Are Early Stage Investors Biased Against Women?

Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology and Richard Townsend is Assistant Professor of Finance at the UCSD Rady School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

It is well known that there is a significant gender gap in high-growth entrepreneurship. The persistence of this gap over time runs counter to more general labor market trends. Several potential explanations have been proposed, including gender differences in technical training or risk preferences. However, many have also speculated that part of the gender gap may, in fact, be due to a lower propensity for investors to fund female entrepreneurs seeking capital. This view largely stems from the fact that over 90% of venture capitalists (VCs) are men. In this article, we directly examine whether female entrepreneurs are at a disadvantage in raising capital due to their gender and if so, why.

To examine these questions, in our article we use a proprietary data set obtained from AngelList, a popular online platform that connects investors with seed-stage startups. Companies create profiles on AngelList describing their businesses and founding teams. They can then start a fundraising campaign wherein they specify the amount of capital they are trying to raise along with other desired deal terms. Accredited investors—both angels and VCs—can register on the platform and subsequently connect with companies seeking funds,

There are several advantages of this setting for studying the impact of gender on entrepreneurial fundraising. First, we are able to observe a large set of startups that are trying to raise capital—some of which succeed and some of which fail. In contrast, standard data sets only cover funded startups. Second, because our data come directly from AngelList, we also observe other nonpublic investor actions. In particular, we see when an investor decides to “share” a startup profile with someone else or “request an introduction” to the founders. As noted earlier, investment is a two-sided decision, but we are able to study expressions of interest that only involve an action on the part of the investor. These actions also precede any personal interactions with founders that may differ across investors and thus complicate the analysis. Third, because of the nature of the platform, all investors have “access” to all deals in the sense that they can see the exact same information about the same set of companies and are free to take action on any company. Therefore, each investor’s information and opportunity set is the same, at least with regard to the one-sided actions discussed above.

We find that female-led startups are less successful with male investors, even controlling for a battery of startup/founder characteristics that encompass much of the information that was available to investors online when making the decisions we are studying. The behavior of male investors is particularly consequential for startups since men constitute the bulk of early stage investors. Nonetheless, it is interesting to also examine the behavior of female investors for comparison. Interestingly, we find that the same female-led startups are actually more successful with female investors than the same observably similar male-led startups. We next explore potential explanations for this differential treatment.

We partition potential explanations into two categories: explanations where investors have gender biases and explanations where they do not. We define gender biases to encompass both taste-based discrimination as well as miscalibrated beliefs. Taste-based discrimination would involve investors directly experiencing disutility from investing in entrepreneurs of the opposite gender. Miscalibrated beliefs would involve investors holding an incorrect stereotype of entrepreneurs of the opposite gender.

In contrast to explanations involving gender biases, explanations not involving gender biases are ones in which differential treatment of female-led startups maximizes a purely financial objective function. Importantly, the fact that male and female investors respond to female founders in opposite ways is already suggestive of gender bias by at least one of these types of investors. Nonetheless, there remain potential explanations that do not involve gender bias.

First, it could be that investors have a screening and/or monitoring advantage with startups led by founders of the same gender as themselves. To explore this possibility, we repeat our analysis on various subsamples of “gender-neutral” startups—for example, startups that three independent evaluators categorized as equally likely to have been founded by a man or a woman when shown the non-founder sections of their profiles. The results are similar in these subsamples. We also find that male investors are less likely to share female-led startups, even when they are sharing with female investors. Similarly, female investors are more likely to share female-led startups, even when they are sharing with male investors. This result further suggests that the reason investors show more interest in startups with founders of the same gender as themselves is not simply because investors anticipate that they will work better with these founders.

Alternatively, female-led startups may be less risky than male-led startups and female investors more risk averse. However, within the male-led-only (or female-led-only) sample, we find a strong positive correlation between female investor interest and male investor interest. Thus, male and female investors tend to agree with one another when comparing two observably similar founders who are both men or who are both women. However, male and female investors tend to disagree with one another when comparing two observably similar founders, one of whom is a man and one of whom is a woman. If our baseline results were driven by differences in risk, male and female investors would also disagree when comparing two founders of the same gender. Having failed to find evidence in support of the most obvious non-bias explanations for our results, we investigate the possibility of bias more directly by examining long-run startup performance.

If investors prefer founders of the same gender not due to bias, but for purely financial reasons, we would expect same-gender pairs to also outperform mixed-gender pairs. In contrast, if investors are biased, it is possible that same-gender pairs may underperform mixed-gender pairs. We find that for a given male investor, the male-led startups that he pairs with underperform the female-led startups he pairs. These results suggest that male investors are reluctant to reach out to startups led by female founders due to bias and therefore only do so for the most promising companies. We do not find a similar pattern for female investors.

Overall, our results are consistent with some form of bias among male investors. In general, we find weaker evidence of bias among female investors. However, we do not rule out the possibility that male and female investors are symmetrically biased in favor of their own gender. One could view symmetric biases as being reflective of “homophilistic” investor preferences. Alternatively, female investor bias could arise as a response to male investor bias—in an attempt to offset it. In either case, given that the bulk of early stage investors are male, biases that lead investors to favor their own gender would be of greater concern for female-led startups than male-led startups. Thus, even with symmetric biases, one potential implication of our results is that more female investors may be necessary to support the entry of more female entrepreneurs.

The complete article is available here.

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