Gender Gap in VC Funding: More Women, Less Money for Women-Led Businesses?
Venture capital (VC) is a crucial source of funding for startups, but the system struggles with a persistent gender gap. While VC firms play a vital role in getting new businesses off the ground, a recent study reveals a surprising truth: having more women in decision-making roles at these firms might not automatically translate to more funding for women-led startups.
Data Unveils Disparity: Male Dominance in VC Funding
The data paints a stark picture. Surveys and research show that over 80% of partners at U.S. VC firms are men. This dominance is reflected in funding allocations, with only about a quarter of VC funds directed towards female-led companies in 2023 according to Crunchbase.
Advocates for gender equity have long proposed that increasing the number of women making investment decisions would lead to more funding for women-led businesses. Professor of entrepreneurship and the study’s lead author decided to investigate whether the data supported this theory.
Unexpected Findings: The Correlation Between Female VCs and Reduced Funding
The study analysed funding decisions from over 150 mid-sized and large VC firms in the U.S. over eight years. The findings were unexpected: firms with more senior female venture capitalists on their decision-making teams actually allocated less funding to women-led businesses. Each additional female senior VC was linked to a 0.46% decrease in the proportion of newly funded female-led businesses within the firm’s portfolio.
Beyond Blame: Cultural Bias and Its Impact
This translates to a significant funding disparity. Considering the average funding round in the study was $5.4 million, adding one extra female senior VC to a VC decision-making group could mean roughly $25,000 less in funding for women-led businesses.
The study emphasises that it doesn’t place blame on individual female VCs. Instead, it highlights a potential cultural bias within the male-dominated VC landscape. Interviews with female entrepreneurs and VCs suggest that women may feel pressure to defer to their male counterparts. Existing research also indicates that women in such environments might distance themselves from other women to gain status. This dynamic could explain why female VCs might hesitate to fund women-led startups.
Mitigating the Bias: Trust, Neutrality, and Potential Solutions
However, the study also identified two factors that can mitigate this negative effect. Firstly, teams with senior VCs who have prior experience working together showed no such funding disparity. This suggests that trust and established working relationships can be crucial.
Secondly, the study found that politically neutral decision-making groups, identified through analysis of public political donation records, were less likely to exhibit bias against women-led businesses. This implies that politically impartial VCs might foster improved communication and consensus-building within the group.
The study’s findings offer valuable insights for VC firms seeking to combat gender bias. One potential approach could be to invite external female investment professionals with connections to existing VCs to act as consultants. These professionals could provide independent assessments and recommendations to VC decision-making groups.
While increasing diversity in the workplace can be beneficial, the study underscores the need for a more nuanced approach, especially in entrenched male-dominated environments like VC funding. Efforts to promote diversity can backfire if they fail to address underlying cultural biases and power dynamics.
