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Why do female entrepreneurs get less funding despite better results?

Posted by Shivali Anand

September 16, 2021    |     4-minute read (716 words)

According to BCG research, businesses headed by women generate greater returns on investment — more than twice as much per dollar invested and over 10% higher cumulative revenue over five years — than businesses managed by men. Despite this, they only receive a small portion of overall money from investors.

The COVID-19 problem appears to be exacerbating this funding shortfall. In 2020, the percentage of venture capital funding going to female entrepreneurs decreased significantly. According to Crunchbase, female founders received only 2.3% of total venture capital funding last year. In addition, compared to the previous year, the overall amount of capital flowing to female-founded businesses decreased by 27%.

Take a closer look

Nassim Abdi, the co-founder of StoryBolt, an Indiana-based business that provides equity and diversity training, struggled to find investors. But according to professor Dana Kanze's study, this had more to do with being a female entrepreneur than with any flaws in her company’s strategy.

Kanze is a professor of organizational behavior at London Business School. She recalled similar experiences herself as a serial entrepreneur, prompting her to research gender differences among founders seeking investor backing.

Kanze’s research found that women and men employed comparable levels of promotion and prevention language in their pitches after reviewing numerous presentations from TechCrunch's Disrupt Startup Battlefield, the world's top startup competition. On the other hand, women founders did not have the same opportunities for funding as their male counterparts.

Kanze elaborates on how male entrepreneurs were given more promotion-coded questions during presentations in her 2017 TED Talk, "The Real Reason Female Entrepreneurs Get Less Funding." In contrast, female entrepreneurs were asked more prevention-coded questions. A whopping 67% of the questions asked to male entrepreneurs pertained to the founder's vision for the company's growth. For female founders, the numbers were reversed: 66% of the queries given to female entrepreneurs were about prevention.

In general, prevention questions focus on how an entrepreneur will keep things from going wrong. Promotion questions focus on the venture's potential success. 

Regardless of gender, all venture capitalists exhibited the same latent gender prejudices in the emphasis of their queries. Female VCs investigated male entrepreneurs with mostly promotion questions before turning around and probing female entrepreneurs with primarily prevention questions, precisely as male VCs did. According to Kanze, a "similarity bias" works against women founders, further limiting their opportunities to shine in front of investors.

A silver lining?

Kanze expanded her research by examining the entrepreneurs' replies to queries during pitch sessions and discovered that promotion-driven responses resulted in more significant financing.

In general, a query on prevention elicits a preventative response. Such replies, in turn, prompt investors to ask biased questions, and these limited queries and answers collectively feed a bias loop that maintains the gender gap. The only way out is to react with promotion-related responses.

 Female entrepreneurs might get more investment for their companies by framing their responses in promotional terms. According to Kanze's research, daring entrepreneurs who shifted the normally prevention-focused conversation into the positive area of gains could raise 14 times more money.

Suggestions

The most profitable businesses should be given an opportunity to develop and prosper, regardless of whether men or women manage them. And there is something that each stakeholder in the process can do to help address the gender funding disparity.

During pitches, female entrepreneurs should first understand the question they're being asked. Second, they should strive to exude more assurance and phrase their replies using promotional language in response to every investor query on prevention.

Meanwhile, investors should modify how they engage female entrepreneurs to improve financing results – anything from their queries to outreach. They might, for example, consider allocating a minimum percentage of funding to women-founded businesses, providing a variety of training, and reaching out to local, national and international groups that support female entrepreneurs.

Female investors could also organize more balanced financing meetings. By shining the same light on every startup's potential for profit and loss, they will be able to support all deserving businesses, regardless of whether a man or a woman started them.

Finally, more women need to step forward as investors and take their rightful place at the table. If women continue to ignore the male-dominated venture capital business, they will lose the power, money and influence that investing may provide.

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