Let’s say that two entrepreneurs, a man and a woman, co-found a startup and raise venture capital. But the business struggles, and they shut it down and go their separate ways. Eventually, each of them independently forms a new business. Do these entrepreneurs have the same chance of getting venture capital funding for a second time?
The answer is no, according to Yale SOM’s Heather Tookes, whose new research uses this scenario as a natural experiment of sorts to understand how potential gender bias shapes the world of entrepreneurial financing. It’s long been recognized that women are underrepresented in the group of startup founders who receive funding from venture capital investors. But how underrepresented, and why, are more difficult questions to answer.
In their working paper, Tookes and her co-authors, Camille Hebert of the University of Toronto and Emmanuel A. Yimfor of Columbia, find that women represent just 16% of first-time VC-backed entrepreneurs, and their numbers dwindle down the line; they are just 9% of the cohort who found two VC-backed startups, and only 4% of people who launch three or more VC-backed outfits. And by comparing co-founders of different genders, they can rule out business reasons for the discrepancy.
“We don’t find any evidence that women-founded businesses in subsequent startups that are VC backed provide less favorable outcomes to investors. They have the same probability of providing a successful exit through an IPO or acquisition.” says Tookes.
Tookes, whose work explores a diverse range of topics in the areas of capital markets and corporate finance, has studied the supply of capital and various frictions that can limit firms’ access to capital for years. She has also studied gender disparities in her own field of academic finance. In her new paper, she combines those research interests to study frictions in the supply of venture capital for women.
The working paper is unique in that it compares men and women who co-founded the same startup—meaning, a woman’s failure to secure future funding can’t be blamed on the type of company she started, its quality, or its ultimate outcome.
The authors liken their approach to twin studies. “Our empirical design is, to our knowledge, new to the entrepreneurial finance literature and helps ensure that any results are not driven by unobservable differences in the businesses that men and women start,” they write.
The authors’ other novel contribution is that they deploy a series of tests to determine why women are underrepresented and underfunded in venture capital compared to their male counterparts. First, they explore demand-side factors—maybe women aren’t as interested in pursuing subsequent startups?
In fact, according to LinkedIn data, women are less likely to start another business. But, among those who do, compared to their former co-founders, they are still 30% less likely to raise VC funding for their next business after a failure and 18% less likely to do so following a success.
The authors also use the fundraising success of firms founded during times of abundant capital to help determine whether women founders are just not as talented as their male counterparts (if they weren’t, these poor quality founders should find it particularly difficult to raise capital when their firms fail after flush funding periods). But they find no evidence of such a difference.
How about the supply side? By studying VC investors’ portfolios, the authors track how they invest in women-founded businesses over time. Their analysis shows that women receive 14% less funding than male founders in general, and an additional 8% less if the investor has experienced a failure by another woman-led startup in the past five years.
The authors point to similar research in other contexts: one study, for instance, showed that physicians are less likely to refer patients to women surgeons if one of their patients has a negative outcome with a completely different woman surgeon, but male surgeons do not experience a reduction in referrals because of the poor outcomes of their male colleagues.
Tookes says that the findings are even more striking since in venture capital, unlike in medicine, “failure is ubiquitous,” Tookes says. “You’re looking for a great outcome, but you’re going to experience failures in your portfolio.”
Tellingly, while investors who have experienced a previous failure of a woman-led startup are less likely to invest in future women-led businesses, those who’ve experienced successes are not more likely to invest in the future. Such “one-way updating,” the authors write, “along with the persistent and negative direct effect of gender for women-founded firms, suggest that both preferences and stereotyping play a role in the gaps that we observe in the data.”
What might incentivize investors to address the gender gaps in their portfolios? Well, there’s always money: Years of data on entrepreneurship have shown a correlation between multiple attempts at business creation and eventual success. That means that by failing to invest in experienced women founders, investors could be leaving money on the table.
With women, Tookes says, “we have this large group of entrepreneurs who are not getting that second or third bite at the apple. So it may be that there are opportunities for investors who target this group.”
“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”
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