The fact that female founders and CEOs attract disproportionately little venture capital has been known for quite a while. Only 1.7% of all capital went to female founders in Europe in the past five years, according to The Venture City, a collective of female-led venture capital funds. In the US 3% of venture capital went to female-founded startups in 2019, while over 40% of all entrepreneurs in the country were women.
"It has been really challenging for us to get funding, and yes: I dare say some of this is linked to us being an all-female founded business," a British co-founder and CEO told Impact Investor. Her tech4good startup recently entered their series B funding round for their app aimed at reducing food waste.
"Almost all investors are male and the problem of household food waste is mainly a woman's problem. So if I pitch this to a male investor he often isn't aware of the problem."
Diverse companies more profitable
There are no clear figures on how common investor gender bias is in impact investing. Partly because the field is rather new and there is no agreed definition on what counts as an impact venture.
"Gender stereotypes are deeply ingrained and widely shared among both men and women, so those underlying forces would suggest that we will see an investment bias in favour of male over female candidates in social impact investing as well," said Dana Kanze, assistant Professor of Organisational Behaviour at London Business School.
The pandemic has made matters worse. The share of venture capital to female startup founders "dropped dramatically" worldwide in 2020, according to Crunchbase figures. This is happening even though most investors probably know the stats: female-led and diverse startups have a higher return on investment, higher revenue and faster growth than companies run by men (see this Forbes article for a stats overview).
Asked not to lose
So why are investors forgoing opportunities? According to Dana Kanze's research, women entrepreneurs typically get other questions from investors than men.
The title of one of her co-authored papers sums it up: "We Ask Men to Win and Women Not to Lose". In practice this means that men are asked how they plan on expanding their business, while women are asked how they will deal with risks and problems.
"This makes pitching very emotionally challenging. You always have to be defensive, instead of talking about how to solve challenges or co-create a solution," said the co-founder of the food waste app, who wished not to be identified in this article due to reputation risks among investors.
Steering away from what the researchers call prevention-focused questions can be awkward and difficult during a pitch session with investors. But when women manage to do so, they are far more successful in raising capital, Kanze concludes.
Investors are men
Another reason for investor gender bias is that people invest in their peers. Only about 12% of decision makers at venture capital firms are female. Just 2.4% of VC partners are female founding partners and thereby have the final say on investment decisions, according to a Harvard Business Review overview.
The Review also refers to a Kaufmann Fellows study including 90,000 venture-backed startups in the U.S. It concluded that once women get to decide who to invest in, they are twice as likely to invest in female founding teams than men are.
Still, research suggests that women looking for funding for their impact venture might be better off than women outside impact investing. Firstly, gender lens investing is emerging as a world of its own inside the impact investment sector. The whole point of this methodology is to positively discriminate, or ‘favour’ female-founded or led ventures, as well as companies that develop products that benefit others than men.
The stereotype: women are caring
Secondly, being a woman and caring for society (i.e. having a social impact) works well with our stereotypes about women. Researchers have concluded that gender bias among investors hits female-led ventures less hard if the venture is profiled as a social impact company.
According to an article in Organization Science, the reason would be that social impact ventures are associated with ‘doing good’, an idea that would fit well with the general view of women.
"Social impact framing increases attributions of warmth for all entrepreneurs," the authors write, adding that this has "positive consequences on business evaluation only for female-led ventures, for which increased perceptions of warmth attenuate female entrepreneurs’ gender role incongruity."
This is also where the ’lack of fit’ theory comes in. The idea is that ventures led or founded by women are disadvantaged by investors and customers in male-typed markets (like craft beer made by women).
On the contrary, male entrepreneurs venturing into typical female-typed markets (like a man running a cupcake company) are not penalised by the market, researchers conclude in a Social Forces article.
In other words: Investors and customers find women entrepreneurs more convincing – a better fit – if they are running a social impact company than a conventional business, since this would match up with stereotypes of women as caring and socially responsible.