The Gender Factor in Investing

Dana Kanze, PhD '19, wrote her doctoral dissertation on the gender gap in the amount of venture capital that entrepreneurs are able to raise for their ventures.

Her research examined the ways in which different interactions that male and female entrepreneurs have with investors contribute to the disparity in their funding outcomes.

Now a professor at London Business School, Kanze presented her paper while interviewing at various universities for a faculty job. During those presentations, she kept receiving a similar set of questions: What kinds of industries are investors funding and how does gender factor in?

That line of questioning helped motivate additional research Kanze conducted in tandem with her former advisor Damon J. Phillips, the Lambert Family Professor of Social Enterprise, along with Mark A. Conley of the Stockholm School of Economics, Tyler G. Okimoto of the University of Queensland, and Jennifer Merluzzi of George Washington University. Their article was recently published in Science Advances.

“A number of those audience members pondered whether female founders may be getting less funding because they're catering to 'female-friendly' industries,” Kanze says. “But our work reveals something quite different is happening.”

In exploring answers to those questions, Kanze, Phillips, and their research team carried out two complementary studies.

The first involved an observational study of funds raised by nearly 400 comparable tech ventures led by either male or female founding CEOs. These ventures catered to industries of varying gender dominance, a variable that the research team obtained using the US Bureau of Labor Statistics percentage of women employed by industry.

They then coupled that study with an experiment involving over 100 actual investors who were exposed to venture opportunities that were manipulated according to founding CEO gender and the male vs. female dominance of the industry served, holding all other relevant information about the investment opportunities constant.

In doing so, the researchers examined three output measures to determine whether the interaction of founding CEO gender and industry gender dominance influences fundraising activity. The first, the amount of funding a venture would receive, is a metric typically studied by scholars, according to Phillips.

But very few papers to date have tackled the other two: the valuations at which entrepreneurs receive funding and the amount of equity entrepreneurs retain in the process.

“First off, our results revealed that female founders are significantly disadvantaged when compared to male founders on all three of these key outcomes,” Kanze says. “We then found that fundraising-related disparities are far more pronounced for female but not male founders depending on industry served.”

“Female-led ventures are at a particular disadvantage—in terms of funding allocations, valuation amounts, and equity retention—when catering to male- as opposed to female-dominated industries," Kanze adds.

Conversely, they found that male-led ventures experience similar outcomes on all these measures regardless of industry served.

“For instance, this means that a female founder is unfortunately going to experience even worse funding-related outcomes when she's at the helm of a fintech venture than, say, a fashion tech one,” Kanze says. “But our research shows that male entrepreneurs and their ventures can thrive funding-wise across industries served, even in female-dominated ones.”

As to the reason behind this effect, Kanze, Phillips, and their research team found support for the “lack of fit” model at play. Introduced several decades ago by NYU Professor Madeline Heilman, the well-documented “lack of fit” model demonstrates that women are going to face discrimination where there is a mismatch between attributes seen as necessary for success in a male-dominated area and those qualities that women are expected to possess.

Kanze explains that investors perceived female founding CEOs to be significantly less of a fit with their ventures when they catered to the male-dominated as opposed to the female-dominated industries. But there were no perceived fit differences for the male founding CEOs with their ventures across the male- versus female-dominated industries.

“This was particularly compelling, given that investors perceived all the standalone CEOs and the ventures as being otherwise comparable,” she says.

When asked about any silver linings to these findings, Kanze says that she and her co-authors found that the lack of industry fit-induced gaps tightened when accredited as opposed to non-accredited investors evaluated the female-led ventures.

“This means we ought to increase the degree of sophistication among investors evaluating early-stage opportunities. We need to earmark resources to support greater financial literacy," Phillips adds.

The researchers' findings also suggest the need to reform investor best practices to uniformly capture data points on ventures and their teams—including founders' industry experience, interest, and affiliations—so that these misperceptions are not perpetuated.

She has recently been training investor groups to combat the bias that can creep into their decision-making.

“They seem to be open to this type of training,” Kanze says. “And, over time, I'm hopeful that greater representation of women employed across industries will continue to chip away at the underlying stereotypes as well.”