Studies show venture capital underestimates female entrepreneurs
Thursday, March 29, 2018/
A recent Swedish study has shown venture capital funding is not going to female founders because of biases in the way venture capitalists view criteria such as risk and potential to scale when applied to female entrepreneurs.
Using interview data and statistical analysis of objective key performance information from accounting reports, the authors identified four common assumptions made by VC decision-makers when evaluating applications from female entrepreneurs:
- Assumption 1: Women are cautious and risk-averse, whereas men are ambitious and risk-taking.
- Assumption 2: Women are reluctant to grow their businesses, whereas men are willing to do so.
- Assumption 3: Women do not have resources to engage in high growth, whereas men do.
- Assumption 4: Women’s ventures underperform, whereas men’s ventures perform well.
Four measures were applied to the assumptions:
- Growth resources
In measuring the financial results of the female-led businesses surveyed by the study, the conclusion was clear: “In total, none of the beliefs VCs expressed about female versus male entrepreneurs could be backed up by data related to how ventures actually performed”.
Keep in mind also that Sweden is among the most progressive countries in the world when it comes to matters of gender equality. The results in less progressive countries would likely indicate an even bigger problem for women in business.
These biases are also at play when women seek funding from other sources as well, such as traditional banks. The Swedish study reinforces the findings from other studies into the provisioning of business loans to female small business owners and US venture capital funding for women-led businesses.
The results of the Diana Project report titled ‘Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital’ arrived at similar conclusions to the Swedish study in regard to the types of attitudes female entrepreneurs encounter, but sounded a slightly more positive note when it came to funding outcomes:
“This report shows that the percentage of businesses with women on the executive team receiving funding has nearly tripled during the past 13 years from fewer than 5% in 1999 to 15% of the total venture capital investments today. The amount of total aggregate dollars of funding in companies with women on the team has risen as well. Further, the average amount of funding for businesses with women entrepreneurs is equal to or higher than that for businesses with no women on their management teams.”
However, it did note “only 2.7% (183) of the 6,517 companies that received venture capital funding have a woman in the CEO role”.
Another important thing the Diana Project report points out is it’s not only women who are missing out here. It’s VC firms too:
“There is an enormous untapped investment opportunity for venture capitalists smart enough to look at the numbers and fund women entrepreneurs.”
This is the case across the board, whether you’re looking specifically at the VC space or at the broader example of bank business loans to female-owned businesses, an area where women still do relatively poorly compared to men. The broader cultural attitudes and stereotypes outlined in the Swedish study still permeate the banking and finance industry, to their detriment.
The economic potential of women is huge. The fact is that it is not yet being properly harnessed and utilised. Once it is, we’ll see a tremendous boost to the financial wellbeing of women-run businesses, as well as everyone else.