Women-Led Startups Face Setbacks in Securing Additional Funding When Backed by Female Investors
5 min read · Jan 2025
Snellman, Kaisa, and Isabelle Solal. 2023.
“We find that firms with female founders who received funding from female rather than male VCs are two times less likely to raise additional financing. We find no equivalent investor gender effect for male-founded firms.”
Summary
This article examines the impact of investor gender on female entrepreneurs’ access to venture capital. The study finds that while female investors may initially support women-led businesses, this homophily can hinder long-term success. Female-founded startups backed by female investors are less likely to secure additional funding than those with male or mixed-gender investor teams.
Method
The authors used a quantitative research design with regression techniques to explore the relationship between investor gender and the funding outcome of female entrepreneurs. In the first study, Crunchbase data on U.S. venture-backed startups was analyzed to assess whether female-founded firms with initial female investors were less likely to secure subsequent funding than those with male or mixed-gender investor teams. The second study used an experimental approach, where 134 MBA students evaluated entrepreneurial pitches. By manipulating investor gender, the study examined its impact on pitch evaluations and inferred perceptions of the entrepreneur's competence.
Key Findings
Female-founded businesses that received initial funding solely from female investors faced difficulties securing subsequent funding rounds.
Female-founded ventures with only female investors were significantly less likely to raise additional capital than those backed by male or mixed-gender investor teams.
Backing from a male investor doubled the chance of securing a second funding round.
There was no significant difference in funding outcomes between female-founded ventures with only male investors and those with mixed-gender teams.
Female entrepreneurs received unfavourable perceptions when backed by female investors.
Neither the gender of the entrepreneur nor the investor independently affected the perceived quality of the pitch or the perceived competence of the entrepreneur.
However, when a female investor supported a female entrepreneur, both pitch quality and perceived competence of the entrepreneur were rated lower
Takeaways
This study provides a nuanced perspective on how gender impacts investment decisions and entrepreneurial success. While the research highlights a "competence discount" for female entrepreneurs backed solely by female investors, a relatively small pool of experienced female investors may contribute to these findings. Additionally, the role of investor networks, where VCs often rely on social networks for "signals" of success and to mirror their peers' investments, should be explored further. This might be a larger factor than gender-based influences in shaping investment decisions.
A multifaceted approach is needed to address the challenges faced by women entrepreneurs. Beyond mentorship and support programs, a more fundamental shift is needed. Increasing the representation of women in investor roles and fostering a culture that values and rewards female-led entrepreneurial success is essential for creating a more equitable ecosystem.
References
Snellman, Kaisa, and Isabelle Solal. 2023. “Does Investor Gender Matter for the Success of Female Entrepreneurs? Gender Homophily and the Stigma of Incompetence in Entrepreneurial Finance.” Organization Science, 34(2): 680-699.
About WIN-VC Canada:
New Power Labs is the research lead of the Women and Nonbinary (W) Impact (I) Network (N) for Venture Capital (VC), a national collaborative of organizations working to provide services, programming, events, and dedicated resources to women and non-binary entrepreneurs and gender lens investors across Canada who are working towards becoming investment ready and increasing the pool of investors driven to invest in these ventures.
This research is part of WIN-VC Canada, supported by the Government of Canada. WIN-VC acknowledges the support of Innovation, Science and Economic Development (ISED). ISED has awarded funding for WIN-VC that will make the venture capital environment more inclusive for women by transforming traditional investment processes, processes and knowledge into respectful and meaningful approaches that value equity and impact with a focus on diverse women and non-binary entrepreneurs and SMEs including Black communities, Indigenous peoples, racialized populations, persons with a disability, 2SLGBTQ2+ and new Canadians.
