Three ways in which CFOs can drive digital transformation
How CFOs can lead digital transformation by focusing investments, aligning strategy with execution, and embracing agile planning to drive resilience and growth....
Strategy
The cost of venture capitalism’s inherent gender (and other) biases
Recent research has revealed how deeply held assumptions about what a successful founder looks like can lead to the misallocation of capital, with clear financial consequences.
Rapid read:
- Venture capital systematically misallocates capital by relying on intuitive but weak signals, such as gender stereotypes, elite education, and fashionable sectors, rather than evidence of what actually predicts breakout performance.
- Empirical data reveals clear performance blind spots. Mixed‑gender founding teams generate higher returns per dollar invested yet remain underfunded.
- The barrier is organizational, not informational. The data is available, but VC firms struggle to override entrenched beliefs, creating an opportunity for investors willing to adopt disciplined, evidence‑based decision‑making.
In 2002, American Major League Baseball team the Oakland Athletics were competing against opponents who could outspend them three to one. They had no way of competing for talent with the top teams. So, their general manager, Billy Beane, stopped trying.
Instead, as chronicled in Michael Lewis’s Moneyball: The Art of Winning an Unfair Game (2003), Beane asked a more fundamental question: what factors predict winning in baseball? The answer turned out to be different from what baseball scouts believed.
Baseball scouts were evaluating players using visible, intuitive signals like athletic build and physical appearance, pitching speed and the look of their swing. The problem is that these signals felt meaningful but were often poor predictors of actual performance. Scouts were essentially fooled by aesthetics.
Statistical analysis revealed that they undervalued metrics like a batter’s ability to get on base (their on-base percentage), which were far better predictors of scoring runs and winning games. Because scouts ignored these metrics, players with high on-base percentages but “unimpressive” aesthetics or appearances were being sold cheaply on the market. Oakland saw what others couldn’t and acted on it.
Beane proved that a disciplined buyer who understands the true drivers of outcomes can exploit mispricing to outperform far better-resourced competitors. Decades of social psychology research have established how easily even experts can be swayed by false heuristics, stereotypes, and confirmation biases.
Venture capital today faces a strikingly similar condition: the market is inefficient; the heuristics are entrenched and the mispricings are measurable. The institutional resistance to correcting them requires investors to override deeply held assumptions about what a successful founder looks like.
A recent study reveals VC bias towards women-led ventures
To make the Moneyball case for venture capital, you need two things: evidence that evaluators hold biased beliefs, and evidence that those beliefs produce measurable financial consequences. Recent research provides both.
In a study published in Venture Capital, Koch, Berger and Kuckertz surveyed 361 international venture capitalists (VCs) using a sensitive questioning technique called the Crosswise Model. This matters methodologically because it guarantees respondent anonymity and circumvents social desirability bias – the tendency of people to tell researchers what sounds respectable rather than what they actually think. The results are stark.
Among the 361 VCs surveyed:
- 9% believe that women’s participation in founding teams is overrated.
- 3% consider women to be poor entrepreneurs.
- 9% admit they would not invest in women-led ventures.
These biases are not uniformly distributed. They are most pronounced among male investors, seed-stage funders, and corporate VCs. Male VCs reported a 30.0% prevalence of devaluing women’s participation, versus 16.2% for female VCs. Seed-stage investors – precisely where the most consequential and information-poor decisions are made – showed the highest bias at 35.9%.
The declining prevalence across the three statements (from bias through prejudice to discrimination) is itself analytically interesting. It suggests that many VCs hold biased beliefs, but that only some manage not to act on them, which echoes the Moneyball dynamic in which scouts could see the data, but most could not override their instincts. Koch and her colleagues’ study should be regarded as providing conservative estimates: even with anonymity protections, some social desirability effects likely persist.
Our findings reveal a clear blind spot in the way capital is allocated.
Our own research reveals the financial consequences of investor bias
If Koch’s work provides the mechanism – documented bias in investor cognition – our own research considers the consequences: measurable financial mispricing in the market for startup capital.
We analyzed 22,345 startups from Crunchbase, including 165 unicorns, using regression analysis and cross-categorical comparison. We classified founding teams into three categories: male-led, female-led, and mixed-led (the latter defined as teams with an equal number of male and female founders). The dependent variable was the total funding raised. We also examined post-money valuations and constructed a proxy return-on-investment measure by dividing valuation by total funding.
Our findings reveal a clear blind spot in the way capital is allocated. They deserve to be set out in detail.
The current investment rate of 81.6% indicates that mixed-gender teams are not valued at their true worth, despite consistently outperforming single-gender teams.
Mixed-gender teams outperform single-gender teams
The headline result is that mixed-gender founding teams – those with a balanced 50/50 split of male and female founders – outperform single-gender teams on a valuation-to-funding ratio, our proxy for return on investment.
The median proxy ROI for mixed-led teams is 5.244, compared with 5.001 for male-led and 5.000 for female-led teams. That 4.87% premium may seem modest, but in a high-stakes environment, small margins are economically meaningful.
The valuation data reinforces this. Mixed-led ventures reach a median post-money valuation of $170m, compared with $100m for male-led and approximately $19m for female-led ventures. Yet they receive only a median of $2m in funding – less than male-led ventures at $2.4m, though far more than female-led ventures at $600,000.
The investment rate for mixed-led teams is the highest of the three groups: 81.6%, versus 80.1% for male-led and 77.4% for female-led. This suggests the market sees these teams and funds them at comparable rates (frequency-wise and in proportion). It is also important to remember the absolute values – only 816 companies in our dataset were mixed-led, compared with 18,480 male-led and 3,049 female-led ventures.
Crucially, the allocation is not proportional to performance. Given their superior ROI, the mixed-led investment rate should be around 84% (considering the 4.87% premium discussed earlier). The current investment rate of 81.6% indicates that mixed-gender teams are not valued at their true worth, despite consistently outperforming single-gender teams.
Investors misread educational credentials as a linear signal of entrepreneurial capability and reward a proxy that does not predict exceptional outcomes.
Investors over-reward education
Our regression shows that each step up in educational attainment adds approximately 21.7% to funding. Yet when we focused exclusively on unicorn founders, the pattern reversed: unicorn founders predominantly hold undergraduate degrees, not doctorates. This suggests that investors misread educational credentials as a linear signal of entrepreneurial capability and reward a proxy that does not predict exceptional outcomes.
Research-based sectors attract disproportionate funding
Research-based startups (AI, biotech, pharmaceuticals) represent 6.2% of our overall population but receive a significant funding premium: our regression estimates a 70% increase associated with being in a research-based field. However, only 3.7% of unicorns are research-based – nearly half the overall proportion. The most-funded sector (Software & IT) is not the sector that produces the most unicorns (Finance & Security). This suggests that investor capital is swept along by crowd signals rather than tracking the sectors where breakout performance actually occurs.
‘Genius investors’ are not trailblazers
We define a “genius investor” as one who has participated in two or more unicorn funding rounds. Their involvement is associated with a dramatic increase in both funding (a 3,334% premium) and median post-money valuation ($1bn for genius-backed ventures versus $10m for non-genius-backed companies). But genius investors invest on average 9.3 years later than typical investors. Strikingly, no genius investor in our dataset participated in a funding round within the first three years of a company’s existence. This raises important questions about whether the most celebrated investors are identifying exceptional companies or riding the momentum of companies that have already proven themselves.
Non-unicorns have a median time-to-first-funding of one year; unicorns have a median of six to seven years.
Patient bootstrapping predicts unicorn status
Contrary to the prevailing assumption that exceptional ventures attract capital quickly, we find that a longer lag between founding and first funding is positively correlated with both higher subsequent funding and higher post-money valuation. Non-unicorns have a median time-to-first-funding of one year; unicorns have a median of six to seven years. This suggests that companies that bootstrap, build a solid base, and develop resilience may ultimately outperform those that scale rapidly on external capital – an insight with direct implications for how investors time their entry.
At the unicorn level, female-led and mixed-led investor teams disappear entirely
Perhaps the most striking structural finding is that at the unicorn level in our database, there are no female-led or mixed-led investor teams at all. The investors that have previously funded a unicorn are 100% male-led, and of the capital they have allocated, 91.3% goes to male-led ventures. The pipeline that produces the most celebrated outcomes in venture capital is, at the top, entirely homogeneous.
This is not an evidence problem, but an institutional one
The underlying problem we highlight for venture capitalists is not the absence of evidence. It is the institutional difficulty of acting on evidence that contradicts entrenched assumptions. This is a leadership challenge as much as an analytical one.
Our findings on mixed-gender teams are the clearest illustration. The data says these teams produce higher median valuations per dollar invested. The data also says the market underweights them. The data further says that the investors at the top of the food chain – those funding unicorns – are 100% male-led.
Koch’s study clarifies the mechanism: implicit biases among VCs shape how they evaluate founding teams, and these biases are strongest at the earliest and most influential stage of investment, seed-stage funding.
Billy Beane’s baseball story is remembered as a triumph of data over intuition. But the data was available. The real challenge was convincing his own scouts and his own organization to act on what the data showed.
Venture capital’s version of that story is still being written. The evidence from Koch’s study combined with our findings suggests that the spreadsheet is ready. The question is whether the institution is.
Authors
Related
Are you scaling, or just burning cash?
Are you scaling or just burning cash? Learn how to validate demand, use data, forecast growth, and focus your strategy to build a sustainable, profitable business....
IMD AI Safety Clock moves closer to midnight
IMD’s AI Safety Clock shows tension between rapidly expanding artificial intelligence capabilities and lack of meaningful oversight, raising risk. ...
Why women’s leadership matters in the age of AI
AI may become one of the most significant leadership opportunities for women in decades. Its impact will depend on how capability, governance, and leadership are built around it....
Learn Brain Circuits
Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on - they only take five minutes.
Explore Leadership
What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Join Membership
Log in here to join in the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.