Reducing Gender Bias in Investing
In 2020, female-founded startups globally received $4.9 billion in venture funding, a 27% decrease since 2019. Additionally, the proportion of venture dollars to female-founded companies declined as well, from 2.8% to 2.3%.
While this decline may have been in part due to the pandemic, one thing is clear. There’s an immense disparity in the amount of venture funding female-founded companies receive.
What’s contributing to this discrepancy?
Women have dealt with gender bias for decades, and the investment process is not immune to this bias. There are a number of ways that gender bias creeps into the way investors evaluate founders, and identifying these problems is the first step to eliminating this issue.
A study at a funding competition found that venture capitalists asked different types of questions to male vs female founders. They tended to ask men promotion types of questions (potential for gains), while they would often as women prevention types of questions (prevention of losses). Additionally, another study found that founders who were asked primarily promotion-driven questions received twice as much funding as founders who were asked primarily prevention-driven questions. This promotion vs prevention discrepancy sheds light on one major reason why female founders receive less venture funding than male entrepreneurs.
Another study looked at identical slides and scripts with two voiceovers, one voiced by a man and one voiced by a woman, and asked people to rate the investment. Presentations voiced by men performed significantly better than those voiced by women, regardless of whether the judge was male or female.
What should investors do to address gender bias?
First, it’s important that investors acknowledge that this gender bias and discrepancy are real. Investment firms need to have ongoing internal and external conversations about diversity, equity, and bias.
Second, as shown in the studies above, the pitch process allows for significant bias. What if investors stopped relying as much on pitches and relied more on business metrics? Harvard Business Review found that firms that don’t consider a pitch invest in 8-12x more women than firms that do. There has been a rise in venture firms leaving the traditional pitch method behind, from traditional venture equity to the rise in alternative financing.
Additionally, it’s important to recognize that systemic issues contribute to the gender discrepancy in investing as well. Female founders can have access to less resources, coaching, and mentorship than their male counterparts. When possible, extra coaching can go a long way to improving the venture industry’s overall investment diversity.
Revenue-based financing: A possible solution
While a metrics-driven approach may not work for every venture firm, revenue-based financing underwrites based on historical metrics, rather than a founder’s vision or pitch style. Focusing on metrics like revenue, customer retention, and burn keeps the focus on quantitative characteristics of a company, rather than qualitative judgments of a founder.