“Our day job is crushing entrepreneurs’ hopes and dreams. Our main skill is saying no, and getting people not to hate us.” Marc Andreessen, partner at Andreessen Horowitz, one of the largest venture capital firms
“Every VC in Silicon Valley turned us down. … as I go from venture capitalist to venture capitalist to venture capitalist — …. — and each and every one of them said no” Marc Benioff, Salesforce founder.
Besides being underrepresented, female entrepreneurs still have significantly less access to financial resources to support their ventures (Brush et al., 2014; Ewens & Townsend, 2019;
Gompers & Wang, 2017; Guzman & Kacperczyk, 2019). According to Pitchbook, in 2019 in the US, of every $100 of VC financing, female-founded ventures received only $2.7. In the Nordic countries, which are frequently among the top 10 countries in terms of gender equality indices, women received only $1.3 during the same year.21 Considerable interest in the gender gap dilemma within the industry and among policymakers and scholars has brought several issues to light, the first being a significant lack of gender diversity in the capital supply-side. Men make up more than 90% of venture capitalists (Gompers & Wang, 2017). This gender disparity among industry gatekeepers has spurred the establishment of many initiatives across the globe to increase the proportion of women investors (e.g., Kaden, 2019). However, empirical research examining the effect of the investors’ gender on the funding gender gap remains limited. The second issue is extremely high rates of funding rejection with roughly 1% of all considered proposals eventually receiving funding (Gompers et al., 2020; Petty & Gruber, 2011). The entrepreneurship literature documents gender differences in reaction to failure and rejection. Female entrepreneurs have lower odds of re-entry after venture failure (Simmons et al., 2019). They are less likely to relaunch a failed reward-based crowdfunding campaign and are more likely to anticipate rejection when applying for a bank loan (Greenberg et al., 2019; Moro, Wisniewski, & Mantovani, 2017). Such evidence raises many questions regarding whether there are gender differences in response to rejections during the fundraising process and, if so, how these differences shape the funding gender gap. We argue that considering both the role of resilience in fundraising and the gender
21 https://medium.com/speedinvest/female-founders-and-speedinvest-partner-up-to-level-the-playing-field-for-women-in-tech-c70f4b0293c8
dynamics between investors and entrepreneurs would improve our understanding of the funding gender gap phenomenon and its underlying mechanisms. Thus, this paper investigates entrepreneurs' resilience and the role of the investors’ gender during the fundraising process.
Increasing the proportion of women investors can reduce the gender gap in the entrepreneurial finance market through two mechanisms. First, having evidence that indicates male investors are systematically biased against female entrepreneurs (Ewens & Townsend, 2019;
Gompers & Wang, 2017) suggests that increasing women’s share in the industry might mitigate the scale of the bias effect. Second, female investors may reduce the gender gap through their positive bias in favor of their own gender. Female investors’ preference for gender is potentially shaped by gender homophily (see, e.g., McPherson, Smith-Lovin, & Cook, 2001), which would mean they are more likely to be associated and form connections with entrepreneurs from their gender group. Moreover, their preference is potentially shaped by similarity attraction (Byrne, 1971), which would mean they are attracted to and rate female entrepreneurs more positively due to reduced uncertainty and because of the estimated rewards (e.g., easier communication). A report by the Diana Project shows that venture capital firms with female VCs attract more female-led ventures, which is probably due to homophily in networking (Brush et al., 2004).22 Other scholars show that female investors have a higher preference for investment relationships with female entrepreneurs (Gafni et al., 2020; Greenberg & Mollick, 2017) and are more likely to express interest and invest in female entrepreneurs (Alnamlah, 2020; Ewens & Townsend, 2019).
Hence, we explore investor-entrepreneur gender dynamics by examining the effect of the gender of the rejecter (investor) on entrepreneurs’ responses to funding rejection.
As the introductory quotes highlight, resilience in fundraising is very important since the fundraising process is characterized by an exceptionally high rejection rate. Investors receive many funding proposals each year; however, they are only able to invest in a handful of them (Gompers et al., 2020). Varying levels of resilience among male and female entrepreneurs may explain the gender gap even if, in an ideal situation, other demand-side (statistical discrimination) and supply-side (taste-based discrimination and inaccurate beliefs) discriminations do not exist.
Recent theories from patenting (Aneja et al., 2020; Jensen et al., 2018) and executive recruitment (Brands & Fernandez-Mateo, 2017) claim that women have lower resilience, i.e., the ability to bounce back after rejection and loss, and that this gender difference in resilience may, to some extent, explain women underrepresentation. In contrast, theories from politics (Bernhard & De
22 The Diana Project was established in 1999 and is involved in research activities, forums, and scholarship focusing on women entrepreneurs and their growth.
Benedictis-Kessner, 2020) suggest that women candidates are not less likely to persist after losing compared to men. Besides the inconsistent theories, the characteristics of rejection in entrepreneurial finance are unique relative to other settings due to several factors. First, alongside the extraordinary rejection rate, funding rejections are not exclusively driven by investment opportunity lack of financial viability (Shafi, Mohammadi, & Johan, 2020). VC firms reject investment opportunities due to geographical focus, industry focus, unavailable funds, and/or time constraints (Gompers et al., 2020; Petty & Gruber, 2011). Second, investing in an entrepreneurial venture is associated with a high level of uncertainty and the investors’ evaluations of future success are highly inaccurate, which is evidenced by the fact that more than 50% of investments made by VCs do not generate a return or result in a successful exit (Cochrane, 2005; Gompers et al., 2020; Gompers & Lerner, 2001; Korteweg & Sorensen, 2010). There are many anecdotal pieces of evidence that highly valuable and successful firms such as Airbnb, E-bay, Google, PayPal, Salesforce, Zoom, and Klarna were rejected by at least one investor before they managed to successfully secure funds.23 Third, funding rejections are unique relative to other settings due to the relatively more severe consequences of not “bouncing back” on both the venture-level and individual level. Inability to access financial resources is a substantial threat to the venture’s survival (Aldrich & Ruef, 2006; Shane & Stuart, 2002). Moreover, venture failure is not only associated with a loss of personal income but also negative emotions such as disappointment, anger, shame, and grief (Cope, 2011; Shepherd, 2003; Ucbasaran, Shepherd, Lockett, & Lyon, 2013).
In this paper, we argue that our understanding of the gender gap in the entrepreneurial finance market is incomplete if we do not consider entrepreneurs’ resilience during the fundraising process and the role of investor-entrepreneur gender dynamics. Thus, we experimentally examine whether there is a gender difference in entrepreneurs' resilience while seeking to secure external capital and whether entrepreneurs' resilience is influenced by the gender of the investor. We launched a two-stage venture competition with a significant monetary prize to examine the effect of the judge’s gender in the first stage on the participation of losing entrepreneurs in the second stage. An empirical examination of the aforementioned questions is difficult since standard data sources only provide information on entrepreneurial ventures that have already successfully
23 For example, Bessemer Venture partners, which is one of the oldest venture capital firm in the US, provided a list of companies that they had the opportunity to invest in but decided to reject and
https://www.forbes.com/sites/alejandrocremades/2019/02/05/these-entrepreneurs-were-rejected-hundreds-of-times-before-bringing-in-billions/?sh=2f55ff155c67
secured investment. Therefore, it is not possible to observe: 1) the number of unsuccessful fundraising attempts and previous rejections; 2) the timing and characteristics of the subsequent fundraising attempts; 3) the characteristics of the rejecter (e.g., performance, geographic location, gender, etc.). Recent studies use data from crowdfunding platforms (e.g., AngelList or Kickstarter) to study investors' biases toward female entrepreneurs and failed female campaigns (Ewens & Townsend, 2019; Greenberg et al., 2019). Our experimental design enables us to isolate the causal mechanisms for the exhibited attitude after experiencing a loss in the first stage. The second stage allows us to observe the resilience of entrepreneurs. Furthermore, an experimental design enables us to observe and randomly assign the gender of the potential investor or judge.
This is an important feature of the experimental design since female entrepreneurs might self-select into investors to pitch their business based on the perceived probability of loss. Lastly, to prevent the competition loss from being the outcome of gender bias, the judges evaluate the business in a gender blind process.
Our sample consists of 403 UK-based entrepreneurs, who have, on average, nine years of entrepreneurial experience and run ventures that employ, on average, two full-time employees.
On the one hand, the results show that there is no gender gap in resilience while seeking to secure financial resources. This means female and male entrepreneurs participate at a similar rate in the second venture competition after losing in the first. On the other hand, we observe that resilience is moderated by the gender of the judge. Male entrepreneurs are more likely to participate in the second competition when they are assigned to a female judge while there is no change among female entrepreneurs. We also find that the effect of the judge’s gender is more pronounced in more ambiguous situations (i.e., when the outcome of the first competition is not yet known). In additional analyses, we show that in a gender-blind assessment process, both male and female judges assign lower scores to female-owned ventures. The result is robust to the inclusion of the industry of the venture and the language characteristics of the venture pitch. This gap in the assigned scores may indicate the existence of statistical discrimination in our sample.
We contribute to the literature on gender and entrepreneurship. Prior literature has focused on the differential rate of success in fundraising among male and female entrepreneurs (Brush et al., 2014; Coleman & Robb, 2009; Ewens & Townsend, 2019; Snellman & Solal, 2020). We focus on the behavior of entrepreneurs after rejections and document that there are no gender differences in resilience and capital seeking. In particular, we find no gender difference in entrepreneurs' competition participation after losing. These findings speak to the body of work that provides inconsistent evidence about gender differences in persistence in several contexts (Aneja et al.,
2020; Bernhard & De Benedictis-Kessner, 2020; Brands & Fernandez-Mateo, 2017; Greenberg et al., 2019; Jensen et al., 2018). We also show that the investors’ gender affects the resilience of entrepreneurs by increasing the participation rate of male entrepreneurs. This counter-intuitive result may indicate a side-effect of increasing the number of female investors. More female investors may improve the resilience of male entrepreneurs consequently leading to greater gender inequality in the entrepreneurial finance market.