If women solely associate with other women business owners and investors, they may find themselves alone.
Millionaire businesswoman Lori Greiner once urged female entrepreneurs, “Don’t think of yourself as a woman in business.” Greiner appeared on the renowned TV show Shark Tank, in which hopeful entrepreneurs present their businesses to a panel of investors. You can hold your own in business with anyone.
While male-founded businesses may have an easier time securing funding, female-led startups nonetheless face significant obstacles. An all-female or mixed-gender team submits 25% of the pitch decks assessed by VC companies, yet these businesses only account for 11% of the invested cash, according to a recent research commissioned by the UK government on diversity in venture capital. Unfortunately, the situation is not any better in the United States, as PitchBook reports that female founders were engaged in 5.4% of VC transactions in 2018 but got just 2.2% of VC money.
Investors do not rate male and female business owners equally, which helps to explain the disparity. Researchers have shown that investors pose distinct queries to male and female founders, and that their vocabulary to characterize entrepreneurs follows stereotypical views of the sexes.
In my working paper, “The Gender of Money: How Gender Shapes the Market for Entrepreneurial Capital,” I demonstrate that gender also influences investment in start-ups through positive biases. It’s important for entrepreneurs and investors to get along in the early stages of a deal. This is consistent with the idea of homophily, which explains the propensity to create close relationships with others who have similar characteristics with oneself, especially those of the same gender.
There are two major ramifications of the prevalence of homophily in early-stage financing. To begin, it’s important to consider the figures. Recruiting more women to work in venture capital should increase the likelihood that companies founded by women will receive funding. All Raise, an organization founded by prominent women investors to promote gender parity in finance, makes this case.
Second, and more negatively, increased sex segregation can lead to the isolation of women business owners and investors in “pink silos” that are closed off to the rest of the economy. This may have negative effects on women’s entrepreneurial success and engagement over time. Potential financial possibilities may be lost if males are more likely to ignore this advice. Many female-driven startups, including 23andMe, Glossier, and Rent the Runway, have recently reached the elite unicorn club, outperforming those run by all-male teams at certain investment firms.
Swimming with sharks
Shark Tank is a great place to study the differences in investing styles between men and women. In contrast to data on closed agreements, this information allows us to see which pitches did not receive any offers and which offers were declined, giving us insight into the criteria investors and entrepreneurs use to choose which partners to work with to further their businesses. At least one woman is always present as an investor on the show, and she invests large sums of her personal money in return for shares or royalties. While the show is structured for entertainment purposes, the entrepreneurs and investors will act in a way that they feel would serve their best interests, just as they would in real life.
After analyzing 570 proposals from many seasons of Shark Tank (also known as Dragons’ Den in the UK and Canada), I came to three conclusions about the impact of gender on the decision-making processes of investors and entrepreneurs:
- Investors prefer to invest in someone of their own gender
The odds that an entrepreneur would receive an offer improved by 6.3% for males and by 7.5% for women if the entrepreneur and the investor were of the same gender. It’s been shown that males like to invest in other men, whereas women prefer to invest in other women. This accords with current tendencies in crowdsourcing and angel financing. This parallels the high rate of ethnic similarity between early-stage investors and start-up founders, indicating that the investors’ preference for someone who looks like them is likely to influence their selection of an entrepreneur when they anticipate building a connection or relationship with them.
- Female entrepreneurs disproportionately seek out female investors
As far as I can tell, female entrepreneurs are nearly 22% more likely to accept an offer from a female investor than they are to accept an offer from a male investor. When looking at men business owners, we did not find a comparable trend. Possible explanations include the fact that women business owners see other women as a more reliable resource for mentorship, advice, and emotional support than men do, and hence turn to them for financial backing.
- Female investors are more likely to invest in female-typed businesses
Female Shark Tank investors, regardless of their professional or educational backgrounds, often found themselves investing in enterprises with a focus on women customers or in traditionally female-dominated fields like fashion and early childhood education. Entrepreneurs heading female-typed enterprises were more likely to accept offers from female investors, while female investors were more likely to make offers on female-typed presentations (and fewer on male-typed pitches). One possible explanation is that female investors are often seen to be more adept at recognizing and maximizing opportunities in traditionally female-dominated fields. It may also be an indication that female investors are conforming to the stereotype that it is their duty to support female entrepreneurs. One of the women I spoke to expressed it this way: “Men (VC) firms hire at least one woman on staff to focus on that (female founder) transaction flow.” Someone who is both outgoing and able to go around easily is desperately needed.
Tearing down ‘pink silos’
In addition to the Tank, there is data suggesting that same-gender inclinations influence investing behavior in general and venture capital in particular. While it’s true that women’s investment in other women can help close the gender gap in the short term, in the long run, this kind of gendered decision making on the part of both men and women runs the risk of splintering the market and creating what I call “pink silos,” or communities where only women invest in businesses run by women. Because of this, women are more likely to be part of smaller, less varied, peripheral networks with less access to resources in a world where there are still relatively few women entrepreneurs or founders. Therefore, positive financial results are not guaranteed when people have similar values and interests.
As a result, it is incumbent upon women to take proactive measures to ensure that they build networks that include people of both sexes in order to reduce their risk of falling victim to these traps. Certainly, there are times when it becomes rather unpleasant. To the Financial Times, Sarah Turner, founder of the London-based angel investor network Angel Academe, said, “Most of the women we’re investing in have stories about some sort of bias including real #metoo incidents where they think they’re meeting an investor and they think it’s a date over a drink.”
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If males want to continue to have access to the finest discounts, they need not disregard women business owners or leave them to their female coworkers. Although though Kevin O’Leary is renowned for his tough rhetoric on Shark Tank and is not a fan of investing with a social purpose, he told Barron’s Magazine that he invests nearly solely in firms established and led by women since they provide him with superior returns.
In the end, it’s probably better to encourage business owners and financiers to actively seek out and support a diverse range of investment opportunities. Money is gender-neutral, to quote the famous African-American businessman A. G. Gaston.
