Unfortunately, the sad statistics regarding the gender disparity in funding of early stage companies are well established and predictable; by most accounts, female entrepreneurs are less likely to receive funding, and receive less funding when they do (even though companies with women founders are shown to be higher performing).
{mosads}As a result, men start their businesses with nearly twice as much capital as women. Thus, if capital provides the nutrients that sustain early-stage ventures, women-owned firms are essentially starving. What is more surprising, however, is that our recent research shows that the limitations to financing of female entrepreneurs may in fact be self-imposed.
Isolating the reasons for differences in funding by gender is important for both entrepreneurs and policymakers, as different reasons suggest very different things about how our economy allocates capital. Maybe differences in funding are simply because women enter lower growth industries or have poor past performance relative to male counterparts? If this is true, then the lower levels of financing for female entrepreneurs is justified in the efficiency sense, and not a function of some type of inherent bias against women.
(This ignores the idea, however, that fewer women may start their own firms precisely because they know they will not receive funding, or may be poorer performing without access to precious capital, but let’s ignore that for a moment.)
If, however, women-owned firms are not lower performing or in lower growth industries, for instance, then markets are essentially inefficient and lack of access to capital for female entrepreneurs may be holding back our economy from reaching its full economic potential.
To get at this, my co-author and I spent a year coding over 100 variables from every pitch in each episode on all seasons of the popular television show “Shark Tank.” The program involves aspiring entrepreneurs, mostly in the startup phase, pitching their companies to a panel of angel investors who then may negotiate a deal. Of course, this environment does not exactly replicate the angel investing environment (and we take great pains to empirically analyze the differences), yet it provides a variety of remarkably substantial benefits, particularly since systematic data from angel investment and venture capital deals is almost impossible to access.
Not only can we collect information on elements of the deal that may influence success but are typically non-observable (such as whether entrepreneurs and investors are of the same gender), but we can also see failure: those pitches that did not get a deal. Thus, unlike most available data that shows only funded deals, we are able to generalize results to all potential angel financing deals, as well as analyze not only whether female entrepreneurs receive more funding, but also whether there are differences in the likelihood of getting any funding at all.
The results suggest a double-edged sword in the world of angel financing for female entrepreneurial ventures. On the one hand, women are no less likely to receive financing offers relative to men. This statement holds true even when accounting for firm characteristics one might think drive funding decisions, such as prior performance.
On the other hand, when they do receive financing, female entrepreneurs receive less, and give up more equity in exchange. And this difference results not from differences in prior performance, but merely because women ask for less.
Importantly, we also show that this “undervaluing” is not merely an optimal response for women who expect that asking for more will decrease the chances of getting a deal in the first place. Women who ask for more are just as likely to get funding as their male counterparts. In other words, ask for more and ye shall receive.
While the fact that women receive less and do so because of asking for less may be viewed as disheartening, we view this result as decidedly positive from both an economics and empowerment view. Namely, our analysis suggests that the solutions to this important, complicated issue of why women get less money to fund their ventures may be cheap, straightforward and lie within.
Financing of entrepreneurial ventures may simply be another realm in which women systematically underestimate their own worth. And while, of course, the myriad of other implicit and explicit biases in the world of financing for early-stage companies cannot be minimized, at least in part, some of the gender discrepancy in financing is within our own control.
Poczter is an assistant professor in the Charles H. Dyson School of Applied Economics and Management at Cornell University. Follow her on Twitter @sharonpoczter.
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