The gender gap in venture capital explored

Gender bias in venture capital, particularly in Silicon Valley, has grabbed a number of headlines with stories of challenges that women-led startups face.

New research by Sahil Raina, a University of Michigan doctoral student at the Ross School of Business, looked at whether the numbers support those anecdotes and what's driving it. He studied the performance of women-led firms that receive venture capital and found a gender gap in performance.

Overall, women-led startups that received venture capital had a 37-percent lower rate of exit (IPO or sale) than startups led by men.

Could the financial backers be playing a role?

"I wanted to find out if venture capital financing played a role in the performance gap," said Raina, a finance student. "If women-led companies perform worse when they are financed by some VCs, then some good projects that should successfully exit VC financing are being held back."

Raina analyzed information from CrunchBase, a large crowdsourced database that tracks high-tech startup activity, financing rounds and information on the entrepreneurs. The percentage of women-led firms in the dataset was comparable to that of all venture capital-backed firms.

He found that the performance gender gap for women-led startups in his database was large for firms financed by venture capital firms with all men partners: a 25-30 percent lower rate of exits for women-led firms. The gap disappeared entirely among firms financed by venture capital firms with at least one woman partner.

Further, all-men venture capital firms and those with women partners invested in women-led entrepreneurs at the same rate. Along with the overall lower exit rate of women-led firms, this suggested that what was happening was not discrimination in selecting projects.

"I found that venture capital financing does impact the performance gap, but it's not the straightforward story we think of when it comes to discrimination," Raina said. "It seems that women-led venture capital firms are either better at selecting women-led projects, or they're better at advising them. At least one of those two things is at play in the VC industry."