Venture funding: we ask men to win, and women not to lose

Just 1% of venture funding goes to female entrepreneurs. Shocked? New research by Dana Kanze throws some light on why this is


Aine Doris (AD): What were you and your colleagues looking for when you started to investigate the gender gap in venture funding?

Dana Kanze (DK): When you discount the possibility, as we have, that women are starting up different types of business that either don’t require venture capital or pursue less aggressive growth strategies, you’re really left with only one conclusion: investors are somehow biased when it comes to the allocation of venture finance.

We wondered if this might be down to the types of questions investors were asking male and female entrepreneurs. To dig into this, we used the psychology theory of regulatory focus. This posits two distinct types of orientation: promotion and prevention. In our study, we wanted to see if investors were using promotion-type questions with men – questions that focused on positive things like gains and advancement. And conversely, if they were using prevention-oriented questions with female entrepreneurs, that were focused on loss avoidance, safety and responsibility.

AD: So you hypothesised that men and women were being asked materially different questions by investors. How did you put this theory to the test?

DK: The TechCrunch Disrupt New York funding competition is one of the world’s most prestigious pitching events. We reviewed eight years’ worth of TechCrunch pitches between 2010 and 2017. So, that is about 189 interviews. We looked at the funding allocation made to those start-ups.

Using a linguistic software programme, we analysed hundreds of interview transcripts for promotion and prevention terms. With promotion, we were looking for ‘positive’ words like accomplish, aspire, earn, expand, grow, and so on. For prevention we were looking for words like accuracy, afraid, avoid, defend, fail, fear and loss.

Our software generated the frequency of these terms in each of the six-minute interviews with angels and start-ups. To be extra sure of the results, we also had all of the (almost 2,000) questions and answers manually coded to look at promotion/prevention intentions.

AD: Can you give an example of promotion and prevention type questions?

DK: Well if you take the topic of customers, for instance, a promotion-framed question might be: “How do you plan to acquire or gain new customers?” A prevention question would be more along the lines of, “How do you plan to retain or avoid losing customers?”

We found that 67% of the questions put to men were promotion questions. And 66% of the questions put to women were prevention-type questions.

AD: So you found evidence of gender bias on the part of the investors. Was this consistent among male and female angels?

DK: Yes, we found that male and female investors behave similarly.

AD: Does this mean that women entrepreneurs are seen by investors as more of a risk then men?

DK: Well, our research has been developed by a research team in Europe who replicated our findings and found that there was a difference in the way that investors processed information when female – as opposed to male – entrepreneurs talked about risk. Our results have also now been replicated in an industry study. It’s exciting to see how this research is driving more research.

AD: Going back to your original work, how did gender bias play out in terms of funding allocation to the start-ups in your study?

DK: Those entrepreneurs who are asked predominantly promotion-type questions raise approximately seven times more funding than those asked mainly prevention questions. But that’s not all. We also found that for every additional prevention-oriented question, the entrepreneur, the start-up, raised almost USD $4 million (£3.1 million) less in capital investment.

So, there is a significant impact on the growth trajectory of these companies that desperately need funding at this critical stage in their lifecycle.

AD: That’s staggering. You found very material evidence of bias among business angels and the concrete impact this has on entrepreneurs.

DK: Yes, but it’s not just angel investors. We also conducted a number of experiments with 200 accredited investors and 100 regular, lay people to see if this bias effect was limited to business angels, or whether it would extend to other types of investors (crowdfunding and so on). Here we simulated the TechCrunch Q&A setting and we created four six-minute audio files with exchanges between investors and entrepreneurs based on the actual transcripts. We standardised these files for quality and stage of the start-up to control for any factors other than the question orientation. Then we manipulated the dialogues to contain different combinations of promotion-versus-prevention type questions and answers.

What we found was really interesting. Both sets of investors allocated significantly more funding to entrepreneurs who had been asked promotion, as opposed to prevention questions. Angels invested twice as much, and laypeople 1.6 times more.

But what was also really significant was the impact when entrepreneurs switched the orientation of their answers. In other words, if an entrepreneur was asked a prevention-style question but answered with a promotion-type answer, the start-up awarded significantly more funding than if the entrepreneur had answered with a prevention-oriented answer.

AD: So you’re saying that even if an investor puts a ‘negative’ prevention question to an entrepreneur, if that entrepreneur gives a positive ‘promotion’ answer, they can mitigate the effect?

DK: Absolutely. When entrepreneurs framed an answer to a ‘negative’ question positively, we found that angel investors were allocating 1.6 times more in funding than when they answered a prevention question with a prevention-type answer.

Entrepreneurs have an opportunity to recognise the orientation of the questions they’re being asked and to answer the spirit of that question by all means, but to frame their response in terms of promotion in order to garner more funding and better outcomes for their start-up.

So, say an investor says to you: “How long will it take you break even?” I would answer something like: “We’re managing the business for aggressive top-line growth with a good deal of sales momentum so far. Here’s what our sales forecast looks like. Our goal is to expand our margins as we grow our top-lines in the forecasted period.”

It’s about redirecting the dialogue into the more favourable domain of gains, without evading or disregarding the question. And that stands whether you are male or female. In our study, women were not penalised or seen as aggressive when they were more assertive in their responses. In fact, they were considered to be more confident.

AD: What about investors? What message do you have for them?

DK: I think the onus is really on the investors more than on the entrepreneurs, and I’d like to be clear that women are not doing anything wrong when they’re pitching their businesses. By asking a disproportionate number of promotion-type questions to men, investors are over-exposing themselves to downside risk. By asking a disproportionate number of prevention questions to women they’re under-exposing themselves to upside potential.

So they need to think about the orientation of the questions they’re asking and make a conscious effort to reframe them consistently, regardless of candidate gender.

AD: Do you plan to extend your research in this field?

DK: Yes. I will be looking into the ways that female entrepreneurs are penalised when they try to start ventures in typically male-dominated spheres or sectors like tech, and how this effect does not apply when men start up in ‘female’ areas.

I’m also excited to tie my work in with the work of my colleague here at London Business School, Olenka Kacperczyk, Associate Professor of Strategy and Entrepreneurship, who investigates growth orientation and funding outcomes between the genders. There are clear commonalities in our research to explore.

Finally, I’d also like to dig a little deeper into some of the more nuanced findings in our research and look at how even when they are asked more difficult or negative questions, male entrepreneurs are still quizzed about their ventures within a predominantly promotion orientation. This is a subtle finding and there is plenty more to be explored here.

Dana Kanze is Assistant Professor of Organisational Behaviour at London Business School.

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