Essec Business School

With Isabelle Solal

We tend to think of women supporting women as a good thing: we’re all in this together, so why not give each other a hand? This has been touted as a strategy for reducing the gender gap in many areas, including entrepreneurship, but the jury is out on whether that support might come at a cost. Isabelle Solal, assistant professor of management at ESSEC, and Kaisa Snellman (INSEAD) investigated the impact of investor gender on the success of female entrepreneurs, finding that in fact, pitches by female-backed female entrepreneurs are viewed as lower quality and the entrepreneurs as less competent, and that female founders who received funding from female venture capitalists were less likely to raise additional funding. The road to hell is paved with good intentions - and relying on female investors to support female entrepreneurs may have unintended consequences.

Women in entrepreneurship

Even in 2021, women are still underrepresented in many traditionally male-dominated fields, entrepreneurship being one such field. Policy-makers, scholars, and the press alike have developed different solutions, ranging from legal ones like affirmative action or gender-blind recruitment and selection processes. One solution that has been put forward is to encourage women who have “made it” to support other women through networking, mentoring, sponsorship, and even financial support. While same-gender support in other fields has been shown to have certain psychological benefits, we need to better understand its effects on audience perceptions, especially in a domain like entrepreneurship where perceptions play a significant role. 

Recent research has examined whether the presence of female investors increases the likelihood that female founders receive funding. This may be because women and men alike tend to support their own gender, or because women are actively aiming to boost other professional women. This gender homophily has been linked to strong trust and better communication in past research.  Despite these potential benefits, there could also be unexpected consequences for the female entrepreneurs who receive help from female investors. Why? Other observers might make biased inferences about the relationship, for example assuming that the female investors offered funding to the female entrepreneurs simply because of their gender and not they deserve it- a perception not applied to male investors funding male entrepreneurs. This can take a toll on how the female entrepreneurs’ competence is perceived, potentially resulting in difficulty accessing resources or lower performance reviews. Dr. Solal and Dr. Snellman explored this question using experimental and field data.

What happens when female investors support female entrepreneurs?

In the first part of the study, the researchers studied field data from early-stage startups in the United States. Since young startups need a significant amount of capital, they will seek out investments from venture capitalists who then take a minority stake in the business. This type of funding is done in rounds, depending on the firm’s development stage and funds required, and so venture capitalists will not provide startups with all necessary capital in the first round due to the high failure rate of new business ventures. Using data from Crunchbase, which has a wealth of information gathered from various sources including the media, VC firms, entrepreneurs, and investors, they examined firms that received a first round of VC funding between January 2010 and April 2018, for a total of 290 female-founded firms out of a sample of 2136. 

They found that female-founded firms who received first-round funding from female venture capitalists were two times less likely to receive additional funding compared to female-founded firms that received funding from men, a phenomenon that was not seen in male-founded firms. 

Building on their initial findings, the researchers recruited 134 MBA students from a prestigious business school and had them watch one of four pitch videos, featuring either a male or female entrepreneur, backed by either a male or female investor. They then rated the pitch’s quality and the entrepreneur’s competence: the results revealed that pitches by female-backed female entrepreneurs were seen as lower quality compared to other conditions, and that these lower ratings were linked to perceptions of the entrepreneur’s competence. This result was only seen for the female investor x female entrepreneur pitches - not, say, the male entrepreneur x male investor pitches. 

 Taken together, the results indicate that female entrepreneurs who receive funding from female investors are likely to be perceived as less competent and to be less successful in raising capital past the seed round. 

What does this mean for female entrepreneurs and female investors?

While we can agree that women supporting women can be beneficial, this study highlights the fact that same-gender support can have negative consequences in some situations. In entrepreneurship, where early funding decisions hinge on how potential investors perceive the founder, female entrepreneurs who received funding from female VCs are seen as less competent since observers are less likely to believe that they received the funding due to merit. These women then go on to raise less funding. 

Policy implications: inclusive investing

Female entrepreneurs may face challenges growing their business if they don’t have a male investor.  Additionally, female investors may be pigeon-holed if they are seen as only investing in female-led businesses. As a result, initiatives encouraging women to support women may negatively impact both parties and put undue pressure on women. ew initiatives should focus on encouraging inclusive investing, where men and women work together to support female entrepreneurs.

Entrepreneurship is a male-dominated field, and while efforts to reduce the gender gender gap by encouraging women to support female entrepreneurs are well-intentioned, they may unintentionally backfire in some instances. This suggests that working toward gender equality in entrepreneurship needs to be a team effort, undertaken by men and women alike. 

Reference

Snellman, K., & Solal, I. (2022). Does investor gender matter for the success of female entrepreneurs? Gender homophily and the stigma of incompetence in entrepreneurial finance. Organization Science. doi: 10.1287/orsc.2022.1594