advertisement
advertisement
advertisement

The Way To Get Around Persistent VC Bias To Get Funding

New research proves inherent bias among investors and advises on ways to skim past that bias to get funding.

The Way To Get Around Persistent VC Bias To Get Funding
[Photo: JPM/Getty Images]

It’s no secret that women-owned businesses are seldom funded by venture capital investors.

advertisement
advertisement

Bias among male investors is a much discussed reason for the fact that less than 10% of venture-backed companies are led by women. But it doesn’t make good business sense, because women-led, venture-backed companies than those with men at the helm, according to research from Babson College.

But new research suggests there may be a workaround to that persistent mind-set. The study, titled “Gender and venture capital decision-making: The effects of technical background and social capital on entrepreneurial evaluations,” found that there is indeed bias against women, particularly those without a technical degree, but a close connection to a VC can make a difference.

The researchers posit that other studies have focused on supply and demand using statistics to parse out how personality and career history plays into bias. This team actually simulated funding decisions by venture capitalists for men and women entrepreneurs who differ in technical background and social ties.

Here’s how it went down.

After an initial series of focus groups with Silicon Valley entrepreneurs and VCs to learn about the pitching process, the research team brought together a group of 114 participants who weren’t VCs–they were male MBA students recruited from the Stanford Graduate School of Business Entrepreneur Club. The research team believed that the group had been trained in the VC process and had access to Silicon Valley networks. The reason the group was all male was because the team was unable to recruit enough female club members to reach an adequate sample size.

Participants were told that they had to evaluate business plans that had already been vetted by a Silicon Valley VC firm, and those who were able to match the evaluation of the VCs by reading a summary of the plan and answering a questionnaire would get paid $15 instead of the $5 base pay for taking part in the study.

advertisement

In reality, all participants read the same business plan–that of an existing successful telecoms company with the name changed–and were paid the same amount, according to the paper. The difference was the founder’s gender and technical backgrounds.

“In all conditions, the entrepreneur was described as having a Bachelor’s degree from the University of Michigan, an MBA from University of California, Berkeley, and a few years of industry experience. Because the high-tech industry tends to provide different job tracks to those with technical degrees versus those without technical degrees, the entrepreneurs with technical degrees were described as having experience in software engineering and product management, in addition to marketing and sales expertise (described in all conditions).”

The final breakout had 43 men with a tech background and 18 without, 29 women in tech, and 24 without a tech background. The entrepreneurs were evaluated for leadership, competence, and sociability. That’s where the biases came out.

There were no significant differences in rated leadership ability for male and female technical entrepreneurs, but the male nontech entrepreneur was evaluated as having more leadership ability than the female nontech entrepreneur.

The male nontechnical entrepreneur was viewed to have significantly more leadership ability than the male technical entrepreneur, who was viewed as less social.

Though stubbornly persistent, the research did illuminate ways that women can get male investors to see beyond their biases, namely, to have a technical background, and to make sure they had a personal reference from a trusted connection.

Lead study author Justine Tinkler of the University of Georgia told the Wall Street Journal that it’s because people default to thinking the epitome of a successful entrepreneur is going to be the next Steve Jobs. “And that image is never going to be a woman,” she said, which makes the personal reference that much more important.

advertisement

Indeed, that is what got Nicole Sanchez of luxury hair company VIXXENN funded. “I met my lead investor, Charlie O’Donnell of Brooklyn Bridge Ventures, a year before I started raising,” Sanchez told Fast Company. “We kept in touch and he had a chance to see my business evolve.”

Barring that, Patricia Nakache, a venture investor and partner with Trinity Ventures in Silicon Valley, believes that recruiting team members or advisers who have particular skills the female founder lacks, or who are respected and viewed as successful by an established VC, can be very helpful. Nakache explains it’s like an endorsement. “This person was willing to sign up because they saw something, so I should look closely,” she explains.

And Jessica Richman, cofounder of uBiome, whose company raised $6.5 million total, points out that asking for capital is no time to be shy about accomplishments. “Lead with the credentials you have, whether that’s an undergrad in a relevant field, domain experience, a high-powered MBA, or whatever,” she said.

Though the inequity persists, there is a bright spot. In spite of their disadvantage, women are launching businesses at an impressive rate: during the period between 1997 and 2013, the number of women-owned establishments grew 1.5 times more than the national average. If women business owners in the U.S. formed a country, its GDP would rank fifth globally.

RELATED: The Truth About Women And Funding

advertisement

advertisement
advertisement

About the author

Lydia Dishman is a reporter writing about the intersection of tech, leadership, and innovation. She is a regular contributor to Fast Company and has written for CBS Moneywatch, Fortune, The Guardian, Popular Science, and the New York Times, among others.

More