The Funding/ROI Disconnect Plaguing Female Founders – And How to Fix It

At Project W, we are laser-focused on moving the needle beyond the 2% of venture funding that goes to female founded companies.  So the recent research conducted by MassChallenge and Boston Consulting Group caught our attention.    Despite the lack of parity in funding, that research confirmed what is rapidly becoming conventional wisdom:  Companies founded by or with women leaders perform better.

Given this, why does there continue to be such a disconnect with investors seeking great returns but failing to invest in companies that produce those returns?   The researchers at MassChallenge and BCG put forward a number of different explanations:  Women don’t advocate for themselves, they don’t promote their technical expertise; they don’t respond proactively to criticism; they undersell.

We don’t buy these explanations.   There are hundreds of female founders in the Project W network and they are bold, assertive and confident of their technical credentials and business acumen.   And we have no doubt they are representative of the larger universe of female founders.  If that’s so, what is the explanation for this disconnect and how do we fix it?  

We think meaningful progress can be made with workarounds to two key impediments to funding female founders:

Interrupt the Implicit Bias in the Process

The Problem.   That there is bias in the system is obvious.   And, to their credit, many investors are actively seeking to address it.   However, more insidious is the implicit bias that continues to permeate the selection, pitch and interview process when female founders seek funding from VCs.

In her groundbreaking research, Dana Kanze of Columbia Business School discovered that investors (both men and women) tend to ask women entrepreneurs “prevention” questions (focusing on challenges, risk and the past or current state of the business) and tend to ask men entrepreneurs “promotion” questions (focusing on opportunities, growth and the future).   Dana further learned that a founder tends to respond to a prevention question with a prevention response and to a promotion question with a promotion response.  That being the case, who wouldn’t prefer to invest in the company that is likely to grow tenfold in the future rather than the company that has overcome a number of challenges to get where it is today? 

The Fix.   By being mindful, both founders and investors can interrupt this implicit bias.  Here are some suggestions: 

• Female founders can educate themselves on the cues that signal prevention questions and reframe their responses with a promotion answer.  Listen for words like “barriers,” “avoid” or “ security.”   Then, answer the question but conclude with your vision for growth and success.
• Investors can:

1. Start with a standard set of questions they ask both men and women;
2. End every Q&A session by asking all founders – men or women – how they see the trajectory of their companies over the next five years; and 
3. Pause after every interview with a female founder to take stock of whether questions asked were prevention in nature and consider how you could ask the question differently next time. 

Access Alternative Paths to Funding

The Problem.     As noted in the MassChallenge/BCG report, the VC community has, until recently, been an old (or young) boys’ network.  Most VCs are white men and, traditionally, they have invested in the founders they know and understand:  white men.    In addition, many investors continue to invest in the familiar:  solutions for problems or products for customers they understand.    It’s harder to convince an investor to commit to your business if he doesn’t understand the problem you are solving or the needs or interests of the customer you are serving.   This focus on affinity and the lack of empathy for diversity impede access female founders might otherwise have to investors.

The Fix.     While we don’t suggest writing off traditional VCs, there are a number of other options for female founders to find the funds they need to grow their businesses.

• Seek out the growing number of funds, angel groups and crowdfunding platforms that are now focused exclusively on investing in female and other underrepresented founders and in business models that address the needs of underserved markets.  BELLE Capital, Backstage Capital, Plum Alley, Portfolia and Female Founders Fund are just a few examples.
• Look for accelerators, such as New York Fashion Tech Lab, Springboard Enterprises Health Innovation Hub and Tech Innovation Hub and HearstLab, that are focused on taking companies with diverse leadership teams to the next level.
• Don’t overlook government economic development funds like New York’s Empire State Development Innovation Venture Capital Fund and Accelerate NY Seed Fund and Connecticut Innovations that invest in companies with the potential to enhance regional economic growth.  
• If you manufacture or distribute products consider what financing options may be available from your suppliers or vendors.
• For businesses with a scientific or educational mission, check out Small Business Innovation Research (SBIR) and other government grants.
• Finally, don’t underestimate the rewards of pitch competitions, many of which frequently offer cash and in-kind prizes.  Examples include Vinetta Project’s Venture Challenge (with a $20,000 cash prize) and Women Founders Network Fast Pitch Competition (with $45,000 in cash prizes).

With mounting empirical evidence that female founders are more likely to generate greater returns than their male counterparts, the tide should turn and we should see more VCs investing in women-led companies to produce the results their LPs expect.   Until then, female founders should interrupt the bias, access alternative sources of capital and show the world what many of us already know:   that female founders produce great returns, build great companies and set the standards for the next generation of entrepreneurs.

Read more about the MassChallenge/BCG findings.

Learn more about Dana Kanze’s research.

Check out the interview with Arion Long on NPR to hear how she turned to pitch competitions out of frustration with lack of access.