Why is gender still a factor in VC investment decision-making in Europe?

Interview with Catarina Cawén, co-author of "The outsized role of gender in European venture funding".

We analyzed 9,422 companies using data from Q, NGP Capital’s AI platform, to uncover the real situation women face in the European fundraising market. The study shows that the female gender alone reduces the probability of receiving venture capital by 17%. Catarina Cawén explains why gender is still a factor in venture capital investment decision-making in Europe.

First, can you summarize the most interesting findings of the study?

Sure. What’s new here is the scale of this research. It is also one of the first studies that look at women and fundraising in Europe in relative terms, rather than just in absolute terms. Previous academic studies have focused on the absolute amount invested in female founders and they have shown that only 1% of venture capital is invested in women, which obviously shows the large gender gap in the industry. But you can argue that this is because women simply do not start as many companies as men. Unfortunately, that’s not the whole truth. This analysis shows that gender plays a role on a relative basis as well; out of all European companies founded by women, only 30% received venture capital, compared with 43% of the companies founded by men.

A positive surprise was that gender-diverse founding teams have the highest likelihood of success when raising venture capital. The study shows that when the founding team consists of both men and women, the probability of getting venture capital increases by 8%.

The gender differences across European industries were also analyzed to see if there are certain sectors where women are more or less successful in getting VC funding. We found a large variance among the different industries. For example, 80% of software-based companies are started by men, and 77% of them raised venture capital. At the same time, female-only founding teams started 17% of all the fashion startups in Europe, but only 12% of them got venture capital financing. That can be compared to mixed-gender founding teams, which, for example, started 23% of the EdTech companies, 35% of which received venture capital financing.

Founder background factors are also considered in this study, including whether the entrepreneur had founded a company before, had a background in economics or technology, or had a university degree.

One of the most interesting findings was that, all other influencing factors being equal, being of the female gender alone reduced the probability of a founder being allocated venture capital by 17%. This emphasizes the importance of discussing the gender-specific biases within the venture capital industry, because, clearly, the problem is rooted in stereotyping and gender.

Would more women in VC lead to more funding for women entrepreneurs?

I would say that I agree with that, even though some studies have shown the opposite. The venture capital industry is closely networked and women only account for a marginal number of investing teams. Information on potential investment opportunities circulates within these small networks, and, as we know, it is the partners and upper-level managers who ultimately decide whether founders are given funding or not. Currently, these are mostly men. But yes, I do think that more women in VC would lead to a more open environment for funding women as well.

Having more women as decision-makers in VC would address two other problems that are relevant here. First, according to the theory called homophily, people tend to associate with people who are demographically similar. So having more female investors could contribute to more positive perceptions of women entrepreneurs. Second, the lack of role models for women within venture capital makes it even harder for women to aspire to, enter, and succeed in venture capital, which puts them in a disadvantaged position.

What can women who are raising money for their companies do to raise their chances of receiving venture funding?

While there are certain things that women can do to raise more money, I believe that the problems lie mainly in structures that cannot be influenced by the entrepreneurs themselves. Nevertheless, one of the things entrepreneurs can do is to be aware of some of the traits that women tend to have in common and to talk openly about them so as to normalize them. For example, prior research shows that women tend to be more risk-averse than their male counterparts. This can lead to female entrepreneurs being more cautious, especially in pitching situations, where their male counterparts might present more fearless statements, aiming for maximum funding. These same studies say that women tend to be more realistic and modest with their forecasts and tend to ask for less capital. Another issue that is surprisingly common is “imposter syndrome,” where female entrepreneurs suffer from chronic self-doubt regardless of their level of success. This is especially common among high-achieving women.

However, the real problem is not with the female entrepreneurs, nor is it that female entrepreneurs should become more like male entrepreneurs. Rather, the problem is with the current structure of the venture capital industry and, perhaps, with societal barriers and stereotypes. We should not try to fix the women who are active in the industry. Rather, we need to fix the structures within the industry itself.

Let’s talk about the structures and how we can fix them

You can divide the structural barriers women face when it comes to fundraising into three different categories: industrial barriers, organizational barriers, and interpersonal barriers.

The venture capital industry has a long tradition. Since it is historically male-dominated and the networks remain homogeneous, the rules, patterns of action, and practices created in this environment are primarily linked to the male gender. Studies show that the standards of pitching, feedback, and coaching, for example, tend to be associated with socio-psychological modes of action that can be directly linked to the male gender. These patterns within the industry have not only maintained the exclusion of women in the past but continue to prevent the VC industry from diversifying today.

Because investor cognition plays an important role in the investment decision-making process, there are also many interpersonal barriers for female entrepreneurs. The perception of a successful entrepreneur is based on factors that are more often associated with masculine characteristics. For example, research shows that women and men get asked very different types of questions in a pitch setting. The questions asked of men tend to focus on potential gain, while the questions asked of women focus on losses. At the same time, it has been proven that founders who get asked promotional questions raise, on average, seven times more capital. Basically, because entrepreneurship is a male-dominated industry, both men and women currently need to exhibit stereotypical masculine characteristics in order to gain more interest and support from venture capitalists.

If we are taught from a young age what women can and cannot do, how can we expect female investors – or female entrepreneurs – to see themselves as successful within venture capital? It is important to note that men do encounter these same obstacles within female-dominated industries – there are plenty of stereotypes to go around. In any case, to resolve these interpersonal barriers, which are a product of the underlying norms of our society, we need to talk about them more openly, starting with education at a young age. We need to educate individuals about the differences between the genders, and the unconscious biases and prejudices they face, to help people become aware of these patterns and reflect on how they affect their approach to investing.

However, this will not be enough by itself to solve the fundamental problem. The VC industry must find ways to address the roots of gender inequality with interventions aimed both industry-wide and at an organizational level. As an industry, we need to expand VC networks to be open to both women and men. We need to highlight existing female role models, as well as easy access to VC firms for female talent. At the organizational level, we need to restructure and formalize HR procedures, and to assign accountability for enhanced D&I, both within VC firms and in their portfolio companies.

A combination of these actions would be among the first steps toward a more diverse venture capital industry.

As a young woman embarking on a career in VC, what change would you like to see happen in the industry in the next few years?

I hope to see a much more open and honest discussion on many levels, not only among women, who represent a clear minority in the industry. As I stated earlier, I think the discussion should not focus on women as the problem but rather on understanding the underlying problems that lie within the cornerstones of the industry.

Establishing more diverse teams is an evidence-based way to boost returns, so I would love to see that become the standard. It’s not just that women do not have the same opportunities as men, but that, for the venture capital industry, this leads to an entire resource class being unused. By transparently defeating structural barriers and making the venture capital industry more accessible to women, both individual entrepreneurs and the industry as a whole will benefit.

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