As was brought up in the VC discussion last class, there are significant gender disparities in both female representation at VC firms and the startups these firms invest in. As one of the articles noted, female entrepreneurs receive only two percent of VC funding. In this blog post, I’d like to dig into that statistic a little more (When I first read it, I almost didn’t believe it because it was so small). Additionally, I’d like explore a piece of research that attempts to attribute the funding gender gap to subtle differences in how male and female entrepreneurs are perceived and questioned in VC pitch meetings.
First, the data. Pitchbook (one of the sources for one of in-class articles) pegs the total amount of dollars invested by VC firms in 2017 at 85 billion. Of this total, female-led teams raised 1.9 billion. That translates to 2.2 percent–the number we were discussing last week. 66.9 billion flowed to male-led teams, which is 79 percent of the total. Notice that these percentages do not add up to 100, and that’s because Pitchbook tabulates a third category: money raised by mixed-gender teams. These entrepreneurs raised 10.2 billion, or 12 percent. To round out the total, the remaining 7 percent of funds went to startups whose gender composition Pitchbook did not have data on.
In terms of deal numbers, female-founded startups make up 4.4 percent of the total completed by VCs. I think noting the absolute deal count makes the contrast between single-gender teams even more apparent: 368 (women) vs. 5,588 (men). Further, if female startups compose 4.4 percent of deals, yet only receive 2.2 percent of total funding, one would predict that not only are women involved in less overall deals than men, but their average payout is comparatively less. And that’s exactly what’s happening. The gender gap in average deal size was 7 million in 2017 (5 million vs. 12 million).
Quite frankly, these numbers are stark. Two natural questions arise: What is driving this gap, and can it be closed. In researching the origins of the disparity, I came across two common responses. The first claims the VC gender funding gap is basically a pipeline issue, pointing to female underrepresentation in Silicon Valley and tech as a whole (31 percent of Google’s employees are women, women earn 18 percent of computer science degrees). Therefore, one would expect the proportion of female-led startups to be lower, which translates into fewer potential VC deals.
While the previous sentence may be valid to some extent, it does not really explain why women-led startups are so drastically underrepresented in VC funding. Women may be in the minority, but not at the 4.4 percent level. This is very much a intuitive guess on my end, but if the proportion of female startup founders is in any way a rough reflection of either the proportion of women studying computer science or the proportion working at a big tech company like Google (or both), we would expect to see more female startups invested in, perhaps composing a fraction of the total somewhere in the teens.
In addition to the pipeline argument on the entrepreneurial side, other sources identify the fact that women compose 7 percent of venture capitalists as a potential driver of funding disparities (the number was 3 percent in 2014). This argument reasons that the amount of female employees (and partners) would increase the funds invested in female companies because male-dominated firms have an adverse tendency to favor male-led startup teams. Further, more female partners would allow women to network more effectively, for as Prof. Doyle emphasized, a good VC partner does not just invest in companies, but attempts to nurture and guide their success.
This is a plausible storyline, but an interesting paper in the Harvard Business Review entitled, “Male and Female Entrepreneurs Get Asked Different Questions by VCs–and It Affects How Much Funding They Get” argues that increasing the number of female VCs may not be as helpful as it would seem on the surface. Prompted by the personal experience of one of the authors, Dana Kanze, the paper explores how the questions VCs ask of male and female entrepreneurs in pitch meetings lead to disparate funding outcomes.
Kanze explains her research in this Ted Talk.
Basically, in the Q&A session of a pitch meeting, there are two broad categories of inquiry: promotion oriented and prevention oriented. Promotion-type questions focus on “hopes, achievements, advancement, and ideals,” while prevention-type questions are concerned with “safety, responsibility, security, and vigilance.” In analyzing observed pitch sessions, the research team found that 67 percent of the questions male entrepreneurs received could be classified as promotion oriented, whereas 66 percent of the questions female entrepreneurs received could be classified as prevention oriented.
These differences in questioning may at first seem trivial, but they tend to translate into vast differences in funding. For example, in examining comparable startups, the ones that were asked prevention questions raised an average of 2.3 million. Startups that were asked promotion questions raised 16.8 million. Interestingly, 85 percent of respondents mimic the type of questions asked by VCs in their answers: “A promotion question begets a promotion answer, and a prevention question begets a prevention answer.” Since men tend to be asked promotion questions, their answers tend to emphasize the home-run potential of their startup. Analogously, in answering prevention questions, women reinforce the subconscious notion that their startups are at best break-even enterprises. VCs naturally gravitate towards the home-run, but their perception of an entrepreneur is in part created by their own line of questioning.
I think the block quote below is worth including in full.
“In fact, for every additional prevention question asked of an entrepreneur, the startup raised a staggering $3.8 million less, on average. Controlling for factors that may influence funding outcomes — like measures of startups’ capital needs, quality, and age, as well as entrepreneurs’ past experience — we discovered that the prevalence of prevention questions completely explained the relationship between entrepreneur gender and startup funding.”
In addition to the attribution of startup funding to the different types of psychological questioning, one of the most fascinating nuggets to come out this paper was what happened when entrepreneurs did not resort to mimicry in their answers and gave asymmetric responses. Researchers found that entrepreneurs who were asked prevention-type questions but responded with promotional answers raised 7.9 million on average. Vice versa, when promotion questions were met with prevention answers, the startup received 563,000 on average. As the article concludes, “Armed with the knowledge that promotion has advantages over prevention, informed entrepreneurs can recognize question orientation and frame their responses to benefit their startups.”
Such strategies may not full solve the gender gap in VC, but if female entrepreneurs are aware of them, it appears they can play an active role in reframing the built-in narrative of the pitch meeting.