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The Gender Gap in Startup Funding
In a recently-published academic journal titled “We Ask Men to Win & Women Not to Lose: Closing the Gender Gap in Startup Funding”, Dana Kanze (Columbia University), Laura Huang (University of Pennsylvania), Mark A. Conley (Columbia University), and E. Tory Higgins (Columbia University) examine the underlying mechanism of startup funding disparity between the two genders. Here are some key takeaways:
Almost 40% of privately-held companies are women-led, but only 2% receive venture funding
- In 2016, VC invested in more than USD 58 billion in enterprises with all-male founders, compared to only USD 1.48 billion received by women.
- The discrepancy is due both to the number of deals and the average ticket size.
Was it due to the lack of female venture capitalists?
- No; the number of female venture capitalists actually increased over the past few years, albeit the number is paltry compared to their counterparts. (source)
The researchers explored an ingenious method to seek the answer to the funding gap.
- Tracking and comparing startups with similar characteristics (i.e. quality and capital needs), they find that male-led startups raised 5x more funding than the female-led ones.
- They then analyzed the Q&A sessions between 140 venture capitalists (of which 40% are female) and 189 entrepreneurs (12% female).
They found one crystal-clear difference between the Q&A session: male entrepreneurs are more likely to get asked promotion-based questions, which focus on achievements and advancements, while their counterparts are more likely to get asked prevention-based questions, which revolve around responsibility and security.
- A simple example of income statement: “How do you plan to monetize this?” (promotion) vs. “How long will it take to break even?” (prevention)
- This evidence is found in both male and female venture capitalists; implying that we cannot close the gender gap in venture funding by solely involving more female venture capitalists.
Now, on to the statistics:
- Controlling for other factors that may influence the decision to fund a startup, for every additional prevention-based question, the startup raised USD 3.8 million less on average.
- In their samples, on average startup who receive promotion-based question raised USD 16.8 million, compared to only USD 2.3 million received by the startup who fielded prevention-based question.
Why is that so?
- For most of the cases, a positive (i.e. promotion-based) question will be answered with a positive answer, and similarly, a negative (i.e. prevention-based) question will be answered with a negative answer.
- By answering the prevention-based question, the startup founder inadvertently admits that there is a chance of loss. Any small chance of loss is deemed as unfavourable in front of the investors’ eyes.
But correlation does not mean causation. Is this fact even true?
- The research goes beyond listening to hundreds of Q&A sessions. They invite both professional capital providers and laypersons to listen to the Q&A and allocate imaginary fund to the startups of their choice.
- The result is robust: from the experiment, startups who receive promotion-based question received twice as much funding as the other ones.
What can be done, then?
- Answer prevention-based question with a promotion-based answer.
- For example, when a startup founder is asked about her market size, the founder should respond by talking about the growth potential of the overall shares rather than talking about how she would protect her own share of the pie.
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