors might be more responsive to female founders, and more able to see their potential. Networking between women can also be more comfortable and less fraught, and a female founder may be more likely to establish a trusting mentorship relationship with a female VC, which can bring substantial long-term benefits to both.
However, this can be a risky strategy when it comes to a startup’s long-term success. There are still very few female investors, and they tend to be concentrated in funds that focus on earlier-stage investments, where risk is higher and funds invested are smaller. Today, female VCs simply do not control sufficient assets to continue to invest in female-led firms as they scale. This means that female founders will ultimately need to attract male investors in order to grow — and if you’re a woman, our research shows that’s a lot easier to do if you raise at least some capital from men from the start. As one female founder we spoke to put it:
I think there’s definitely a problem, if you’re a female entrepreneur, backed by a female investor, and you want to get more capital, and now the only people around the table are these two women. It’s almost like, you’d want to do the hard thing first, and get a few men brought in.
Of course, as with any systemic inequity, it’s on those who’ve already made it into positions of power to address bias and ensure founders are evaluated fairly. In particular, VCs have a responsibility to rethink how they evaluate investment opportunities and ensure that business metrics rather than implicit biases guide early-stage funding decisions.
But for female founders faced with fundraising in today’s imperfect world, our research suggests that it may be worth the extra effort up front to cast a wider net and try to recruit a diverse team of VCs in the first round. Indeed, beyond the effects on future fundraising, prior research suggests that mixed-gender coalitions tend to outperform single-gender ones in advocating for gender equity. While there are legitimate reasons why female founders may both have an easier time attracting female VCs and reap more benefits from those relationships, there is also a lot to be gained by ensuring a diverse set of perspectives on the cap table.
Similarly, while VC firms may encourage their female investors to identify and champion female entrepreneurs (perhaps even driven by a desire to support women-led startups), this responsibility should not rest solely on female VCs’ shoulders. Ultimately, both investors and founders will benefit if male VCs work alongside their female counterparts to proactively support women-led startups — and do what they can to ensure that the next generation of unicorns is a little more well-balanced.
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