There is an unconscious bias among venture capitalists that is preventing female entrepreneurs from securing more funding, new research suggests.
A study set to be published in an upcoming issue of the Academy of Management Journal revealed that venture capitalists have different expectations of men and women entrepreneurs, which in turn impacts how much, if any, money they give them.
The research argues that the bias comes in the form of the questions venture capitalists pose to entrepreneurs when trying to learn more about their startups. Specifically, women are asked questions that focus on how they won't lose a venture capitalist's money, while the questions to men focus on how much money they can make.
"Female entrepreneurs are implicitly expected to prove that they can execute a safe return for the investor, whereas male entrepreneurs are instead expected to show the opportunity can grow," the study's authors wrote.
In turn, the answers the entrepreneurs give match the focus of those questions. The researchers said this prompts female business owners to position their startups as "playing not to lose," referred to as prevention-focused, while men are better able to position themselves as "playing to win," referred to as promotion-focused – the latter of which is much more appealing to investors. [Launching a startup? These are the most, and least affordable cities to do so]
The study's authors said the unconscious bias comes from investors of both genders.
"Both male and female venture capitalists display implicit bias, holding men and women to different standards, [which] implies that the funding disparity cannot be corrected by merely ensuring that more female VCs are in a position to evaluate investment opportunities," the study's authors wrote.
Researchers came to their conclusions after analyzing the questions posed by venture capitalists at TechCrunch Disrupt, a startup competition held annually in major cities around the world. Since its launch in 2009, entrepreneurs who have presented at the competition have raised about $7 billion in venture funding over their lifetimes.
For part of the research, the study's authors looked at data involving 189 startups that presented at the New York competitions organized by TechCrunch Disrupt from 2010 through 2016. The researchers specifically looked at video footage of Q&As between each company's founder and a panel of venture capitalists. After transcribing all of the videos, they were able to determine the balance between promotion focus and prevention focus in company-panel interactions and the relationship of this balance to companies' funding achievements over time.
The study's authors, who statistically confirmed that the male- and female-led startups had comparable capital needs, discovered that male entrepreneurs secured more than five times as much funding as their female counterparts.
"Male entrepreneurs are more likely to be asked promotion-focused questions, whereas female entrepreneurs are more likely to be asked prevention-focused questions," the researchers wrote. "Comparing dollars raised [over company lifetimes], we note that startups raised an average of $16.8 million when investors asked predominantly promotion questions, 7.21 times more funding than the average $2.3 million raised by those asked predominantly prevention questions."
The study's authors also conducted an online experiment in which angel and seed investors were played audiotapes of Q&As similar to the interactions at TechCrunch Disrupt. The investors were asked to allot hypothetical dollars based on what they heard.
The researchers found that when entrepreneurs were asked prevention-focused questions but provided promotion-focused answers, angel investors allocated them an average of $81,113, which was 1.55 times the allocation of $52,369 when prevention questions were followed by prevention answers. Among seed investors, the differential was even more substantial.
The study's authors believe this shows that female entrepreneurs can counteract the negative impacts of the questions they are asked by providing more promotion-focused answers.
"Entrepreneurs can respond to prevention-focused questions with a promotion rather than a prevention focus," the researchers wrote. "For example, when asked a question about defending market share in a competitive market, the entrepreneur can respond by referencing the startup's unique ability to gain advantage in a sizable, fast-growing market."
Dana Kanze, one of the study's authors and a doctoral fellow at Columbia Business School, said entrepreneurs should take a page from politicians who appear on television news programs.
"Moderators on those shows are paid to ask tough questions, but seasoned politicians are no less adept at providing the answers that serve their respective platforms," Kanze said in a statement. "Framing your responses with a promotion focus is akin to hitting your talking points in politics."
However, this doesn't mean those looking for funding should completely dodge prevention-focused questions.
"But our findings are quite definitive that promotion is a lot more attractive than prevention to investors," Kanze said. "Entrepreneurs – whether men or women – likely do well to keep that in mind, staying on topic while weaving promotion into their responses."
The study was co-authored by Mark Conley and E. Tory Higgins of Columbia University and Laura Huang of the University of Pennsylvania.