Menture Capital? Why Women-Led Startups Get Less Funding

Women are more social than men. There’s research to prove it. And there’s the anecdotal evidence. (How many men chat to the guy in the bathroom stall next door?) So women should do well in the pursuit of venture capital, which is at heart a networking game. But they don’t. Why?

A 2009 study by Dow Jones VentureSource found only 11% of companies that received venture funding had a woman CEO or founder. You’re likely familiar with the old-school explanations for this: girls aren’t as good at math and science, women aren’t as interested in starting businesses, women who do start a business are happier with a beauty parlor than a fast-track high-tech company, etc.

None of that is true. In fact, recent research by Cindy Padnos, managing director at Illuminate Ventures, shows that high-tech companies built by women are more capital-efficient than average, venture-backed companies led by women have 12% higher annual revenues and women-run high-tech startups fail less often than those run by men.

So why do women entrepreneurs in the high-tech field get funded less often than men?

Lakshmi Balachandra, an assistant professor of entrepreneurship at Babson College who researches women and venture capital, says the problem is that despite their innate social prowess, women are not engaged in the networks where venture funding circulates.

The Wrong Networks

“The women who are out there who need capital, they aren’t in the same networks as men. Men go to technology events and are aware of tech investors. Women are just not as connected as their male peers. What happens with women is, even if they are interested in starting a company, they may not be in the right circles to have access to capital.”

Another standby explanation for the shortage of money flowing to women is the essential chauvinism of the old-boy venture network. The thinking goes that VCs invest in entrepreneurs who are like them. And that’s true to some extent.

At the National Venture Capital Association’s annual meeting in 2008, legendary VC John Doerr said he’d always been attracted to startups run by geeky guys with no sex life. “That correlates more with any other success factor that I’ve seen in the world’s greatest entrepreneurs. If you look at Bezos or Andreessen, David Filo, the founders of Google, they all seem to be white male nerds who’ve dropped out of Harvard or Stanford and they absolutely have no social life. So when I see that pattern coming in – which was true of Google – it was very easy to decide to invest.”

Balachandra has also spent time as a VC but says that in her venture career and in her current research, she has not seen rampant sexism in the venture community. “Women who do go for capital are pretty successful at raising money. There is no bias there in terms of investors not giving money because a woman is leading a company, as long as that woman has the qualities investors look for: education, experience, the business metrics.”

But she adds that VCs do discriminate against entrepreneurs without a track record of success – something a lot of women don’t have. “Investors love investing in entrepreneurs who have come back after making a lot of money and have a new idea. For someone like Meg Whitman, that’s not a problem. But for the unknown quantity, not having the initial introduction, not having the same background makes it hard.”

Toys for Boys

Another reason VCs don’t invest in women-led startups is that the companies are often targeted at the women’s market, which is something most male VCs simply don’t understand. They like to fund companies that make toys for boys.

“The male view of what is venture-backable and high-growth tends to be technology, hardware or software,” Balachandra says. “If they don’t immediately see the market potential, they will pass. VCs always want to be the experts. They never want to admit they don’t know something.”

A lot of them obviously don’t know women. Maybe they should get out more.