It is well established that female founders receive less funding than their male counterparts for early stage ventures, even though their companies grow faster and create more jobs. Whether anecdotal or academic, the vast majority of accounts find that female led ventures receive less money than those led by men. And with financing being the oxygen for start-ups, this lack of access to financing, especially in the early stages can often be the difference between life and death of new female led ventures.
While the gender gap in funding is undisputed, however, we have very little academic insight into the question of why this gap exists. And without answering why, there is little actual advice to offer female founders in the pursuit of early stage financing.
That is, up until now. Two new academic studies begin to answer the question of why female founders receive less financing, using data from competitions. While pitch competitions are certainly different than the closed-door environment of traditional angel and VC funding, these competitions finally open the door slightly to the otherwise completely opaque process of the early stage funding.
Altogether, these studies find that differences in financing have less to do with fundamentals like actual prior financial performance, than with aspects of the negotiation and valuation process. These studies suggest that female entrepreneurs can get more for start-ups in the negotiation process by doing the following:
1. Don't Anchor Low in Valuation
In my recent study with co-author Melanie Shapsis, we find that differences in financing between male and female entrepreneurial teams have largely to do with the women anchoring company valuations lower than men. This lower anchoring is then largely determinative of final funding amounts. Looking at ventures with similar financial backgrounds, in similar industries, of similar size, we find that female teams begin negotiations offering more equity for less money than their male counterparts.
One might think anchoring lower may be strategic in order to ensure the funding process closes. However, we also find that the lower valuations make female teams no more likely to get funding in the first place. That is, anchoring lower is not an optimal strategy for female entrepreneurs in order to get funding.
While we still don't know why female teams anchor lower, this persistent difference drives the difference in funding female and male ventures are able to obtain. It may be that male teams overestimate the value of their company, and that female teams accurately represent their value. We don't know yet. But, if this difference impacts access to capital, from the entrepreneur's perspective, it's important to consider.
2. Be More Aspirational in Discussing Your Company
The other recent study examining the reasons why female led start-ups receive less funding also shows that elements of the negotiation process drive differences in funding. This study finds that female and male entrepreneurs are asked different types of questions by investors in the negotiation process and this affects the amount of funding they eventually receive. Female entrepreneurs tend to be asked questions related to how their company will avoid failure, while male entrepreneurs are asked questions about how their company will succeed. When female entrepreneurs, however, answer investor's questions using more aspirational language, regardless of the question, the funding gap diminishes. Thus, if women seeking funding learn to identify these questions and respond with more aspirational language in the negotiation process, this may help alleviate the gender gap in funding.
My advice to female entrepreneurs is simple. First, become experts not only of your product or technology, but also of the process of negotiation itself. Bridging the funding gap is not only about the fundamentals of your company, but how you present these fundamentals, particularly as many investors bet on the jockey more than the horse. There is a well-established science to negotiation that female entrepreneurs cannot afford to ignore, with many good sources to help master the basics of negotiation.
Second, know your worth. This is particularly important if you are pioneering a new category. In these cases, it's even more important to have a solid methodology around estimating demand either using proximate industry analysis, or surveys of consumers. Further, women should take advantage of the increasing amount of information available on funding. By analyzing this data, a better sense of funding of competitors can help women anchor negotiation valuations more accurately.
And finally, female entrepreneurs in general should interpret this news in a positive light. Before we are able to change the underlying issues in the institution itself, we at least have actionable items to help close the gender gap in financing. Either by avoiding anchoring low, or by pivoting focus to company upside, these studies show that relatively costless change in how you negotiate can yield financial gains, and that female entrepreneurs actually have the ability to take control and steer negotiation.