Early last year, the Harvard Business Review published an article with the triggering title “For Female Founders, Fundraising Only From Female VCs Comes at a Cost.” In it, coauthors Isabelle Solal and Kaisa Snellman report their study of fund-raising success for over 2,000 venture-backed firms, which showed support from female investors may make fundraising harder for female founders. While HBR is a reliable source, its articles can be hard to access, so I pulled the original research publication. [2] Let’s take a look at their findings and how they can help us create a strategy to increase funding for female-founded startups.

What’s the Big Idea?

Solal and Snellman’s thesis is “gender homophily may lead biased evaluations of women, making it more difficult for them to gain access to further resources.” Gender homophily is “a theory in sociology that people tend to form connections with others who are similar to them in characteristics such as socioeconomic status, values, beliefs, or attitudes.’ [3] They predicted that “when a female investor supports a female entrepreneur, observers discount the entrepreneur’s competence, which is reflected in lower evaluations of the quality of the business idea and consequently, greater difficulty gaining access to further resources.” [4]

How Was It Tested?

Solal and Snellman tested their prediction using Crunchbase data accessed via their academic license. When firms with female founders receive their first funding from female rather than male venture partners, they are “two times less likely to raise additional finance rounds.” [2] They found “no relationship between investor gender and fundraising outcomes for firms with all-male founding teams.” [2] They also conducted an experiment to evaluate the impact of investor gender on perceptions of entrepreneurial competence. From this experiment they found “pitches by female-backed female entrepreneurs receive lower evaluations compared with all other conditions, and that this is driven by lower perceived competence.”

Find More Details in the Journal

The HBR article is an excellent summary of their research and conclusions; however, I recommend reading the Organization Science article for the opening summary of literature on how competence stereotypes and attribution bias combine to lead observers into discounting a female entrepreneur’s performance in an automatic sensemaking process (frequently referred to as fast thinking). The article also includes quotes from interviews of founders and investors acknowledging the existence of the gender bias from causal inferences the authors found in their observational and experimental studies. The quotes also speak to difficult choices founders may experience when raising capital, especially in high-growth industries.

My Thoughts

I expect we would find similar results from broader studies of disadvantaged founders; however, the drastically smaller numbers of such founders make a statistical analysis of available data underpowered. Solal and Snellman suggest a potential solution for this problem, “to promote inclusive investing, where male and female investors are encouraged to join forces to support promising female entrepreneurs.” [2] First, as funders, we must acknowledge that our unconscious bias exists. Then, we can make thoughtful process changes to shift the pattern of thought towards a more equitable evaluation of a startup company’s prospects, regardless of the gender (or other personal characteristics) of the founder. I’m not saying trust isn’t important. Rather, we should be conscious of what elements go into building our trust models and how we are evaluating founders against those models.

One point evident from the data is that no investor has a surefire method for picking winning founders. Therefore, adjusting how we approach evaluations using this kind of thoughtful research has the potential to change fiscal and community outcomes. I challenge my readers to read either article and think about how their actions could contribute to more equitable assessments in the future.

References

[1] Isabelle Solal and Kaisa Snellman, “For Female Founders, Fundraising Only From Female VCs Comes at a Cost.” Harvard Business Review, February 1, 2023. Accessed March 18, 2024.  https://hbr.org/2023/02/for-female-founders-only-fundraising-from-female-vcs-comes-at-a-cost

[2] Kaisa Snellman, Isabelle Solal (2022) Does Investor Gender Matter for the Success of Female Entrepreneurs? Gender Homophily and the Stigma of Incompetence in Entrepreneurial Finance. Organization Science 34(2):680-699. Accessed March 18, 2024. https://doi.org/10.1287/orsc.2022.1594

[3] The American Heritage Dictonary of the English Language, 5th Edition, via Wordnik. Accessed March 18, 2024. https://www.wordnik.com/words/homophily

If you enjoyed this article and would like to read more by Katrina, sign up for her newsletter.

Please feel free to contact Katrina at any time!