We ask men to win and women to lose: closing the gender gap in startup funding

Kanze, D., Huang, L., Conley, M. A., & Higgins, E. T. (2018). Academy of Management Journal, 61(2), 586-614.

Why are there funding disparities between male and female entrepreneurs? The authors of this study demonstrate that a gender bias in the questions that investors ask to entrepreneurs results in different funding outcomes for entrepreneurs. Male entrepreneurs tend to be asked more promotion-focused questions, and raise significantly higher amounts of funding than female entrepreneurs, who tend to be asked more prevention-focused questions.

SUMMARY

Research has documented gender differences in funding outcomes: male entrepreneurs tend to receive more funding than female entrepreneurs. However, the mechanism behind this disparity and its magnitude remains a puzzle. This study helps foster a better understanding of the mechanism. The study is based on regulatory focus theory (see Higgins, 1997 & 1998), regarding people’s perceptions in the decision-making process, whereby the relationship between the motivation of a person and the way in which they go about achieving their goal is examined. The theory differentiates between two self-regulatory orientations: prevention and promotion.

The authors argue that the funding gap originates with a gender bias in the questions that investors ask to entrepreneurs: investors are more likely to ask promotion-focused questions (approaching gains, avoiding non-gains, e.g. acquiring customers, growing revenue) to male entrepreneurs, and prevention-focused questions (approaching non-losses, avoiding losses, e.g. retaining customers, breaking even) to female entrepreneurs. Entrepreneurs tend to respond in symmetrical ways to the questions: with promotion-focused answers to promotion-focused questions, and with prevention-focused answers to prevention-focused questions. The authors find that the difference in questions asked has consequences: entrepreneurs who respond with promotion-focused answers raise more funding, compared to entrepreneurs who respond with prevention-focused answers. So teaching entrepreneurs to respond with promotion-focused answers to prevention-focused questions could help reduce the funding gap.

The authors conducted two studies to test the hypotheses, the first correlational and the second causal.

The first study was a field study conducted on “question-and-answer interactions at TechCrunch Disrupt New York City during 2010 through 2016”. The sample includes data from the start-ups that participated in the Startup Battlefield (189 in total). The authors use a multiple linear regression, where the main variable of interest is a constructed firm-level regulatory focus binary (promotion/prevention) code for each firm. The dependent variable is the total funds raised by these start-ups over the course of their lifetimes. The results reveal that “investors tend to ask promotion-focused questions to male entrepreneurs, and prevention-focused questions to female entrepreneurs, and that entrepreneurs tend to respond with matching regulatory focus”. This distinction in the types of investor questions and entrepreneur responses leads to different funding outcomes: “those asked promotion-focused questions raise significantly higher amounts of funding than those asked prevention-focused questions”.

The second study used an experimental design where the authors manipulated the regulatory focus of investor questions and entrepreneur responses (promotion question-promotion answer, prevention question-prevention answer, etc.) by simulating the TechCrunch Disrupt Q&A experience, holding all other startup characteristics constant. The authors then had 194 accredited and 106 non-accredited would-be investors allocate funding to each venture. “Examining the influence of regulatory focus on the continuous variable of funding”, the experiment confirmed the results of the field study, and revealed that “entrepreneurs can significantly increase funding for their start-ups when responding to prevention-focused questions with promotion-focused answers.”

The article thus presents practical as well as theoretical implications for entrepreneurship as the authors offer evidence regarding strategies that investors can use to close the gender gap in funding outcomes. By framing questions consistently, investors can offer female entrepreneurs more opportunities to present themselves in the same beneficial manner as their male colleagues.  The study also provides “a tactic that entrepreneurs can use in order to level the playing field in venture funding”, by giving promotion-focused answers to prevention-focused questions.

While the article only studies the regulatory focus of questions and answers in the context of venture funding, additional opportunities exist to study the promotion and prevention framing of questions and answers outside the context of venture funding.