Implicit Bias in the VC World – Why Are Female Entrepreneurs Held to Different Standards?

Written by Sophia Junginger & Lauren Desrosiers

What Is the Current State of the Female Funding Gap?

It is not surprising that there is a gender discrepancy in startup fundraising, nor is it brand-new news. Yet the gap is still as prevalent as ever, not only for female founders who want to have a chance to secure investment dollars but also for women who want to reach leadership positions at venture capital firms. While women have managed to rise in many other sectors, the venture capital space remains mostly male-dominated, with change for the better happening at an almost imperceptible speed.

In 2019 only a mere 3% of all VC investment went to all women-led companies. Even more shocking is the number in the Fintech sector, where female-founded startups have only managed to raise 1% of the total fintech investments over the past 10 years. Not to mention intersectional founders, where black female founders received only 0.6% and Latinx only 0.4% of investment dollars since 2009. While startups with all-female founders (or with at least one co-female-founder) have been rapidly increasing in number over the past 10 years, the investments in these startups have not kept up with the pace. More specifically, female teams receive less capital and provide more equity and this holds true, even when controlling for factors such as industry or prior company success.

VC-Culture & Challenges Female Founders Face

Culture change is a slow process, but the change in the VC-culture has been too slow. With only a few numbers of female investors in venture capital firms, women tend to be generally disadvantaged in the funding process. If VCs don’t change their strategy, this is not only a disadvantage for female entrepreneurs but the VCs themselves. A Morgan Stanley research report shows that “venture capitalists are missing out on a trillion-dollar opportunity” by not closing the gender gap. This reinforces that tackling the gender gap in startup financing goes beyond benefiting female lead businesses but can also improve overall economic growth.

So what are the biggest hurdles? Research shows investor bias in networks seems to be the most prevalent disadvantage for women. This extends from (1) the homogeneity of males in VCs, that tend to invest in individuals they perceive to be similar to them, and (2) the language being used and questions asked throughout the fundraising process. Let’s dive into both.

1. Why Female Partners at Venture Capital Firms are Essential for the Success of Female Founders

The gap in investments can partially be attributed to the lack of female partners at VC firms. Although women are starting to enter the space, as of 2020 65% of the U.S. VCs don’t even have one female partner. As the VC culture tends to revolve around people getting recruited from within the already existing network, the space has remained mostly male-dominated, posing a bigger challenge for women to enter the space. Especially in 2020, many VCs have stayed closer to their networks as a result of the turbulent circumstances. This has significantly closed them off individuals outside their network. A trend heading in the wrong direction, as it especially affects women and minorities.

So how exactly does the lack of female investors affect female founders? The truth of the matter is, investors (regardless of their gender) will always have an implicit bias whether they acknowledge it or not. This doesn’t mean they are anti-feminists or against female founders succeeding, some might even say they are actively interested in helping out female-founded startups. However, often implicit bias leads investors to invest in people who they trust and who they think will succeed; and as human nature has it, this will most likely be people who they believe to be similar to them.

As mentioned, this type of bias is subconscious and it can become present in imperceptible ways. As explained by one of our German Accelerator program participants Dr. Michaela Hagemann: “When meeting with investors, they always want to talk to me about the products and the brand. And when it comes to financial stuff, they always turn to my brother because they think I cannot answer those questions, when in fact I can.” Just one of many anecdotes that reinforce the importance of fostering diversity in the ranks of venture capital firms, to have a better representation across the board. This is the only way to ensure progress and equal access for female founders in the long term.

2. How Language Plays a Role in the Fundraising Process

Apart from the lack of diverse talent at venture capital firms, another major challenge for women when trying to secure funding is the language used throughout the fundraising process. Published in the Columbia Business School Journal 2018, researchers found there are immense differences in the types of feedback women receive in comparison to their male counterparts. The article “We Ask Men to Win and Women Not to Lose: Closing the Gender Gap in Startup Funding,” dives into how language in the VC-culture setting further drives subconscious bias. The study’s main finding is the importance of messaging and framing in the Q&A between investors and entrepreneurs. The research determined that female founders typically get asked prevention-focused questions, while male founders are asked promotion-focused questions.

In other words, prevention-focused questions emphasize not losing, e.g. questions along the lines of: “What does customer retention look like? Are you operating at break-even? And let’s see what can go wrong here so we can minimize losses” (Kanze et al.). While promotion-focused questions focus on growth-oriented gains and sound something along the lines of: “How do you intend to acquire customers? What does your revenue forecast look like? Is this opportunity big enough to maximize gains?” (Kanze et al.).

When female founders are focused on talking about how they won’t fail, this means they have less time to talk about how they plan to succeed. Thereby, female founders face a larger hurdle to convince investors of their ability to be successful and execute a safe return of capital.

How Do We Address Closing the Funding Gap?

There are several short-term and long-term changes that can address the gender disparities in startup funding. As noted above, investors make decisions based on surface-level perceptions such as “nonverbal gestures, displayed social competence, attractiveness, and – perhaps most readily available – gender” (Kanze et al.). By calling out the elephant in the room and addressing inherent stereotypical judgments, we can reframe the questions posed by investors to promote gender parity – and allow the most deserving startups (regardless of gender) to receive funding.

An easy first step for female founders, now that we are acutely aware of the implicit bias, is to level the playing field by tweaking responses. Even if investors continue to pose prevention-focused questions, with practice, female entrepreneurs will be able to respond with a promotional angle and ideally elicit a more positive result. Through entrepreneurial training and a shift in mindset, the Q&A portion of the investor/entrepreneur dynamic will not be so gender-biased.

On top of this, we also want to highlight the importance of women creating communities around investing and the rise of all-female-funds. For example:

  • Networking communities are an integral part of women gaining a foothold in the space and them having the possibility to expand their network. A prominent organization focused on increasing representation is All Raise. They have been tracking the statistics of female representation in VCs and have dedicated themselves to the fact that “women are woefully underrepresented across the tech ecosystem. One seat at the table isn’t enough.” With fundraising sessions, workshops, and networking events, they create a space for female founders to advance in the space.
  • All-female-funds on the other hand, aim to help women realize impactful projects through gender smart financing and investing. The funds are 100% allocated to startups with a female founder/co-founder or startups that have a significant amount of women in leadership positions. If women still face traditional barriers in financing due to stereotypical judgments and bias, they need to have access to funds that are solely dedicated to them succeeding.

So, if you are a female founder and looking for investment opportunities all-female-funds may be the way to go; or at least we believe they should be on your radar. If you are by chance looking to expand to the U.S., here is a list of some of the most prominent all-female-funds to watch out for:

  • Amplifyher Ventures: Venture Capital firm that invests in visionary founders with women in decision-making roles.
  • Female Founders Fund: Investing in the exponential power of exceptional female talent.
  • Golden Seeds: One of the first angel groups to invest exclusively in women-led companies.
  • Rethink Impact: The largest U.S. venture capital firm investing in female leaders using tech to tackle global challenges.
  • BBG Ventures (Built By Girls): Early-stage fund focused on consumer tech startups with a female founder.

On a final note, we have been seeing a small but positive trend over the past years in female startup financing. While many may still be discouraged by the current statistics, we need to encourage women to seek out external funding and give them the right tools to do so. This means educating entrepreneurs and investors on how bias is still present today and keeping the topic on the top of our agendas. We also need to make sure the possibilities for women to secure funding continually increase through organizations such as all-female-funds and networking communities. While change might still be slow, with the rise of funds focused solely on female founders and communities encouraging women to raise money for their businesses, we will see a positive and sustainable change in the years to come. Let’s keep the trend going.

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