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How gender is holding back female hi-tech entrepreneurs

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Posted January 25, 2017

Powerhouse success stories of female-led startups like ZipCar and SlideShare often find their footing thanks to venture capital (VC).

UAlberta research indicates that securing venture capital may depend on the gender composition of the venture capital firm. Image credit: creativecommons.org

“Unfortunately, winners like these are far less common than male-led hi-tech and biotech start-ups,” said Alberta Business School professor Sahil Raina. “Women’s participation in VC-financed entrepreneurship is lower than in other sectors of the economy. And the women who do participate lead startups that perform 34 per cent worse than startups led by men.”

In 2012, women comprised 47 per cent of the labor force while 36 per cent of small businesses were majority-owned by women. In stark contrast, 15 per cent of VC-financed firms had a woman on the executive team and only 2.7 per cent of them had a female CEO.

In order to find out why there’s a gender-based performance gap, Raina conducted the first study looking at gender interactions in venture capital firms and start-ups and found out that word on the street is true: it may come down to gender composition of the venture capital firm.

“Our research showed that there is a large performance gender gap among startups financed by VC (firm)s with only male members, but no such gap among startups financed by VCs that include female members,” said Raina.

Bottom line: female startups do much better when they are led by female VCs. Raina explored two explanations why this likely occurs in his study.

Evaluation and nurturing of start-ups

“Female VC (firm)s are somehow able to evaluate female startups better than male VCs and to nurture them in later stages,” said Raina, who added that the study ruled out the possibility of it being a numbers game—that female VC firms were simply funding more female startups.

“That requires some pretty unreasonable assumptions, namely that VCs are doing no screening at all. A lot of money is at stake in early round stages of funding. Millions. VCs aren’t going to invest in a business they don’t deem to be viable.”

Liked-mindedness at play?

Raina said that bias is not necessarily at play.

“One theory is that like-minded groups communicate more effectively because of shared understanding. In other words, they relate better.”

More research is needed to get to the bottom of why, he added.

Source: University of Alberta

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