The Hidden Biases of Well-Intentioned Investors
One of my favorite childhood memories was frolicking around my grandpa’s office in WuHan, China, soaking in the hustle and bustle of his small entrepreneurial venture. It was far from a glamorous office, and the job was much less stable than his former role as a professor. But it was clear to me, even then, that he loved it. Often, as young people do, I would trail behind him, mimicking his every movement, until his employees jokingly started calling me, “Little boss Tan.” And I thought to myself, “I’m going to be just like him one day.”
I became more involved in the business world as an undergraduate at Harvard and joined the board for Women in Business. It was at that point where I was first hit by the dearth of women leaders in business. Our speaker pipeline only had a few dozen women who were Fortune 500 CEOs. The investor list for our pitch competition was equally as short, given that 4.9% of VC partners are women.¹ Thinking back, my desire to become “Little boss Tan” suddenly seemed much more daunting.
Today, I feel fortunate to be in the position to effectuate change as a member of the Investment Team at Cue Ball. I’m proud to be part of a firm where 50% of our capital has been dedicated to female and BIPOC founders, and I am eager to continue backing these — often overlooked — opportunities where some of the greatest value will be created.
Unfortunately, Cue Ball is much more the exception than the rule. In 2020, only 2.3% of VC funding went to female founders,² which declined to 2% in 2021.³ However, the data continues to support that female founders are just as good of a bet (or better) relative to male founders. Since the 1980s, women have steadily advanced in educational attainment, gaining more bachelors and advanced degrees than men. The proportion of female founders has also greatly increased, with ~40% of small businesses owned by women.⁴ 90% of women pay back their loans,⁵ and a BCG study found that women-owned businesses earn twice as much revenue per dollar invested compared to male-owned businesses.⁶
I am certain that nearly all venture capitalists are ardent believers in egalitarianism and gender equity (which is partially due to a push by LPs and the growing awareness around biases in the industry). Yet there is still a myriad of structural and implicit biases that lead to persistent inequities, such as the old boys club, the dearth of role models, the imbalance of female investors, and ingrained habits of thought that lead to implicit biases. Ultimately, this results in women having a higher bar in terms of proof-of-concept and lower retention of equity. In this article, I will focus on the deeply ingrained and mutually reinforcing psychological biases — among both men and women — that perpetuate inequities in access to capital, followed by some methods to unroot our deeply-rooted biases.
Notably, white women tend to receive a majority of capital and senior VC positions. Intersectional identities (e.g. BIPOC, LGBTQ, people with disabilities) correspond to compounding barriers in accessing capital. This is an extremely important topic to explore in depth, though we will not do it justice if consolidated into this article.
Overview: Our Hidden Biases
The mind of man at one and the same time is both the glory and the shame of the universe. – Pascal, Munger’s Lesson on Elementary, Worldly Wisdom
The undeniable truth is that humans are irrational actors with natural and hidden biases in thinking. In Daniel Kahneman’s seminal book, Thinking Fast and Slow, he describes two modes of thinking: first is your fast, instinctual, automatic thinking and the second is your slower, analytical, effortful thinking. In 98% of our daily decisions, we rely on the former — which often utilizes shortcuts leading to cognitive errors.
One well-known example is the following: If a baseball bat and a ball cost a total of $1.10, and the bat costs $1 more than the ball, how much is the ball?
Most people will respond with, “Of course, it’s 10 cents,” even though the correct answer is 5 cents. The punchline: your first answer may not always be the best answer, and ideally, the two modalities of thinking should be used together.
Implicit Associations
When making investment decisions, we all are prone to a host of misjudgments (e.g. confirmation bias, recency bias, cognitive dissonance, anchoring). Especially when assessing underrepresented founders, a key cognitive error that influences our decision-making is implicit association bias.
In all stages of investing, but especially in early stage investing, a critical component of the bet is the “people bet,” or an assessment of the founder’s leadership capabilities, business instincts, grittiness, responsiveness to change and feedback, among other factors. Relative to other diligence areas, the people bet tends to rely more on gut instinct and is, quite honestly, very difficult to assess. Therefore, our unconscious attitudes about different identities can heavily influence our ability to accurately assess female founders. This impacts the types of questions asked during fundraising, valuations, capital commitments, board dynamics, and more.
Mahzarin Banaji, one of the pioneers in this field, discovered that both men and women tend to unconsciously associate men with being career-oriented and women with being family-oriented. At the Tory Burch Foundation’s Summit, she conducts a modified Implicit Association Test and confirmed these findings, even with a primarily female audience. Similarly, Tina Kiefer, a professor of organizational behavior, asked business executives to picture a leader and found that a vast majority would draw and/or describe them as a male.⁷
These experiments illustrate how we subconsciously intake of large volume of information that are replete with hidden biases. When you overlay our naturally formed perceptions with how we are taught (e.g. analogies, pattern-recognition, hacks), it creates the reality of structural and systemic biases. These implicit biases are partially driven by a behavior termed availability heuristics, or the tendency for our perceptions to be based on easily recalled examples.⁸ In other words, it’s more likely for investors to take the people bet if there are many analogous, A+ entrepreneurs that come to mind. It’s not surprising that we have a much easier time pattern-matching male entrepreneurs with other successful entrepreneurs or leaders. There are more CEOs named David than there are total female CEOs.⁹ When evaluating investments, we subconsciously assess if this founder has similar characteristics to someone like Jeff, Bill, Mark, Jack, Steve, or Elon. (Yet we often overlook that there are over 100 unicorns with a female founder or co-founder.)¹⁰
This dynamic is perpetuated by the media, where men not only receive more coverage, but their content is much more business oriented. On the other hand, women’s business accomplishments often get diluted, since the media scrutinizes all aspects of their lives, including their wardrobes (Hillary Clinton), childcare choices (Marissa Mayer), past relationships (Whitney Wolfe), anti-racist behavior (Emily Weiss), work culture (Steph Korey), and more. The fall from grace of many female founders (Tyler Haney of Outdoor Voices, Steph Korey of Away, Yael Alfalo of Reformation) is even more heavily detailed, because “readers find their takedowns even juicier” — think Theranos, which has been dramatized into a TV show.¹¹
As a result, our unconscious minds use the crutch of “pattern recognition” which ends up associating “inevitability of success” and “commercial intuition” with the most familiar archetype. The subtle differences in the way investors unconsciously treat and judge male and female entrepreneurs have led to 62% of female founders reporting that they have experienced gender bias in the fundraising process.¹²
Ripple Effects of Implicit Biases
Our unconscious assumptions about gender have a definite impact on male and female investors’ decision-making. One experiment used identical scripts for a pitch and found that twice as many participants chose to fund the business narrated by a male’s voice, as opposed to a female’s voice.¹³
We subconsciously hold women to a very specific standard on how they ought to behave; women must walk the fine line of appearing passionate but not emotional, leaderlike but not aggressive, firm but not overconfident. When women exhibit “un-feminine” behaviors, they are often met with harsh character judgements. For example, when given identical descriptions of an entrepreneur but with different names, “Howard” was seen as likable, strong, decisive, whereas “Heidi” was described as aggressive, selfish, and not a team player.¹⁴ This illustrates the double-bind for female leaders, where embodying leadership qualities that aren’t viewed as “feminine” sacrifices likability, but “feminine” qualities are seen as “not leadership material.”
Our implicit biases are also reflected in the type of questions female founders receive. Researchers analyzed the Q&A of several pitch competitions and found that men are twice as likely to receive questions about the potential for gains (promotion orientation). On the other hand, over half of the questions to female founders were around the potential for losses (prevention orientation).¹⁵
Subconsciously anchoring around the likelihood of losses with female founders is especially harmful, given our strong propensity for loss-aversion bias. (Most people will choose a guarantee of winning $100 as opposed to a 70% chance of winning $200 and a 30% chance of getting nothing, even if the expected outcome of the latter is greater.¹⁶) Thus, when focused primarily on the likelihood of losses, investors are less likely to take risks relative to when focusing on potential rewards.
So what can we do about this?
Like many issues, awareness is the crucial first step in mitigating these biases. Below is a short — and certainly not comprehensive — list of suggestions for teams and investors:
As a Team:
Deliberately using our two systems of thinking when making important decisions can greatly reduce cognitive errors. To ensure both modalities are concurrently used, look to foster an open culture where individuals are empowered to express their perspectives and point out blind spots. This can be enhanced — but not guaranteed — by promoting balanced representation in investment decision-making. At Cue Ball, 40% of individuals in Investment Committee are women — which leads to a broader set of perspectives for all investments in addition to a better evaluation of women-focused ventures. We have found that productive discourse leads to better outcomes, irrespective of the gender of a founder. Other hacks we have used to in our Investment Committee include encouraging less represented / junior voices to express their position first or to arrive at IC with a POV in mind (or written down) — since the opinions of the first (or most senior) speaker often is overweighted.
As an Investor:
Having a seat in the investment decision process comes with great privilege and even greater responsibility, especially when investing on the behalf of others (e.g. universities, families). When we meet female founders, we collectively have a responsibility to encourage them to put themselves out there, to give guidance and support, and to recognize our own biases and permission them to be as bold in their voice as men — which necessitates great self-awareness.
Some underutilized strategies to help with self-awareness include having a sharp point of view for both yes and no decisions, devoting time to “retrospectives” on deals (e.g. ensuring consistency in the questions asked to male vs. women), constantly asking why to test fallacies in logic (especially around people bets), and deliberately updating beliefs with new information. Two other strategies that I have learned at Cue Ball include:
- 24x3 Rule: Pause for 24 seconds before reacting to an idea, reflect deeply for 24 minutes, and if time permits, spend the next 24 hours pondering why an idea might work before introducing why it might not work.¹⁷ Delaying intuition is a powerful tool that gives space to your analytical mode of thinking and enables greater reflection about the specific qualities of a founder that make them a good or bad bet.
- Bull and Bear Case: I am often asked to argue both sides of a deal, partially to check confirmation bias, partially to deepen my understanding of the bet and the probabilities of success. As I’ve been told, “do you really understand the situation if you can’t argue both sides?”
Even when you are not directly the target market of a company (which is almost always the case), these techniques allow for a deeper level of diligence, which can be critical in uncovering overlooked opportunities. During the fundraising process for one of our portfolio companies, MiniLuxe, a nail care brand, I witnessed far too many investors who dismiss it with the convenient excuse of it being “beyond their circle of competency” and that they’ll “ask my wife/girlfriend.” These reactions lead me to wonder if investors weighted conversations with their college-aged kids, taxi drivers, or guy friends as a prerequisite to listening to the pitches of Facebook, Uber or Dollar Shave Club. Don’t get me wrong — while customer reactions and analyses are undoubtedly crucial, there are certainly many other components and methods to evaluate women-focused ventures!
Concluding Remarks
While the percentage of capital dedicated to female founders has not improved, there is still room for optimism. We hope to acknowledge and celebrate the highest rates of female entrepreneurship in recent years and the growth in organizations that support underrepresented founders. While these systems and biases have made many falter, it has also created a generation of highly capital efficient, highly resilient women entrepreneurs who have thoughtfully built sustainable and durable businesses. Our hats off to the great entrepreneurs of Sarah Blakely of Spanx, Sarah Kauss of S’well, Lynda Weinman of Lynda.com, Michelle Phan of Ipsy, Mary See of See’s Candy, and many more — all of whom have scaled profitable businesses without the old boy’s network or significant outside capital. I am reinspired and reinvigorated by the stories of these women, and many others, who have trailblazed a path to make “Little boss Tan” feel within reach.
I am confident that the resiliency and grit built through doing more with less will prove itself over time, and those who are willing to bet on underrepresented founders and orphan areas of innovation will ultimately win. Mitigating our hidden biases doesn’t just make us better people; it helps us place better bets and is just good capitalism.
[1] https://www.fastcompany.com/90567387/women-in-vc-growth
[2] https://hbr.org/2021/02/women-led-startups-received-just-2-3-of-vc-funding-in-2020
[3] https://www.bloomberg.com/news/articles/2022-01-11/women-founders-raised-just-2-of-venture-capital-money-last-year
[4] https://www.bizjournals.com/bizwomen/news/latest-news/2020/03/women-entrepreneurs-making-progress-but-gender.html?page=all
[5] https://www.cnbc.com/2019/03/07/how-tory-burch-aims-to-empower-female-entrepreneurs-around-the-world.html
[6] https://fortune.com/longform/female-founders-startups-the-wing-away-outdoor-voices-ceos/
[7] https://www.nytimes.com/2018/03/16/health/women-leadership-workplace.html
[8] https://fs.blog/mental-model-availability-bias/
[9] https://seattlebusinessmag.com/workplace/large-us-companies-ceos-named-john-outnumber-total-number-woman-ceos
[10] https://news.crunchbase.com/news/here-are-the-new-2021-unicorn-startups-founded-by-women/
[11] https://fortune.com/longform/female-founders-startups-the-wing-away-outdoor-voices-ceos/
[12] https://www.shopify.com/blog/gender-bias-funding#:~:text=They%20employ%209.4%20million%20people,bias%20during%20the%20funding%20process.
[13] https://www.fastcompany.com/3027458/your-startup-is-more-likely-to-get-funding-if-youre-a-man
[14] https://www.forbes.com/sites/pragyaagarwaleurope/2018/10/23/not-very-likeable-here-is-how-bias-is-affecting-women-leaders/?sh=35d74985295f
[15] https://hbr.org/2017/06/male-and-female-entrepreneurs-get-asked-different-questions-by-vcs-and-it-affects-how-much-funding-they-get
[16] Thinking Fast and Slow
[17] https://hbr.org/2011/07/learning-optimism-with-the-24x.html
