Why aren't female founders getting funded? Sometimes it's a lack of fit.
Updated: Oct 13, 2022
Since my last blog post, I have been working with my third accelerator for edtech start-ups, providing training and mentoring to founders in London and across North and Central America. As with the field of education in general, there are a lot of women in edtech, so I was somewhat surprised to learn just how big the funding gap is between male- and female-founded edtech start-ups. According to Brighteye Ventures European Edtech Funding report for 2022, globally, male-founded edtech-start-ups received $15.5 B in funding while female-founded teams received only $0.5B. In the UK, the proportion of capital received by female founding teams has gone down since 2017 (4.4% of funding) to only 2.8% of funding in 2021.
As a researcher and someone who works with some incredible female founders, I wanted to understand why this disparity exists. As it turns out, there's a fair amount of research conducted by organisations as varied as governments, consulting firms and academia, addressing the gender-based funding gaps that occur across industries. A female-founder friend introduced me to a fascinating and well-publicized study led by Dana Kanze of the London Business School that examines the difference in the questions that are asked of female versus male founders during the pitching process. (See her Ted talk explaining her findings here.) Kanze and her team found male founders typically receive "promotion" questions which allow them to talk about the future possibilities for their business. Women, on the other hand, are more likely to be asked "prevention" questions that require them to address the problems their business might experience. Not surprisingly, the research shows that founders receiving more promotion questions are more likely to get funded.
Kanze's more recent research examines other factors that might influence why female founders are not getting funded to the same level as their male colleagues. The research is grounded in organisational psychology's "lack of fit" model, which describes the gender bias that can occur when a person of one gender steps into a role or industry in which society perceives they do not fit. The article presents two different studies run by her team with the aim of proving or disproving hypotheses derived from existing research literature about female founders' lack of fit in industries that are traditionally considered male.
The research found that lack of fit is yet another factor preventing women from introducing or advancing ventures in male-dominated industries. Specifically:
Male-led ventures raised 10 times what female-led ventures were able to raise when they target male-dominated industries.
However, there was no significant funding gap between women and men when both were pitching to female-dominated industries. Female-founded companies were also valued significantly higher by investors when their products targeted female-focused industries rather than male-focused ones.
This lack of fit did not matter for male CEOs in terms of pitching and receiving funding or experiencing a difference in valuation if their products or services addressed female-dominated industries.
Finally, investors retained a significantly higher percentage of equity from start-ups led by women (who retained on average 67% equity) versus those led by men (who retained 74% equity).
The investment culture clearly needs to change, but how do we start? I know there is some great work already being done by female VCs and others in the industry. I'd love to hear your thoughts.