For entrepreneurs starting new businesses, the gender gap persists. According to researchers from Columbia Business School and London Business School, businesses led by women are 63% less likely to obtain venture capital (VC) funding than those led by men.
Previous studies have focused on gender disparities at the investment-seeking stage. This study shows how the gender gap arises at different points in the entrepreneurship pipeline. Of particular note, some factors occur before women even decide to start a company.
Researchers Jorge Guzman, assistant professor of business at Columbia Business School and Aleksandra Kacperczyk, associate professor of strategy and entrepreneurship at London Business School, identify disparities between female and male entrepreneurs’ initial founding choices and investors’ subsequent funding choices. By evaluating the contribution of each stage to the observed imbalance between female and male founders, they find that the gender gap in entrepreneurial finance is largely driven by the differences in the types of companies that founders are starting. This fact places women entrepreneurs at a disadvantage with the residual gender gap as high as 35%, with this disparity reflecting investors’ gendered preferences.
Guzman and Kacperczyk examine data on the population of American entrepreneurs between 1995 and 2018. They analyze incidents in which the differences in the initial founding choices that predict subsequent growth outcomes could be readily observed and directly measured. Focusing on California and Massachusetts because entrepreneurship and VC activity are more prevalent in these regions, the researchers break down the entrepreneurial process into critical points (founding and funding) and identify differences between female and male entrepreneurs at those stages.
Their findings include:
- Female-led ventures are often viewed as “non-starters”: Women start fewer companies than men, accounting for only 24% of all registered companies in 2018. The most significant portion of the gap (65%) stems from gender disparities in initial founding choices, with women being less likely to launch ventures that signal high-growth potential to external investors. In 2018, 15% of companies led by women were identified as high-growth potential (up from only 11% in 1995).
- Funding disparities exist between female-led and male-led ventures: Female-led ventures are 63% less likely than male-led ventures to obtain VC funding. In 1995, no companies led by women were venture-backed. Today, that number is only 12%.
- Funded female entrepreneurs achieve the same success as male entrepreneurs: Based on the reception of VC financing, women and men are equally like to achieve exit outcomes, either through IPOs or acquisitions.
Overall, the findings reveal how the initial orientation of a venture and the gender-bias of investors both contribute to gender disparities at different stages of the entrepreneurship process. From a policy standpoint, the results imply that the disadvantage female entrepreneurs face tends to compound over time.
Therefore, any policies aimed at reducing gender inequality in high-growth entrepreneurship need to incorporate a number of interventions, which target those at multiple stages of entrepreneurship. Education and training may influence the types of businesses women are starting. Some investors who cannot evaluate the startup potential of new businesses rely on gender to make investment choices.
A version of the paper, “Gender Gap in Entrepreneurship,” which is forthcoming in Research Policy, is available online at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3282574.
To learn more about the research on venture capital funding for female entrepreneurs, visit www.gsb.columbia.edu.