Networking Frictions in Venture Capital, and the Gender Gap in Entrepreneurship

Bottom Line: Networking is a significant reason why men get more funding from venture capital (VC) than women. The difference in networking explains part of the significant gender gap in entrepreneurship. Exposing early-stage female entrepreneurs to more networking opportunities with VCs could help reduce this gap. Ultimately, networking opportunities must help finance the best -- not just the best networked -- ideas.

Venture capital is a significant financing source for entrepreneurs, but only a small number of VC companies account for a disproportionate share of the financing. The process through which these entrepreneurship gatekeepers select entrepreneurial ideas has significant effects on what becomes commercialized in the economy.

The gender gap in entrepreneurship is especially significant, suggesting VC may play a role. Only about 10-15 percent of VC-backed startup founders are women. The gap originates early in the startup lifecycle, at or near the moment of founding. This suggests that high-quality female entrepreneurs or ideas are going inappropriately unfunded.

Networking frictions may be to blame for this gap. It is widely known that face-to-face connections and trusted referrals are important, if not primary, deal sourcing methods for many top VC investors. Since over 90 percent of VC investors are men, they may prefer to network and socialize with other men. 

This study exploits the random variation in the number of VC judges assigned to panels at Harvard Business School’s New Venture Competition between 2000 and 2015 and finds that exposure to more VC judges increases male participants’ chances of founding a VC-backed startup much more than this exposure increases female participants’ chances.

Regression estimates find that relative to the effect among women, each additional VC judge on a panel increases the likelihood of men starting a VC-backed company after HBS by 25 percent.

Survey responses reveal that male participants are nearly twice as likely as women to proactively reach out to VC investors after pitching them. Each individual outreach to an investor by an entrepreneur obviously has a small chance of being ultimately valuable in terms of raising VC, but a fixed difference in the likelihood of outreach between men and women compounds across the number of VCs on a panel, making the difference.

There are numerous reasons why women might be less likely to proactively network than men. Men and women may have different beliefs about appropriate networking norms.

These results point to benefits from encouraging and potentially formalizing networking opportunities between individuals, rather than assuming that people will contact each other independently.

Read the full study HERE.