Editor’s Note: This article has been contributed by guest writer, Eva Waweru
Conversations about the need to invest in women-founded and led startups have been trending for the past few years, and rightly so. In 2022, women-founded companies received only 0.9% of the total capital invested in startups in Europe, according to PitchBook data.
This persisting gender financing gap lacks a reasonable explanation. In fact, research suggests that it’s not the quality of women-led startups, nor is it a “pipeline problem,” a common yet inaccurate argument that there simply aren’t enough” women-led startups.
Research shows that investors inconsistently evaluate women-led and men-led startups of similar quality.
Multiple research studies have revealed that the problem lies not in the quality of women-led startups, but in how investors evaluate startups, and here’s why:
- In one study, when participants were presented with identical pitches, differentiated only by the gender of the voice narrating the pitch, 68.33% chose to fund ventures pitched by a male voice.
- Research suggests that investors typically score women-led startups lower than men-led startups of similar quality and overvalue men-led startups, effectively giving them a bonus- or increase in their scores- due to a lack of structured processes.
- There is evidence that evaluators adjust the characteristics they initially wanted to see in a successful candidate to fit the characteristics displayed by candidates of their preferred gender.
- Researchers found that men-led startups are asked significantly fewer risk-related questions than women-led/founded startups, possibly because investors have a more positive perception of these ventures as involving less risk.
How do we improve the system to unlock more opportunities for women entrepreneurs in the region?
The answer lies in reviewing the investment process, which, as we have already established, is full of discrepancies. A standard evaluation framework should consider the following:
Collect information on each startup’s risk and growth potential, without focusing disproportionately on either.
This comes out clearly in cases where investors ask women-led startups more risk-related questions and men-led startups more growth-related questions. This imbalance can lead investors to overlook key risks or growth opportunities for a startup. Prompting investors to think about both risk and growth-related questions helps prevent them from focusing disproportionately on either, leading to more consistent evaluations.
Assess a team’s potential by evaluating how much they have demonstrated an ability to improve their startup (e.g., acquiring new customers, identifying and addressing risks in their business model, securing new partnerships, etc).
Evaluating how a founding team improves their startup in the short-term helps the investor make a more accurate, performance-based assessment of its growth potential, by creating new data to assess how well the team will be able to continue making improvements to their company in the future.
Last but not least, predefine what evaluation criteria will most heavily influence investment decisions.
Predefining the evaluation criteria increases the likelihood that the evaluator will assess all startups more consistently.
Investors play an important role in driving innovation, and as such, cannot continue to miss out on promising innovations due to discrepancies in their evaluation framework.
