Are venture capitalists really guilty of bias against tech's female entrepreneurs?

Female entrepreneurs are unlikely to get a “fair deal” when pursuing venture capital (VC) as unconscious bias within the industry is “preventing funds from being allocated to the best investment opportunities”, an article in the Harvard Business Review (HBR) warns.

Even though the number of US businesses that are owned by women may be on the rise, only 3% of the total venture capital available in 2018 was assigned to companies with a female chief executive, the piece, entitled ‘How the VC pitch process is failing female entrepreneurs’, points out.

According to a study from S&P Global Market Intelligence, this is despite the fact that public companies on the Russell 3000 Index that are headed by female CEOs and CFOs are more profitable, see faster growth in their stock prices and are perceived by investors to be a less risky bet than those with males at their helm.

One of the reasons for this situation, the report suggests, is that more qualified females are often passed over for top roles during the hiring process in favour of less qualified men, which means that if women are taken on, they tend to be a cut above the rest.

But there are other considerations too, believes Allison Kopf, founder and CEO of agri-tech company Artemis and investment partner at XFactor Ventures, a fund that specialises in making pre-seed and seed investments in firms with at least one female founder. She explains:

All the things that make women statistically worse at activities, such as pitching, are the ones that make them better leaders. So they tend to be more metrics-driven, think about how to scale in a more rational and practical way and are often more cautious and pragmatic than men. They also tend to create more diverse leadership teams and it’s that wider issue of diversity that makes a huge difference.

HBR agrees, meanwhile, that of the four stages of the VC investment process – deal sourcing, pitching, due diligence and closing – it is the pitch stage that is most susceptible to bias. In fact, it cites a 2014 study in which both men and women used identical slides and narrated identical scripts during their pitches. Some had photos on display during the presentation and others did not.

Biased pitching process

The findings indicated that pitches voiced by men “significantly outperformed” those spoken by women, but were viewed most favourably of all if accompanied by a picture of a good-looking male. Interestingly, the outcome was the same whether potential investors were male or female.

A second 2017 study also revealed differences in how the genders are questioned during a pitch. A TechCrunch Startup Battlefield competition, which involved 180 entrepreneurs and 140 VCs, revealed that men were consistently asked more ‘promotion’ questions, which highlight upsides and potential gains. Women, on the other hand, were asked more ‘preventive’ questions, which focus on possible losses and risk mitigation.

But entrepreneurs who dealt effectively with promotion queries raised at least six times the money of those addressing preventive ones.

Another reason why the pitching process may put women at a disadvantage, meanwhile, is the gender confidence gap. In other words, females tend to undervalue themselves in competitive situations compared with their male counterparts, which means they can come across as “less sure of themselves” and, therefore, less attractive to investors.

While Kopf acknowledges that the gender confidence gap exists, she also recommends that for women to obtain more positive outcomes, they should focus on going after more money, dreaming bigger and telling a bigger story. She explains:

When I look at female founder pitches, I often say why are you trying to raise $150,000 when your male counterpart is going after $3 million as capital is necessary to compete? Look at the business through a hard lens and if you really believe it’s a VC business, raise more money.

As to what constitutes a VC business, Kopf says that, as a rule of thumb, it is one with the potential to become a $1 billion organisation or to create a $1 billion market. As a result, she advises:

Don’t describe your business as an SME. To be venture-backable, you need to scale across the entire US market, so it’s not about local needs – you have to think bigger. It’s also not about saying you can get there in 10 years if my fund expects a return in five. So if you don’t understand fund dynamics, it won’t work. In other words, ensure you understand the basics, that you can scale and that you understand the pressures of going for VC funding. There are many ways of raising capital these days, especially with interest rates being low, and VC is a very specific asset class, so think carefully about whether it’s the best route for you.

Ditch the pitch?

Nonetheless, despite such cautionary words, the HBR authors believe that to truly level the VC playing field, the pitch process should be eliminated altogether and replaced with a more data-driven approach based on actual business performance. Social Capital and Clearbanc, for example, use online application forms to gather data and select investment opportunities based on specific metrics.

Another possible approach is that of Loyal VC, a fund set up by one of the authors, which sources prospects based on recommendations from partner accelerator, the Founder Institute. The Institute evaluates these prospects based on watching them work for 14 weeks and reassesses them again for further funding following a six to nine month due diligence period.

A second option includes female-only funds, such as Golden Seeds or Voulez Capital. These consist of female entrepreneurs pitching to female investors, with the aim of eliminating gender bias.

Whatever the route taken though, HBR believes that either removing cross-gender competition or ‘ditching the pitch’ are the two “best ways forward, for now”. It explains:

We’ve found that funds that don’t consider a pitch invest in eight to 12 times more women than average, even though they do not have an explicit gender mandate and are investing on pure financial performance. This means there is both a strong financial reason and a gender equity reason to eliminate the pitch from the venture capital process.

But female investors themselves are not entirely convinced that a biased VC pitch process is really the core issue. Merlie Calvert, founder and chief executive of online legal solutions platform Farillio, points to the fact that lifestyle factors, such as caring responsibilities, mean there are generally fewer female founders  around anyway.

Tackling bigger questions

Moreover, many also take a different approach to funding than their male counterparts. A good number of women start businesses when they are older and more financially secure, which are often funded by bootstrapping or raising money from family and friends. Calvert explains:

When making important choices, women tend to think about health and wellbeing more than men and so may chose not to scale their businesses as the risks and costs are high. Going for VC funding isn’t the most pleasant process and female founders often take the approach that they can do their idea well, just in a small way. If it is scalable, they often look at other options, such as angel investors, who tend to be more benign and accessible and often act as coaches, mentors and sounding boards.

But even if women are keen to develop high-growth businesses, various recurrent issues frequently hold them back, believes entrepreneurial consultant Rachael Cook. A key one is that women usually focus more on building peer-to-peer social networks than concentrating on cultivating relationships with people who can help their business move on to the next growth phase.

Females also often worry about exploiting social connections in a way that most men do not, which includes asking for an introduction or someone to mentor them. Cook explains:

Pitching is one thing, but the bigger part of the equation is networking effectively and developing useful relationships. People are more likely to do business with you if they already have a relationship with you and know, trust and like you. The same is true of referrals, which are implied recommendations. It’s about who you know, especially in the VC world, so if you’re a white male from an Ivy League school with a huge list of alumni, making the most of those relationships will really help when getting funding for your start-up.

As a result, she recommends that female founders network in a purposeful way by attending appropriate conferences, ‘meet the investor’ events, pitching clinics and other educational opportunities in order to do just that:

Build relationships and ask for introductions, even if you’re not ready for funding yet. It’s not about proposing marriage on a first date. It’s about laying the foundations so that when the time is right to ask, they’re more likely to say ‘yes’, or if not, at least find you another match.

As for what investors are looking for, Kopf says, it is primarily a strong founder and sound idea (although not necessarily a finished product). Such individuals know the market inside out, are solving a niche problem in that market and live and breathe what they do. The attraction here is that they “tend to be in it for the long haul” and “have the pure grit to make it happen”, she concludes.

My take

While the HBR article is a thought-provoking one, by focusing on the VC pitch process, it appears to be answering the wrong question, at least partially. As ever with these issues, the situation is an extremely complex one generated by social attitudes and behaviour on all sides that cannot be bundled up into the neat category of discrimination. There is far more to it than that.

As a result, while female-only VC funds may provide an answer in the short-term in that they give female founders a leg up, the real, long-term solution is in boosting diversity. As Kopf concludes:

The industry will continue to face structural challenges for the next decade or two until the ratio in diversity terms is more balanced. Women-only funds are not the solution, but they are great as a training ground for the next generation of VCs coming through, which will balance the pipeline and, over time, help the gender parity issue.