Why does so little funding go to female founders?

The share of funding secured by female founders is unfairly and disproportionately low, a state of affairs that has remained unchanged for many years despite advances made in other areas of gender equality in business.

Based on the research I have done, it is the same story around the world.

Venture capital (VC) funding exploded in 2021, breaking all historic records. According to Pitchbook data, VC investments in the UK and Europe topped $120 billion in 2021 – growth of 115% over 2020. Despite the record-breaking sums invested, the share of funding to female founders and mixed gender teams fell.

It isn’t a question of deal-flow, which some narrow-minded investors claim is the reason they don’t invest in female founders. Let’s look a little closer at the data:

  • All-female teams submitted 5% of decks and received 1% of funding – a ratio of 1 in 5
  • Mixed gender teams submitted 17% of decks and received 13% of funding – a little better than a ratio of 3 in 4
  • All male teams submitted 78% of decks and received 86% of funding – a ratio of 1.1 to 1

The deals from female founders are out there. It’s just that they aren’t getting the attention and the investment they deserve. Why not?

The truth is that there is clear and consistent bias against female founders. Let’s look a little closer at bias.

It is generally accepted that scientists and other experts act impartially, drawing any conclusions they arrive at based on observable quantifiable data. This acceptance focuses on the data and methodology, not the human being making the decision on how to interpret the results, yet studies, academic and otherwise, have shown cognitive bias exists in many domains. It has an impact on how people observe, tabulate and analyse the data, as well as how they reach conclusions.

The impact of bias is not only relevant to the conclusions people draw, but also to the inputs which led to the data being produced in the first place – what data is captured or discarded as irrelevant; the strategy and execution of the testing; how it is carried out and by whom. We have seen, for example, the significant underrepresentation of women in senior roles in VC firms. There is no question this has an impact on bias.

In most cases, bias is unintentional and occurs without the person displaying it even being aware of it. Blissful ignorance, one might say. This needs to change.

To bring the topic of bias to life, let’s look at the research of Dr Dana Kanze, who is an Associate Professor at London Business School. In her PhD studies at Columbia University, Dr Kanze analysed every pitch from the TechCrunch Startup Battle in New York City dating back to 2010. She found no material differences in the way male and female entrepreneurs pitched their businesses. She then turned to the question-and-answer session following each pitch, in which prospective investors asked questions of the entrepreneurs. Here, she found a huge disparity.

From her detailed analysis, Dr Kanze determined 67% of questions asked of male entrepreneurs used promotion terminology – e.g., ‘Tell me how you are going to grow your market penetration’ – and 66% of questions asked of female entrepreneurs used prevention terminology – e.g., ‘Tell me how you are going to protect the customers you have from the competition’.

Drilling further into the data, Dr Kanze looked at the types of questions asked by male and female investors, assuming female investors would ask more promotion questions of female entrepreneurs. This was not the case. In fact, both male and female investors showed the same bias in their questioning.

What was most revealing in her research was the way the entrepreneurs chose to answer the questions. Many people naturally responded in kind, giving a promotion answer to a promotion question and a prevention answer to a prevention question. This perpetuates the cycle of inherent gender bias. However, Dr Kanze found that entrepreneurs who responded to prevention questions with promotion answers went on to raise fourteen times as much funding as those who responded in kind. Fourteen times as much. That’s huge.

This is a key learning for entrepreneurs, especially the 66% of female entrepreneurs who are asked prevention questions. No matter which type of question you’re asked, give a promotion response.

Despite the uneven playing field, it can be done. My book, Funded Female Founders, features the stories of seven women in seven industries from four countries who have successfully raised funding – in some cases into the tens of millions – to grow their businesses. Here are a few key points they share:

"Seed investors are partners in your business. They can be your greatest asset or your heaviest anchor. Choose them carefully and do not compromise on your values,” Stacey Wallin, Founder of CAIN

"Warm introductions are still the best route to success. Network yourself into VC firms. See who else they’ve invested in. Connect with those founders and try to get an introduction,” Lauren Lewis, Founder of Glassworks London

"Don't be afraid to turn down an offer if it doesn’t feel right. It may be one of the hardest things to do, but a relationship with the wrong investor or on the wrong terms is never a good thing,” Agnès Petit, Founder of Mobbot

In addition to my book, keep an eye out for my new venture, Funding Focus Investment Trust plc, which is in process of seeking a London Stock Exchange listing. It will be a fund to address underinvestment in female and underrepresented entrepreneurs and to rectify the strong bias in the VC industry towards all male founding teams.

It’s a numbers game. Prior to the current downturn, there was a wall of money being invested. There was also a huge increase in the number of startups seeking funding. In conversation with the managing partner of a medium sized London VC firm, he told me that in 2021 they received over 1,000 applications for funding. They made 16 investments. Just 1.6% of approaches resulted in funding. Discussions with a partner in a Silicon Valley firm were broadly similar.

To maximise your chance of being in the 1.6%, I recommend the following:

  • Have your fundraising assets – pitch deck, financial projections, and business plan –ready before you approach investors
  • Research and approach investors. This is both time-consuming and critically important to the success of your efforts. Don’t skimp on the time to research and to network, as Lauren Lewis said above
  • Pitching is a process, a series of events rather than a single one. Wherever you are, the goal of the pitch is to get to the next stage. There are many stages before you’ll close the deal. Focus on getting to the next stage

Finally, you must understand that fundraising is a full-time job for you and key members of your team. On top of the day-job. It can be mentally, physically, and emotionally draining, and it can take months to complete. Look after yourself, and don’t try to do it alone.

This article originally appeared in the Sept/Oct issue of Startups Magazine. Click here to subscribe.