We Ask Men to Win and Women Not to Lose: Closing the Gender Gap in Startup Funding
Start-up funders tend to ask men about how they will promote success and women about how they will prevent failure, contributing to the gender gap in funding allocation. Replying to prevention-focused questions with promotion-focused answers can help founders counter biased motivational questions.
Although nearly 40% of all privately held firms in the United States are founded by women, only 2% of U.S. venture capital financing is allocated to female-founded firms. Given that venture funding is a key component of startup success, this funding disparity greatly limits the ability of female entrepreneurs’ projects to succeed.
Previous research on the gender disparity in startup funding seeks to provide either investor-driven or entrepreneur-driven explanations for the gender gap, focusing, for example, on whether investors have a marked gender preference when making investment decisions, or whether female entrepreneurs are presenting themselves or pitching their projects in ways that hamper their success.
This study seeks to examine the investor-driven and entrepreneur-driven factors as a feedback-loop system, investigating how gender bias in investors’ questions leads to divergent entrepreneur answers during the venture capitalist pitching competitions Q&As—both contributing to the gender gap in startup funding allocations.
In startup pitching Q&As, funders are more likely to ask men about how they will promote success and women about how they will prevent failure, contributing to a gender gap in funding allocation. This can be partially counteracted when women reply to questions about potential obstacles and failure (prevention) with answers about potential growth and advancement (promotion).
- Although both male and female entrepreneurs deliver pitches in the lexicon of promotion, investors tend to ask male entrepreneurs promotion questions (such as, how do you intend to acquire customers? What does your revenue forecast look like?), and ask female entrepreneurs prevention questions (such as, what does customer retention look like? Are you operating at breakeven?).
- Male and female investors both display this bias, implying that the gender disparity in startup funding cannot be eliminated merely by increasing female representation among investors.
- Entrepreneurs tend to respond in the style that matches the questions they are asked (such as, responding to promotion questions with promotion answers, and responding to prevention questions with prevention answers).
- Entrepreneurs who are asked promotion questions receive significantly higher funding than those who are asked prevention questions, leading to a gender gap in resulting funding allocation.
- TechCrunch entrepreneurs (from 2010 to 2016) raised $3.8 million less for every prevention question that they were asked.
- Lastly and most importantly, an effective intervention to close the gender gap in startup funding allocations is for entrepreneurs to respond to questions about prevention with answers about promotion.
- This intervention strategy led to an increase in funding, compared to the default strategy of responding to failure-prevention questions with failure-prevention answers.
- In experiments, accredited and non-accredited investors allocated more funding to entrepreneurs who answered questions using promotion instead of prevention.
Investors can begin to debias the fundraising process by asking motivationally consistent questions regardless of entrepreneur gender. Although female founders cannot control the type of questions investors ask them, they can respond to prevention-focused questions with promotion-focused answers in order to achieve more favorable near-term funding outcomes.
Researchers examined the factors that lead to the gender gap in startup funding through an observational field study and a series of controlled experiments on accredited and non-accredited investors. In the field study, they examined the question-and-answer interactions at TechCrunch Disrupt NYC, the most prestigious startup competition in the world. Through transcripts and videos of all the pitches delivered at TechCrunch NYC in the history of the competition (from 2010 to 2016), including 189 startups in total, researchers analyzed whether the questions that investors were asking the competitors were focused on promotion (such as, how do you intend to acquire customers? What does your revenue forecast look like?), or on prevention (such as, what does customer retention look like? Are you operating at breakeven?).
In order to determine whether a question was prevention-focused or promotion-focused, the video transcripts of Q&A sessions were analyzed by a linguistic measurement software (LIWC) and categorized by human coders who were blinded to the gender of the pitchers and the judges, but familiar with overall concepts of venture funding. (The human transcript coders achieved a .97 intercoder agreement based on an overlapping random sample of 1,000 combinations.)
Researchers then analyzed whether the types of questions investors asked depended on the gender of the person pitching. In the second part of the experiment, researchers gave the same scenario to judges in a randomized controlled setting, in which they were tasked to distribute $400,000 of venture funding to competing startups. Some judges were angel investors attending a monthly angel investor meeting, and others were potential seed investors from Amazon Mechanical Turk. The data from these two populations were calculated separately. The benefit of this study design is that it transcends singular events in its attempt to understand the systematic effects of the gender gap in startup funding.
Instead of focusing only on entrepreneur-driven or investment-driven factors, it seeks to understand them as two parts of a feedback-loop system, showing how investors and entrepreneurs both contribute to the gender disparity in funding outcomes. Furthermore, the study is able to show how gender bias at the individual investor level influences venture outcomes at the startup firm level.