Many observers have argued that venture capitalists and business angels are biased against female entrepreneurs. Academics, however, have found those claims hard to substantiate. The main evidence for bias – that only a small fraction of entrepreneurs receiving venture capital and angel money are women – is unconvincing. Female entrepreneurs might find it difficult to tap these funding sources because women tend not to start the kinds of businesses that VCs and angels are looking to back, a pattern that statistics also show.
However, a recent paper by Lyda Bigelow and Robert Wuebker of the University of Utah provides some solid evidence that investors are biased against female entrepreneurs.
The researchers created a fictitious technology company seeking series A financing from a venture capital firm. Then they provided investors with an executive summary of a business plan, financial projections, industry and market size data, and descriptions of the management team.
All of the information given to the investors was identical, except for the gender of the founding team. For that, they randomly assigned male names and photos to the information given to some investors and female names and photos to the information given to others.
The researchers then asked the investors to decide how much to pay the CEO and to assess the CEO’s capabilities.
The authors found that:
• Compensation of otherwise identical female CEOs of identical ventures was 86 percent of that of male CEOs.
• Identical CEO abilities and experience were judged more negatively when associated with women.
For the same CEO descriptions, the investors judged the male entrepreneurs to have better industry experience, leadership ability, general competence, dispute resolution skills and board management talents.
The compensation the investors were willing to offer the CEO were influenced by their perceptions of the founding CEO’s skills, which were manipulated to be exactly the same for the male and female CEOs. Thus, the investors appear to have stereotyped, using the CEOs’ gender to assess ability.
The paper has two limitations. The investors in the study were MBA students. While the students were familiar with early stage venture finance, their knowledge came from a course, not from their jobs. And participants knew that the evaluations they were making were on a fictive venture. It’s possible that when real money is at stake, true venture capitalists and business angels control their tendencies toward gender bias.
Nevertheless, the study got me thinking that venture capitalists and business angels stereotype female entrepreneurs as being less competent, and giving them poorer compensation as a result. It would be great if the authors, or someone else, took this experiment to Silicon Valley and tried it out on the residents of Sand Hill road.