Biases and their impact on venture-investing-decisions

Modern theories increasingly investigate the question why people make irrational investment decisions and conclude that investment decisions are strongly influenced by psychological factors such as unconscious bias. Now, what kind of biases do we talk about when thinking about the startup scene? This question can best be answered when considering the male dominance in such an ecosystem. When female founders start to look for coaching and investments, they without a doubt enter a male industry. This includes that network events as well as pitches are tailored according to male needs and preferences. When thinking about all these, the unfairness towards female entrepreneurs is not the most important consequence. Being blind because of biases make investors choose consequently men startups and this in turn higher the risk that innovation consequently is made from the perspective of men while ignoring the women side. However, it is only fair to say, that in most of the cases biases are not happening willingly, but because most people are not aware of them. The key for reducing biases is recognizing that bias exists. In this sense, let us think about the fundamental question:

What are unconscious biases?

Biases exist because, we as human beings have limits in our information-processing. We use mental short-cuts in order to make a sense of the world as well as reaching decisions in a quicker way. In this sense, biases come into play when we are faced with gaps in our own personal experience. We prefer what is familiar and so we make prejudiced decisions while still consciously believing that prejudice is wrong. 

Types of unconscious bias and their effects on female founders

#1: Similarity bias

What you like is what you are. This is the similarity bias that is based on the “similar-to-me” phenomenon that includes people’s tendency for gravitating towards people who are the same. Theoretically, the perceived similarity causes interpersonal attraction which in turn has an impact on the evaluation of the other persons opinion and/or decision. Plus, people tend to place themselves into social categories like for example the category “gender”: Being a woman or a man (the categories) and the desire for having a positive self-identity causes him/her to have a preference for those who are a similar regarding its social category (e.g. male or female). Moreover, people have the desire to give themselves a social identity and wish to belong to a group as this leads to the positive feeling of this social identity. In turn, all these consequently lead to:

#2: Selective attention bias

When people pay attention to the things, ideas, and inputs to what they tend to gravitate, we can assume that the selective attention bias came into play. When thinking about female founders starting a business in a male-dominated scene, this unconscious selective attention bias naturally comes to mind. This could be one explanation for why male investors have a tendency to selectively invest more in a company founded by men than in one founded by women.

The negative consequences of the similarity- and the selective attention bias for female founders is that male investors – who by the way are in majority – tend to invest more easily in male than female entrepreneurs.

#3: Availability bias

Imagine you hear about a robbery that happened in your neighborhood a few days ago. Everywhere – at the supermarket, on the regional newspaper page, and even at your family dinner – you hear people talking about this robbery. Automatically, you start to feel scared and estimate the probability that someone might rob your house as very high. This is an example of the availability bias. A similar example can be made with entrepreneur role models: When you think of a successful entrepreneur, it is very likely that Steve Jobs, Mark Zuckerberg, or Jack Ma come to mind. This shows how predominant and “available” male entrepreneur role models are in our minds. Due to this availability bias, investors base their decisions on male rather than on female role models of entrepreneurship, and it tempts investors to look for entrepreneurs who most closely match their idea of entrepreneurs.

#4: Overconfidence bias

Studies have shown that men tend to overestimate, and women underestimate their skills, know-how and expertise. These blind spots on the side of male and female entrepreneurs in turn, sends wrong signals to investors. The lower self-perception compared to male role models make investors perceive women as being insecure – especially in highly competitive settings such as pitching formats. Overconfidence bias was also observed on the side of investors thinking that they have to reflect less critically on their decisions regarding to gender stereotypes and unconscious bias. That might bear risks like making the wrong venture-investing-decisions and miss promising opportunities.

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