Why are ambitious female founders penalised by investors?

It is no secret that gender bias in investment decisions is hindering female founders and limiting their ambitions.

Women entrepreneurs have more difficulty securing early-stage equity investments, and the sums they raise are lower.

Commentators have seen this as straightforward bias or evidence of a lack of ambition from female founders. Neither perspective helps women to achieve more success when bidding for investment.

Instead, we wanted to determine whether there was a mismatch between the roles that women entrepreneurs are traditionally expected to play and what investors see as a viable opportunity.

In our first study we asked potential investors to watch a video about a promising new venture. We then asked them to indicate whether they would be interested in meeting the founders and funding it.

Keeping everything else stable, we presented the entrepreneur as either a male or female and manipulated their growth ambitions (between high and moderate).

A rich history of research suggests that high ambition is seen as a negative trait in women compared to men. In women, it is often equated with aggression, not success.

Our research upholds the idea of a mismatch penalty. Male founders with risky, high-growth strategies are seen as the norm and female founders are deemed 'role incongruous'.

What's new is that we found that it varies by gender in unexpected ways.

How do stereotypes affect female entrepreneurs?

What does role incongruity mean, and why is it important?

The theory suggests that individuals or groups will be viewed positively if their behaviour aligns with their perceived social role.

Conversely, they will be viewed negatively if their behaviour does not match social expectations.

Suppose a leadership role requires aggression and dominance, and women are generally seen as more collaborative and consensual.

In that case, the role and person are misaligned. Women will not be viewed as a good fit for leadership roles and suffer a mismatch penalty.

Research has found a substantial gender gap in high-growth entrepreneurship, too.

In our research, we wanted to test this theory in start-up investment bids. Would there be a mismatch between the traits typically associated with the 'role of the founder' and gender stereotypes?

And if so, would this affect ambitious women founders pursuing a high-risk growth strategy?

Why female founders face a 'no-win' situation

We know that investors are more interested in high-growth ventures when investing in start-ups.

Growth aspirations are the founder’s vision for how much they will grow the business and the time frame in which they plan to do so.

High-growth means geographically widespread growth in a short space of time. Investors may expect to get their money back, and maybe more, in around five years.

A moderate-growth strategy is geographically less aggressive with a longer timeframe – a step-by-step approach which tests the market. However, it's still ambitious.

When investors assess a strategy, they also assess the founder, and that's where role incongruity comes in.

A high-growth strategy is high-risk and requires aggression, confidence, and hype. A moderate-growth strategy is more cautious and staged, even if the growth strategy remains ambitious.

As an entrepreneur, you are trying to convince someone to give you money, which means signalling high confidence.

Are women generally associated with aggression, confidence and hype? Not in the lexicon of gender bias.

Indeed, female founders face a classic 'no-win' situation. Women are commonly penalised for exhibiting these traits but are also disadvantaged if they show traditionally feminine behaviours in funding bids.

Men are stereotyped positively for aggression, confidence and hype. As such, male founders typically do better when presenting hyped, high-growth strategies to investors because they view them as the 'default' entrepreneur type.

Do female founders get more support from women investors?

Our findings supported the existence of a gender bias in investment decisions. Investors reported more willingness to meet female entrepreneurs with moderate growth ambitions than those with high-growth ambitions compared to male founders.

This finding upholds the idea of role incongruity, where investors see male founders with risky, high-growth strategies as the norm and women high-growth founders as the exception. However, it’s more complicated than this.

One curious finding is that female investors are more likely to penalise women founders with high-growth ambitions compared to male investors, which contradicts the idea that female investors are more likely to support female founders.

Why? Do they believe they won’t get their money back, because they know female led enterprises struggle more? Are these 'queen bees' pulling up the ladder once they have made it, instead of supporting women embarking on a similar journey? We need more research before we can be sure.

Another curiosity was how much male investors supported women founders, even those with high-growth aspirations. While they were more enthusiastic about female entrepreneurs with moderate growth ambitions, they were still supportive of women with high-growth ambitions.

Are male investors overcompensating because of growing awareness of biases in investment decision-making? Possible. Our research may answer these questions.

How to level the playing field for women entrepreneurs

The investment game is stacked against women founders, even if, as we found, it's in unexpected ways. So, how might they change the game?

While changing the game is difficult, it doesn’t mean we shouldn’t try. Stereotypes are difficult to change, so in the meantime, women need to figure how to play the existing game more effectively.

Presenting a high-growth strategy with de-risking plans rather than a hyped presentation may be a solution for ambitious female founders to overcome this bias, but our research here is still ongoing.

We are doing a 10-minute follow-up study to tease apart what might drive investor decisions. To ensure we are limiting any other possible explanation for why investors make the judgements they do, we are using AI avatars to create pitches.

This approach eliminates issues that might affect investors, such as age or attractiveness, and reduces speech patterns and expressions that may influence decisions. Investors will then answer a few questions about their decision-making.

One of the reasons for this further research is to assess whether adopting a de-risking strategy in high-growth presentations to investors might help them navigate role incongruity.

Is it just highly-ambitious women who should prioritise de-risking when seeking investment, or every founder? Our study will seek to answer these questions.

In an article called Fix the Game, Not the Dame: Restoring Equity in Leadership Evaluations, Gloor et al. argue that diverse teams can reduce gender incongruity effects in leadership evaluations.

Can investor funding evaluations be more objective and standardised if we tweak the process to make the pool of decisionmakers more diverse? Our study shows it is more complex than that.

Over the next year, we hope to have answers to these questions.

What we have already established is that the investment game is stacked against women founders and that more female investors isn't necessarily the solution. It's the game, not the dame, that needs fixing.

If you are interested in being part of our work, please contact Noni (noni.symeonidou@wbs.ac.uk) or Dawn (dawn.eubanks@wbs.ac.uk) to participate.

Further reading:

The authentic founder: How to stay true to your values

When should entrepreneurs trust their gut instinct?

Why is there a gender gap in entrepreneurship?

Growing pains: How to help small businesses scale

Dawn Eubanks is Associate Professor of Behavioural Science and Entrepreneurship and Innovation at Warwick Business School. She teaches Leadership and Harnessing Diversity on the Global Online MBA, the Full Time MBA, and the Executive MBA, Leadership Plus on the Full Time MBA, and Leadership on the Executive MBA (London).

Noni Symeonidou is Associate Professor of Entrepreneurship and Innovation at Warwick Business School. She teaches on Entrepreneurship and Business Venturing on MSc International Business, MSc Business Analytics, MSc Business and Finance, MSc Business with Operations Management, MSc Management of Information Systems and Digital Innovation, MSc Business with Marketing, and MSc Marketing and Strategy.

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