Editor’s Note: This article was originally published by The Conversation on their website. The Conversation is a nonprofit, independent source of news and analysis from academic experts.
Venture capital is important in helping start-up businesses. The field has a persistent gender gap.
Surveys and research indicate that more than 4/5 of partners in venture capital firms in the United States are men. In a similar vein, VC firms tend to direct their funding to businesses led by men: According to Crunchbase, only 1 in 4 VC dollars were allocated to female-led companies in 2023.
For years, advocates of gender equity have called on firms to hire more women as senior venture capitalists. The idea is to have more women making investment decision will translate into more funding being provided for women-led business.
As a professor in entrepreneurship, I was curious to know if the facts supported that idea. My co-authors analyzed funding decisions made by more than 150 large and mid-sized VC firms in the United States over an eight-year period.
When women don’t support women
What we discovered surprised us: firms with more female senior venture investors in their decision-making groups offered less funding to businesses led by women. Each additional senior female venture investor in a firm’s decision-making group is linked to a 0.46% decrease in the percentage of newly funded women led businesses in its portfolio.
The average funding round for our sample was $5.4m, which means that adding an extra female senior venture investor to a VC group results in women-led companies receiving around $25,000 less funding.
My team does not blame individual female venture capitalists for this situation. Our research was not intended to assign personal responsibility. We found that more women in VC circles were associated with less funding for women-led companies.
This may appear to be a paradox. It’s in line with previous research which shows that male dominance is entrenched on the U.S. entrepreneurial financing market. According to our interviews of female entrepreneurs and senior Venture Capitalists, it fosters a cultural where women tends to defer to male counterparts.
Women in male-dominated environments may also be motivated to distance themselves from women who are less powerful to improve their status. This could explain why female venture capitalists are reluctant to fund women-led businesses.
The importance of trust and neutrality
My team also found that two key factors can reduce this effect.
First, we did not see the same negative effects when senior venture capitalists had previously worked together in a group of decision-makers. This suggests that trust is important.
When a group consists of senior venture capitalists who are politically neutral, as we determine by looking at public records of political donations, the negative effects for funding women-led business are reduced. This is because political impartial decision-makers facilitate group communication and consensus-building.
Our findings suggest VC firms may want to explore innovative ways to combat gender bias. They could, for example, invite female investment professionals with connections to many senior venture capitalists from outside to work as consultants. These professionals could independently assess investment proposals and provide advice to VC firms’ decision-making groups.
In some cases, efforts made to promote women in the workplace can pay off. In one study, the inclusion of female directors in the boardroom was linked to calls for greater gender equality.
Our research shows that efforts to promote diversity may not always be successful, particularly in male-dominated contexts like the U.S. entrepreneurial financial market. They can even backfire if the underlying power dynamics and cultural biases are not addressed.
Our study is not a call for venture capitalists to abandon their pursuit of diversity. It emphasizes the importance of persevering until women reach equal status in society and business.
Lei Xu (Jeremy) is an assistant professor of entrepreneurship and business management at the University of Missouri St. Louis.