I once had a startup founder tell me that he was having a recurring nightmare about being in a small room where 4 law enforcement officers would aggressively interrogate him, and he would try in vain to keep up with their questions. Each night, the dream would change slightly—the interrogators would look different, though always faceless—until finally he realized what the dream was about: pitching his startup and the interrogators were potential investors.
When investors are deciding who to allocate capital to, they of course look at “hard data”—things like company financials, product or service quality, the size of the market opportunity, and other indicators of business viability—but, research shows, they also draw heavily from their perceptions of the entrepreneur and the founding team. Though they want to be investing in a great product, it is perhaps even more important that when a founder faces adversity (as inevitably happens), they have the wherewithal to persevere. In fact, investors will overwhelmingly finance entrepreneurs for whom they hold positive sentiments, regardless of their assessments of the business. One investor said: He had a good business, but what really got me to sign the [investment] check was when [the entrepreneur] said to me: ‘I was sitting outside one day, thinking that I was three months behind in our house payment, I had three employees I couldn’t pay, and I ought to get a real job . . . but then I thought, No, this is your dream. Get back to work.’ That’s when I knew I couldn’t not invest in this guy.
In this way, funding is very emotional, and it is very psychological. And as a result, it invites bias. There is a widespread disparity in funding—a disparity most notably observed through differences in the capital-raising experiences of male founders versus female founders whereby women are less likely to be given funding for their business. For female entrepreneurs, the numbers are clear: they own 38% of all businesses in the United States, yet they are only receive 2% of all venture financing. And even when they are able to raise money, female entrepreneurs find that it is in amounts much lower than their male counterparts. There are debates about why such staggering outcomes and statistics exist. Some argue that it is about the quality of companies that are being formed by women versus men. Others assert that it is because there is a relative dearth of female financiers and role models from whom women can turn to for support and resources. Still others claim that it is a pipeline issue.
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But in recent research my colleagues and I conducted, we find that it may be the quality of the interaction between an entrepreneur and an investor that is driving the disparity. Our findings suggests that investors (both male and female investors) are more likely to approach men with questions about how they will “win”, whereas female entrepreneurs are approached with questions on how they will “avoid losing.” Men are more likely to be seen as the glamorous entrepreneurs who found companies that will become the likes of the Amazon, Google, or Uber. Women, on the other hand, are imagined as the heads of companies which manage to keep their doors open—small businesses and lifestyle companies whose names are not recognizable.
These stereotypes limit the possibilities for women, of course, but investors themselves may also be missing out on an entire realm of companies that have the potential to introduce valuable, disruptive technologies and services. This is a disservice to society because it introduces inefficiency into the system as a whole: some of the best projects and the most cutting edge products and services lie idle, starved of investment.
To better understand why investors might be missing out on an entire population of companies that have the potential to create real impact, just because of the gender of who might be at the helm of these companies, we began by looking at the interactions between founders and investors to see why investors might be turned off to female founders. What we noticed was that the exchanges that female founders were having with investors differed with that of the exchanges that male founders were having with these same investors. But rather than something being initiated by the founders, the difference we observed was being driven by how the founders responded to the demands and inquiries of the investors.
From there, we went to formal pitch competitions, observing Q&A interactions between 140 active and experienced VCs and 189 entrepreneurs who participated in the prestigious TechCrunch Disrupt. We analyzed these interactions more formally, using both linguistic analysis and extensive manual coding, and we found an interesting difference. We found that men were more likely to be approached with “promotion-focused” questions that allowed them to demonstrate the scope and breadth of possible opportunities: “Where do you see this market going?,” or “Can you foresee yourself penetrating tangential customer market?” Women, on the other hand, more often were probed with “prevention-focused” questions on the limitations and potential problems that might arise: “What do you think it will take to achieve break even?,” or “How can you ensure you’ll retain your current customers?” And as research in mirroring and linguistic style matching (LSM) would suggest, people respond in turn—when asked a promotion-focused question, we are more likely to have the freedom to respond with promotion-focused answers, and alternatively, prevention-focused questions beget prevention-focused responses.
What was especially concerning about these interactions was that the different treatment of men and women was leading to real differences in funding. We found that entrepreneurs who were asked prevention questions and responded with mostly prevention answers were able to raise only approximately $563,000. Yet those entrepreneurs who were able to shift, and respond with a promotion-focused answer, despite being asked prevention questions? These entrepreneurs went on to raise an average of $7.9 million in funding.
What this suggests is that despite the disheartening difference in how different categories of entrepreneurs are being treated, there are distinct ways that entrepreneurs can take matters into their own hands. For these entrepreneurs, what we tell them is this: you don’t have to take the bait. Once you recognize that you are being asked a prevention question—one that is focused on risks and limitations—by all means, give a response. But then rapidly shift and re-position your response in such a way that allows you to promote—promote the potential of your company, the growth prospects, and the ways in which you are not only avoiding loss, but you are doing so in a way that is truly winning.