In the United States, the number of female-owned businesses has risen in recent years, as has the number of women intending to become entrepreneurs. Despite this fact, relatively little venture capital goes to women-led companies.
In 2018, only about 3 percent of all venture capital in the United States went to a company with a female CEO. Some researchers have begun the process of identifying the bias that has led to this unfair distribution of funding. This trend hurts not just women, but the entire field of entrepreneurship, which benefits immensely from diversity.
Recently, a topic that has received a lot of attention is the pitching process. Entrepreneurs often need to pitch their ideas to a venture capitalist to get funding. The pitch presents a problem, argues for the unique solution on the table, and outlines how the company might become profitable.
The pitching process itself may be inherently biased and lead to venture capital portfolios that are unbalanced. Some entrepreneurs have called for abandonment of the pitching process altogether in favor of an objective, data-driven process.
The Bias Involved with the Typical Pitching Process
A number of academic studies have examined the gender bias present in the pitch process. One study conducted in 2014 used identical pitching scripts and slides that were presented by male or female voice and sometimes included photos of the presenter. Participants in the study then rated the investment.
Pitches presented by male voices were higher ranked than those voiced by women and presentations including photos of a man actually performed the best of all. Notably, the results were the same for both male and female research participants.
However, the bias involved in pitching goes beyond the surface level. A study from 2017 showed that women are categorically asked different questions following a pitch than men. In general, men were asked questions that highlighted the potential gains of a pitch, while women fielded more questions about risk mitigation.
The problem is that entrepreneurs who spent more time addressing questions about potential gains raised an average of more than six times as much funding than those defending their ideas. While these findings may be surprising, most entrepreneurs have already picked up on them. It is not uncommon to have a lower-ranking male pitch instead of a female CEO.
How Venture Capitalists Feel about the Pitching Process
Venture capitalists have largely pushed back against the idea of getting rid of pitches altogether. These individuals argue that pitches are necessary for gaining an intimate sense of both the venture and the founder. However, the predictors of success include much more important points than someone’s ability to deliver a pitch.
Some more objective data that venture capitalists could examine instead include marketing skills, indicators of customer need, customer relationship management, and the CEO’s ability to assemble a skilled team. In reality, researchers have found that many funders are relying more on this objective data in the initial vetting stages, but these venture capitalists generally still require pitches.
The question is whether or not it makes sense to include a stage that knowingly introduces bias. Some funds have actually already eliminated the pitch altogether. One such fund is Social Capital, which evaluates potential investments using numbers. Altogether, 40 percent of their early investments were companies headed by women.
Unfortunately, this fund has since closed its doors for unrelated issues. Fortunately, other organizations have followed suit, including Clearbanc and Loyal VC. The latter reported that 37 percent of initial investments were headed by women using a system that looks at 14 weeks of performance rather than pitches.
Notably, none of the funds mentioned above make any special effort to fund female entrepreneurs. Their results come from utilizing processes that are as objective and nonbiased as possible. While it is too early to claim that this neutral approach results in higher yields, early results have been promising. Moving forward, it will be interesting to see if these objective funds outperform organizations that rely more heavily on pitches.
Other Options for Addressing Inherent Gender Bias
Some venture capitalists have taken a different approach to addressing the gender bias of pitches by creating separate pools allocated to gender and having women pitch only against each other. This segregation can create some unnecessary tensions, especially when the possibility of eliminating pitches altogether seems to make significant progress toward a more inclusive funding process.
Another idea that has been floated is to obfuscate the gender and appearance of presenters through technology. However, doing this may eliminate the personal connection that many venture capitalists find so important.
Regardless of the strategy that funds eventually employ to eliminate bias, it is clearly important to address this issue. Not only does this bias create a hostile environment for the increasing number of female entrepreneurs, it also hurts the portfolios created by venture capitalists.
Taking a more objective approach to investing ensure that funders judge companies based on their financial potential alone and ultimately build portfolios that outperform their biased ones while creating more evening grounding for entrepreneurs.