Do you remember that old saying, "birds of a feather flock together"? As it turns out, this saying is all
about the social theory of homophily, which describes the tendency of humans to form relationships with similar others. In a room full of strangers, in other words, you're more likely to gravitate to someone who is the same age, ethnicity or gender as you.
After writing my last blog on why female-founded start-ups aren't getting funded, I've seen homophily in action in this arena. In my conversations with female start-up founders, many say how intimidating or off-putting it can be to attend workshops, networking or pitching events that are full of men. The field is starting to recognize this: there are now some incubators or accelerators with women-only cohorts and there is even a movement in investment circles encouraging female investors to fund female entrepreneurs or even set up "women-only" investment funds.
All of this seems like positive practice based on the theory of homophily, right? I thought so, too. Imagine my surprise, then, when I came across this article by two (female) researchers from INSEAD in France who argue that gender homophily in entrepreneurial finance (specifically women investing in female-founded start-ups) can actually be detrimental to the future success of the female-founded businesses. The authors based their hypotheses on the significant body of research indicating female founders are held to a different set of standards than their male counterparts and, overall, are appraised more negatively than men. There are many reasons for this, including the "lack of fit" theory discussed in my last blog, as entrepreneurship is thought of as a masculine domain. But it's also to do with the uncertainty involved in early-stage investing. It is very difficult for entrepreneurs to demonstrate and for investors to ascertain quality or predicted future success of a start-up. Unlike men, the literature says, women need additional evidence of their competence, as stereotype dictates that they are less capable and thus provide a less attractive investment opportunity than their male counterparts. The negative side of gender homophily comes into play if the female-founded start-ups received early funding from women investors. This makes it easier for male investors to discount their achievement, as they credit gender homophily rather than entrepreneur competence for the female-founders' success.
The researchers ran two studies to investigate their hypotheses based on this literature: a field study examining data from Crunchbase on start-ups that received a first round of VC funding between 2010 and 2018, and an experiment in which MBA students watched identical video pitches for a fake start-up. The only differences in the videos were the gender of the founder (David versus Laura Anderson) and/or the gender of the investor (John versus Katherine Clark).
The results were, quite frankly, depressing.
Female-founded start-ups who had received early-stage funding from female-led VCs were two times less likely to raise additional financing.
There was no similar effect for male-founded companies, regardless of the gender of their initial funders.
Pitches from female-founders who had received early-stage funding from women were rated lower in quality than all other pitches (female founder/male investor, male founder/female investor, etc) due to perceptions of entrepreneur competence.
The researchers then conducted interviews with male and female VCs to try to interpret these results. They found that female founders wanted to de-emphasize their gender so that it wasn't seen as a negative point against them (the same was true for ethnic minority founders). The interviews also echoed the theory of homophily in investor/founder relations, as, regardless of gender, respondents expressed a stronger comfort level in investing and working with someone who was "like them".
It's obvious that a cultural shift in investment is long overdue. In the meantime, the authors recommend that "well-intentioned" policies encouraging female investors to invest in women are likely to be negative for both the investor and the founder in the longer term. They suggest that women need support -- and financing -- from both men and women in order to be taken more seriously.
Meanwhile, I'm still thinking about what I can do to help female founders. Stay tuned.
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