Like so much in life, solving the women-in-VC problem—that is, the lack of women—isn't going to be easy. The headwinds are well-known: A lack of representation. A lack of capital funding. Disturbing cases of discrimination and harassment. And a culture that often seems to pay only lip service to the idea that there's a systemic problem.
The easy answer would seem to be that we just need more women as venture capitalists. But recent research shows that female investors typically express the same gender bias demonstrated by their male peers. There's an inbuilt stereotype among VCs that female founders are less likely to succeed, and thus, in a vicious cycle, they are given less funding and face a steeper climb toward success than male founders (illustrated most notably in the 2009 study by Fairlie and Robb).
To have any real chance of equality, according to the work of Columbia Business School doctoral fellow Dana Kanze and her colleagues, female founders and both male and female VCs will have to acknowledge these biases, understand how they are being expressed and actively work to overcome them.
Because not only is this an issue worth solving from a social perspective, but VCs are also allowing their misjudgments to cloud investment decisions—no doubt weighing on returns.
Female entrepreneurs are seen as outsiders
The first step? Let go of the idea that hiring women VCs is the be-all, end-all solution: "That's kind of been the silver bullet that people have been holding on to: the more women hired at venture capital funds, the better it's going to be for female entrepreneurs, and that hasn't necessarily been the case," Kanze told PitchBook.
That perceived solution also limits women entrepreneurs, a concept Stephanie Palmeri of Uncork Capital summed up last year during a panel at 500 Startups' PreMoney conference:
"At the end of the day, female founders shouldn't be constrained to work with only female VCs," Palmeri said. "If we invested only in people who look like us, we would be in trouble as an industry. That's really one of the reasons why we are in trouble as an industry."
In the study, the researchers observed Q&A interactions between VCs and entrepreneurs at TechCrunch Disrupt New York, including tracking the specific types of questions founders were asked. Their findings showed that male and female VCs both exhibited bias against female entrepreneurs as "outsiders" who were more likely to fail. In turn, the research demonstrated that hiring more women as venture capitalists to "fix" the gender funding gap is likely to have little impact.
This takeaway is made more potent by the group dynamics cited by Kanze, in which a solo woman at a venture fund tends to quickly assimilate and begin mimicking the behavior of her male peers.
Flip the script
Kanze has developed a workshop intended to help entrepreneurs and investors become conscious of the unspoken bias in place and redirect conversations to achieve favorable outcomes more often. She does this by teaching attendees the characteristics of "promotion" vs. "prevention" questions and answers—a key facet of the study—and how to identify them.
Promotion-oriented questions focus on hopes, achievements, advancements and ideals, while prevention-oriented questions focus on safety, responsibility, security and vigilance. Women are more often posed prevention-oriented questions (66% of the time), while men were more often met with promotion-oriented questions (67%), per the study. More women, in return, respond with prevention-oriented responses—a natural reflex when met with a prevention question—unintentionally penalizing themselves and their ventures.
In the end, founders who were asked mostly promotion-oriented questions went on to raise much more funding—$16.8 million on average vs. just $2.3 million for entrepreneurs who primarily fielded prevention questions, a disparity that mimics the overall gender gap in funding.
Female-founded startups raise only a small portion of overall VC investment
(In the above chart, female-founded companies are defined as those with at least one woman founder.)
"It's pretty straightforward stuff once you have examples of what each type of question and answer looks like within the quintessential topics that come up during an investor Q&A session," Kanze said.
Not only is it beneficial for founders to be educated on the ins and outs of this underlying bias, but it's equally valuable for investors to be conscious of their own gendered-questioning methods that might affect their funding decisions.
Studies have shown that women-run ventures are successful and lucrative. While we weren't able to use PitchBook data to show that female-founded companies perform better in terms of valuation step-ups, among other metrics, First Round Capital reported that its investments in female-founded companies performed 63% better than investments in all-male founding teams.
"All of these idiosyncratic, gut-feel processes that are based on intangibles ... are fraught with implicit bias."
Kanze says that by becoming aware of "irrational input" into investment sourcing, investors can avoid exclusively backing the archetypal VC-funded founders—aka the "lionized version of the Mark Zuckerberg"—and, by viewing the risks and opportunities presented more clearly, they can reap the benefits provided by female-run companies.
"All of these idiosyncratic, gut-feel processes that are based on intangibles in decision-making are fraught with implicit bias," Kanze said. "They are cesspools of bias, really. 'Hey, I am getting a warm, fuzzy feeling from this person.' Well, is it because he looks like me, or went to the same school, or knows this one person in common? All three of those things are super gendered and super socio-economically biased."
The lack of diversity in VC is a consequence of the fact that venture investing is one of the last bastions of qualitative decision making at a time when everything from public equity allocations to commodity futures trading has gone increasingly quantitative. Algorithmic computer models buy and sell based on hard numbers, immune to the cognitive and emotional shortfalls humans are vulnerable to.
Kanze's advice to both men and women: Recognize these pitfalls and learn ways to reduce them.