Female Founders Face Disadvantages Raising Capital in Male-Dominated Industries

Dana Kanze, an assistant professor of organizational behavior at London Business School, has pursued research that explains some of the reasons why female founders might struggle in early stages of trying to secure funding, and therefore might be less likely to get their startups off the ground.

Dr. Kanze’s work has been published in the Harvard Business Review and the Academy of Management Journal, among others.

Dr. Kanze spoke with The Wall Street Journal about her research.

WSJ: What factors have you uncovered in your research that might contribute to the issues experienced by female founders at the helm of enterprise software startups?

Dr. Kanze: Enterprise software is a male-dominated field, one where women are underrepresented in terms of overall employment. My co-authors and I recently found that women’s sector-underrepresentation not only affects them as employees but also as founders.

This past year, we published research in Science Advances demonstrating that female founding CEOs are at a particular disadvantage when fundraising for ventures that cater to these male-dominated (as opposed to female-dominated) industries. Across our field and experimental studies, we discovered that female founding CEOs raise less funding at lower valuations for decreased equity in male- as opposed to female-dominated industries, while male founding CEOs achieve favorable funding-related outcomes regardless of the gender dominance of the industries they serve.

We learned this is due to a misperception among investors that female (but not male) founding CEOs are a “lack of fit” with their ventures when serving these “gender-incongruent” industries.

WSJ: What are some of the downstream effects of female entrepreneurs failing to get their businesses off the ground?

Dr. Kanze: If female founders are hindered in their ability to raise funding and eventually achieve a successful exit for their businesses and themselves, they won’t be able to amass comparable amounts of personal wealth and industry-relevant operating clout vis-à-vis their male counterparts. Impeded in these ways, women are that much less likely to become serial entrepreneurs and angel investors, as well as entrepreneurs in residence and decision makers at venture funds.

So, the deleterious downstream consequence is that we will see lower amounts of female-founded ventures and female investors operating in these industries.

WSJ: What can be done about it from the investor side?

Dr. Kanze: One silver lining in our research was that we found accredited investors displayed lower amounts of bias against female founders on the basis of misperceived lack of fit than nonaccredited investors did. This suggests a need to allocate resources in support of fostering greater financial literacy and awareness of decision-making biases among investors. Fortunately, venture funds and angel groups have become increasingly proactive about arranging research-driven training seminars to educate their investors over the past few years.

Although they are taking these initial important steps, real change will only happen when funds commit to reforming their best practices. This includes implementing a consistent process for data intake so they are not filling in the blanks with gendered assumptions about the candidate’s industry expertise or otherwise.

But investors tend to eschew formality of process, instead relying on idiosyncratic interactions with each founder based on unique insights they have gleaned. One path forward is for them to embrace a “freedom within a framework” approach that enables both of these objectives to be achieved.

Write to Isabelle Bousquette at Isabelle.Bousquette@wsj.com