Venture capital is an essential element in assisting new businesses to establish themselves in the market. However, there exists a persistent gender disparity in this sector, with surveys and research indicating that over 80% of U.S.-based venture capital firms are composed of male partners. Furthermore, data from Crunchbase reveals that only approximately 1 in 4 VC funds were allocated to woman-led companies in 2023.
Proponents of gender equality have long advocated for the inclusion of more female senior venture capitalists in VC firms, believing that this would lead to increased funding for woman-led businesses. However, recent research has discovered that this may not necessarily be the case.
A study carried out by a team of researchers analysed funding decisions from over 150 mid- and large-sized U.S.-based VC firms over an eight-year period. Surprisingly, the results revealed that firms with more female senior venture capitalists in their decision-making groups actually offered less funding to woman-led businesses. Specifically, for every additional senior female venture capitalist in a firm’s decision-making group, there was a 0.46% decline in the proportion of newly funded woman-led businesses in its investment portfolio. This resulted in woman-led businesses receiving approximately $25,000 less funding.
The research also illuminated the reasons behind this paradoxical phenomenon. According to the findings, the U.S. entrepreneurial finance market is entrenched with male dominance, leading to a culture where women in these male-dominated spaces tend to defer to their male counterparts. Additionally, women in such environments may have incentives to distance themselves from less powerful women in order to improve their status, thereby contributing to the hesitation in funding woman-led startups.
However, the study also uncovered two key factors that can help mitigate this effect. Trust was found to be a significant factor, as firms where senior venture capitalists had previously worked together did not exhibit the same negative impact. Furthermore, the presence of politically neutral senior venture capitalists in decision-making groups also reduced the negative effects on funding for woman-led businesses, as they facilitated group communication and consensus building.
In light of these findings, the study suggests that VC firms may benefit from exploring innovative approaches to combat gender bias. For instance, inviting outside female investment professionals to work as consultants and independently assess investment proposals could help address underlying cultural biases and power dynamics.
Ultimately, the research serves as a reminder of the complexities surrounding gender diversity and bias in the entrepreneurial finance market. While efforts to promote diversity should persist, it is imperative to address the underlying cultural biases and power dynamics in order to create an environment where women can achieve equal status in business and society at large.