A Greater Number of Women Working In Venture Capital Does Not Provide More Funds For Female-Led Firms, New Research Suggests That And Here’s The Reason

Venture capital plays a significant role in helping startups start. It also has a pronounced gender gap.

More than 4 out of 5 partners in U.S.-based venture capital companies are male, surveys and research indicate. It is also worth noting that VC firms heavily direct their money to men-dominated businesses. In 2023 just 1 of 4 the VC funds were allotted to women-led businesses, according to Crunchbase information.

Women’s rights advocates have long demanded companies to include more female venture capitalists in their team. The concept of having more females taking investments will result in greater funding for female-led companies.

As an assistant professor of entrepreneurial thinking I was wondering if the evidence supported this notion. So, my co-authors and myself examined funding decisions of more than 150 large and medium-sized U.S.-based VC firms over eight years.

When Women Don’t Support Women

What we discovered shocked us We found that firms whose group decision-making committees had women who were senior in venture capital gave smaller amounts of funding to female-led enterprises. Every senior female venture capitalist who was part of a company’s group that makes decisions was correlated to an 0.46 percentage decrease in the percentage of new female-led businesses within the investment portfolio of the firm.

As the median investment round we analyzed of $5.4 million, it is possible that the addition of one female VC senior in the VC group that makes decisions could result in female-led companies receiving around $25,000 less in funding.

To be precise, our team doesn’t believe that only women venture capitalists should be responsible for the current situation. Our study was not directed to assign personal blame. We just observed that having more females within VC groups that make decisions was associated with a lower level of funding for woman-led companies.

On first glance this could seem like an untruth. However, it’s in line with prior research that has proven that the dominance of males is firmly established within the U.S. the market for entrepreneurial finance. Based on our interviews with female entrepreneurs as well as high-level venture capitalists, it has created an environment where women tend to be more influenced by men..

Research indicates that women who are male-dominated areas are enticed to disengage themselves from less powerful women in order to increase their standing. This may explain why female venture capitalists might be reluctant to support female-led startups.

The Importance of Trust And Neutrality

My team also discovered, however that two important aspects can reduce this effect.

The first is that when senior venture capitalists of the group that made decisions collaborated previously and we didn’t notice the same negative effects. This suggests that trust is important.

If a group comprises highly neutral senior venture capitalists, as we determined by looking at public records of donations to political parties this reduces negative financial impact for female-led companies. This is due to the fact that politically neutral decision makers improve and aid in the communication of groups and the development of consensus.

Our research suggests that VC firms may want to look at innovative ways of combating gender discrimination. For instance, they could invite female investment professionals who have connections to a number of current senior venture capitalists, to serve as consultants. They could then, on their own, examine investment proposals and provide guidance to VC organizations’ decision-making committees.

In some instances the efforts to increase the status of women’s roles in the workplace might be rewarded. For instance, a study of all the companies in the S&P Composite 1500 index between 2004 and 2015 showed that demands for more diversity of gender in the boardroom were related to the presence of female directors.

As our research indicates that efforts to increase diversity don’t always work particularly in areas that are predominantly male, such as the U.S. financial market for entrepreneurs. In fact, they could backfire if they do not tackle the root causes of cultural biases and power interactions.

To be clear, our research isn’t an appeal to stop the quest for diversity in venture capitalists. Instead, it emphasizes the need to continue until women are equal in society and business generally.