‘The Floating Piers’ Installation By Christo

In venture capital-financed, high-growth technology startups, only 9% of entrepreneurs are women.

That’s really low. Women make up nearly half of the U.S. workforce. They are majority owners of 36% of small businesses.

Of course, VC-financed tech startups are different from the general workforce. Your typical small business is not a future Uber or Facebook. Tech startups imply a science and engineering focus, two fields that are known to be less popular with women.

Still, even compared to women’s lower participation in STEM fields, 9% is quite low. In computer science and math-related jobs, 27% of the US workforce is female. That’s still triple the rate of VC-backed female entrepreneurship.

What is going on with this phenomenon? News articles speak of sexism, a boys’ club, and a toxic atmosphere for women in Silicon Valley. They suggest that’s why female entrepreneurs have trouble securing financing from venture capitalists. And that when they do get funding, female entrepreneurs cannot work effectively with their backers due to the male-oriented atmosphere.

I set out to empirically examine the theories laid out in these news articles. I used data from CrunchBase, a large, crowdsourced database on high-tech startups’ activities. It includes information on both the biographies of entrepreneurs and their financial backers, as well as financing rounds.

My research reveals two practical insights:

For female entrepreneurs, it’s important to know that securing financing from an all-male venture capital firm may drastically reduce their probability of a successful exit.

For venture firms, it’s important to recognize that having female partners improves the chances of success for the female-led startups they finance.

After reading some of those news articles, you might expect that my analysis would find evidence that venture capitalists are simply biased against female entrepreneurs. If this were the case, you would expect startups with female entrepreneurs to be held to a higher standard to receive financing. In that scenario, the typical VC-financed startup with a woman at the top would perform better than those led by men (assuming that startups led by women and men are generally similar across the board in terms of quality).

That’s not the case at all. If you define success as an exit from venture capital financing via acquisition or an IPO, female-led startups perform much worse than male-led startups. About 17% of female-led startups successfully exit VC financing whereas 27% of male-led startups do. That’s a large relative difference, amounting to over 37% fewer successful female-led startups than male-led ones. This finding is inconsistent with the notion that the financing biases of VCs are solely responsible for the low rate of VC-financed entrepreneurship among women.

Interestingly, when you examine startups by the gender of their founders and their backers, you find that a potential driver of low female participation and worse performance of female-led startups is VCs’ ability to evaluate and advise them.

Here’s why. My research compares two groups of startups: those with initial financing from VCs with all male general partners, and those with funding from VCs with female partners. There’s a huge difference in success rates of female-led and male-led startups financed by these two groups.

With startups financed by all-male VCs, there is a whopping 25 percentage-point difference in the exits of female-led and male-led startups. Yet when startups are financed by VCs with female partners, that difference disappears. There is no meaningful difference in the success rates of female- and male-led startups when they’re financed by VCs with women partners.

These findings suggest that, somehow, VCs with female partners are better able to evaluate or advise female-led startups, or both, to the point that there’s no performance gap between startups led by women and those led by men. However, if female entrepreneurs get their funding from VCs solely led by men, their startups will be far less likely to be acquired or make it to an IPO.

The big question is why? Are all-male VCs worse at evaluating female-led startups, or worse at advising the ones they finance, or both?

There are some clues to answering these questions in my comparisons of venture capital financing rounds. The research shows that the performance gap between all-male and female VC-financed startups is much larger in initial financing rounds than in subsequent ones. The ability to evaluate a startup’s potential value tends to be more important in the initial round, when firms decide to finance newer projects. So this suggests evaluation ability underlies the worse performance of woman-led startups financed by all-male venture capital firms. This finding does not imply that advising is unimportant, but rather that evaluation plays the bigger role.

You might also ask why VCs that have female general partners are far better than all-male VCs at achieving success with startups led by women. Is there a better match between the female entrepreneurs and the partners who finance them? Or is there something about the culture of VCs with female GPs that improves performance?

My evidence suggests that gender matching between female GPs and entrepreneurs is responsible for the improved performance. This is based on a comparison of rounds financed by a single VC firm as opposed to multiple ones. If overall VC culture differences are responsible for better performance, you would not expect the number of participating VC firms to affect the gap. However, I find that the performance improvement for female-led startups financed by VCs with women partners is much bigger in single VC rounds. As each general partner is more likely to be directly involved with the startup in such rounds, this suggests that female entrepreneur-to-GP matching drives the better performance of these women-led startups.

Given the ongoing debate about the role of gender in early-stage financing of firms, particularly in Silicon Valley, my research provides several important empirical insights. First, women’s participation in VC-financed startups is indeed very low. Second, there is a sizable performance gap in startups led by men versus women.

Third, and most interestingly, venture capital financing does indeed impact the performance gap. The performance of female-led startups is markedly worse than that of male-led startups, unless they’re financed by VCs with female general partners. Then the difference disappears. Those VCs are either better at selecting women-led projects, or better at advising them, or both.

Either way, this is an important insight. The evidence is persuasive that the structure of VC finance has contributed to the performance gap between female and male entrepreneurs of tech startups. Moreover, by lowering their expectation of ultimate success, VCs might deter some women from starting high-tech firms. This may partially explain their lower entrepreneurial participation in the sector.

There is still much more work to be done to understand this issue. VC-financed startups are an increasingly important sector of our economy. There are potential costs to society of gender-based frictions in venture capital financing. If the goal is to have more successful technology startups led by women, it may not be enough to simply encourage more women to start companies. A crucial step to helping more female entrepreneurs succeed may be to encourage more women to join venture capital firms.