A business journal from the Wharton School of the University of Pennsylvania

Why VCs Aren’t Funding Women-led

Startups
May 24, 2016 • 12 min read

The gender gap in venture funding has important implications for the lack of
diversity in Silicon Valley.

TECHNOLOGY

Featured Faculty Author

Ethan Mollick Knowledge at Wharton Staff

W hat’s it like to be a female entrepreneur raising money in

the male-dominated venture capital industry? It’s a
question Katherine Hays, the co-founder and CEO of
venture-backed Vivoom, an ad tech startup, is often asked. Hays led
her first startup, Massive Incorporated, a video game advertising
company, through several rounds of funding, before eventually
selling the company to Microsoft for a reported $200 million-$400
million.
“I am afraid I don’t have a very satisfying answer,” she says. “Usually I
am the only woman in the room, but I have no idea how much of a
disadvantage that is because I don’t know what it’s like to be a male
looking for funding.”

She admits, though, she has given the matter some thought. “Male
VCs — and obviously most are — are very comfortable now giving
female entrepreneurs capital for ‘girl stuff,’” she says. “Want to rent
dresses or sell baby wipes as a subscription? No problem. The VCs
ask their wives or girlfriends if the idea is cool, and they’re good to
go.”

But female founders pitching hard-core, proprietary technologies —

Vivoom’s platform, for instance, renders Hollywood-quality video in
the cloud for millions of mobile users at a time — face an altogether
different dynamic, she says. “Sometimes I believe if I were a 21-year-
old male in a hoodie, Vivoom would be even more appealing to VCs,”
she notes.

Hays is not imagining things. A recent report from early stage

investment firm Female Founders Fund provides a vivid illustration
of just how few women-led startups are backed by venture capital.
Of the more than 200 Bay Area startups that last year received series
A funding — loosely defined by the Female Founders Fund as a
financing round of between $3 million and $15 million led by an
institutional investor — a mere 8% were led by women, a decline of
nearly 30% from the previous year. The percent of New York
companies founded by women that received series A funding last
year was only a little better at 13%, the same as 2014, according to
the study.
 “Sometimes I believe if I were a 21-year-old male in a
hoodie, Vivoom would be even more appealing to VCs.”

–Katherine Hays

As the tech industry continues to come under fire for its dearth of
women, the gender gap in venture funding has important
implications for the lack of diversity in Silicon Valley. And since high-
tech is a key driver of economic growth, markedly lower levels of
women entrepreneurs pose a threat to overall national
competitiveness, according to Ethan Mollick, a professor of
management at Wharton.

“Every year that goes by where we continue to fund the exact same
pool of overwhelmingly male, overwhelmingly white founders is one
where we are missing out on the opportunities to find important
new innovations and develop new enterprises that a more diverse
founder base would support,” he says.

There is no easy solution, but there is an “imperative to make

progress,” says Mollick. “We have the advantage of being aware of the
problem, and there are good faith efforts on wanting to solve it.”

Enlightened, but Still Biased

In the Era of the Lilly Ledbetter Fair Pay Act, and at a time when
Sheryl Sandberg’s Lean In remains a blockbuster bestselling mantra
of female empowerment, Corporate America has never been so
enlightened about the issue of gender inequality in the workplace.
Women represent 50% of the labor force, but when it comes to
money and power, women have very little of either one. Women, on
average, earn less than men in nearly every single occupation for
which there is sufficient earnings data, according to the Institute for
Women’s Policy Research. In 2015, female full-time workers made
only 79 cents for every dollar earned by men.

Meanwhile, women hold just 4% of CEO positions and only 17% of

board seats at S&P 500 companies, according to Catalyst, the non-
profit group that works to expand opportunities for women in
business. (This is in spite of a growing body of research that shows
that companies with women in their highest corporate offices is
correlated with greater profitability. According to a new study of
nearly 22,000 publicly traded companies in 91 countries by the
Peterson Institute for International Economics, the Washington-
based nonprofit, and EY, the audit firm, an increase in the share of
women in leadership positions from zero to 30% is associated with a
15% increase in profitability.)

A similar dichotomy exists for women-led startups, according to

Mollick. The venture capital community is increasingly aware that
similar gender discrepancies exist, but tackling the issue isn’t
straightforward. “We know that about 38% of new businesses in this
country are started by women but only between 2% and 6% of those
founders receive VC funding,” he says. “There is a problem here, and
‘leaning in’ is not enough to solve it.”

There are many reasons why women don’t receive their share of VC
funding and interest. One explanation is that women don’t start
businesses that look like typical VC-backed businesses. Women-
founded businesses tend to be smaller and in lower growth
industries like retail or food, rather than technology. (Vivoom’s Hays
is a case in point.) Of the women who do start businesses, there is
evidence that suggests they are less apt to ask for things like
venture funding — which obviously results in them receiving less.
According to a Kauffman Foundation survey of nearly 350 female
tech startup leaders, 80% used personal savings as their top source
of funding in starting a new business.

But “biases absolutely play a part” in the funding disparity, says

Laura Huang, a management professor at Wharton. “In the context
of entrepreneurship, there is so little objective data to go on in the
early stages of a venture [that it] makes it easier [for VCs] to be
influenced, whether implicitly or explicitly, and make judgments
based on personal attributes like gender.”

Consider, for instance, the homophily principle, otherwise known as

“birds of a feather flock together.” The premise is here is that
similarity breeds connection: More men are VCs and consequently
forge connections with other men, says Mollick. “If you share a
gender, ethnicity or social background with someone else, you’re
part of the same personal and professional network and are
therefore more likely to [be inclined to want to work together],” he
says. “The problem is that the homophily principle gets baked into
the system. And women can’t access these networks.”

This principle is also part of the reason why women often lack
entrepreneurial resources such as influential colleagues willing to
sponsor and develop them, according to Huang. “Women
entrepreneurs face challenges in getting access to thought-leaders
— people who can help them think through problems they may be
facing: social capital, intellectual capital, and things that are
important in addition to financial capital,” she says. “When there is a
general lower likelihood of gaining access to these things that can
give you a slight edge or foot in the door, it starts to accumulate, and
that’s part of the reason I think we’re seeing an overall gender
disadvantage.”

“Every year that goes by where we continue to fund the

exact same pool of overwhelmingly male,
overwhelmingly white founders is one where we are
missing out on the opportunities to find important new
innovations.”

–Ethan Mollick

Saikat Chaudhuri, executive director of Wharton’s Mack Institute for

Innovation Management, says that many VCs may implicitly
discount businesses started by women because they second-guess
their commitment. VCs, after all, are on a quest for founders who are
available 24/7 to work on their companies and persist at all costs.
“VCs might unconsciously question whether a woman founder
would be willing to compromise on her family life for the sake of her
business,” he says. “Despite growing numbers of men who report
work/life balance as a concern, they often don’t face the same
scrutiny in the community.”

At the same time, Chaudhuri says he doesn’t believe that these

biases are necessarily deliberate. “It’s not that VCs are going in
thinking: ‘I don’t want to fund a woman; I only want to fund men.’
VCs want to fund an investment that will make them money, plain
and simple.”

Chicken and Egg

The challenges women entrepreneurs face in securing financial
capital don’t necessarily start in the boardrooms of Bay Area and
Boston VC firms. When it comes to backing women-led businesses,
one of the biggest impediments is that there simply aren’t a lot of
them to back. The Kauffman Index of Entrepreneurial Activity
data shows that while the percent of men starting new businesses
from 2013-2014 increased by 21%, the percent of women starting
businesses has stagnated.

“In some sense, it’s a chicken and egg problem,” says Chaudhuri. “We
don’t have enough women going into technology, engineering and
entrepreneurship more broadly, so when it comes to funding
opportunities, there’s just not a lot of women who are asking in the
first place.”

One explanation for this may be the male hubris, female humility
effect. Men have more hubris — meaning they tend to be superbly
confident in their abilities. Women, meanwhile, in addition to having
a lower hubris, also have higher levels of humility, meaning that they
are less likely to attribute their success to their own talents and
resourcefulness. They are also are less likely to take advantage of
that success.

“The fact is that in order to be an entrepreneur, you have to be over

confident — you must believe that you’re better than everyone
around you,” says Mollick. “If entrepreneurship is based in part on
hubris, [the] male hubris, female humility effect tells us something
about why women are less likely to do start-ups.”
There are other subtle barriers that undermine a woman’s belief in
her own leadership potential, says Wharton’s Huang. “Female
founders are less likely to receive positive ratings on their ventures
from angel investors, [and] this may create a secondary effect where
investor-side biases may be anticipated and internalized by female
entrepreneurs, resulting in lower aspirations and expectations for
their ventures.”

Experts agree that addressing the obstacles that prevent women

from starting their own businesses is a critical part of the solution.
One hurdle is education and training. Despite the fact that women
have long outnumbered men on college campuses and that they
comprise roughly half of all law and medical school students, women
represent less than a quarter of students in engineering master’s
programs, according to the American Society for Engineering
Education.

“When you’re able to look up the ladder and see

someone who’s successful, who looks like you, it tells
you that it’s possible.”

–Beth Monaghan

It’s a similar story for business degrees. While many of the most
competitive U.S. business schools — including Harvard, MIT Sloan,
Stanford and Wharton — recently reported record numbers of
women, they are the exception. According to data from the
Association to Advance Collegiate Schools of Business (AACSB), the
industry body, the percentage of MBA degrees conferred to women
in the U.S. has been stuck at 35% since 2003.
Chaudhuri says that more needs to be done to establish a
management pipeline of women as early as childhood. “We need to
start earlier and make young girls more aware of entrepreneurship
as a viable path,” he says. “They need to learn how to start a business,
what the challenges are, the risks and the potential. They need to
know the societal impact. They need to acknowledge the personal
constraints and the trade-offs often required of entrepreneurs, and
we need to teach them how to overcome challenges.”

Identifying positive mentors and role models for young women is

another important step, he says. “Where we get caught up is that we
think we need the perfect person. But maybe the role model isn’t
necessarily a company founder, but someone who works
entrepreneurially within an organization or runs an organization,”
Chaudhuri says. “This would be someone who knows how to scale a
company, build a great team or run a profitable division.”

Beth Monaghan, who serves on the boards of the Alliance for

Business Leadership and the Massachusetts Women’s Forum, agrees.
She says that exposing young women to role models “can make all
the difference” early in their professional lives. “When you’re able to
look up the ladder and see someone who’s successful, who looks like
you, it tells you that it’s possible.”

So far, Katherine Hays, the entrepreneur, has raised only seed

funding for Vivoom, her latest venture. She says she is not
discouraged by the current state of affairs, rather it provides
motivation. “As a woman, you stick out,” she says. “And so to the
extent that your idea is a good one and you have a strong track
record, it could be an advantage.
“I have a chance to be that success story,” she continues. “I want to
be a data point that helps break the pattern.”

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