By Abby Davidson and SangEun Kim, PhD

The past five years could be described as “when gender-lens investing became cool.” Countless new initiatives have been launched to reduce the $1.7 trillion investment gap for women-led MSMEs globally. However, most of these approaches aim to influence women business owners – such as increasing confidence and investment readiness – with fewer interventions to change investor behavior. 

The numbers put in evidence the level of gender bias among investors. In 2021, less than 15 percent of venture capital dollars went to companies with a woman on the founding team. Multiple studies have shown that equity investors favor men, even when presented with pitches from identical businesses run by women. Women also have a more challenging time securing loans, though whether lenders exhibit gender bias is less clear from the research.

Boosting the supply of finance for women

So, what can be done to boost the supply side of the financing equation for women-led businesses? To know the answer, we need to examine this question from many angles. Is the gender gap in financing observed in any entrepreneurial context, or does it differ depending on business stage, investment type, or macroeconomic conditions?

ANDE, USAID, and the International Growth Centre (IGC) recently co-hosted a webinar on two new studies funded by the Small and Growing Business (SGB) Evidence Fund that examine gender bias in financing and help close this knowledge gap.

You can watch the webinar here.

The authors of the first study, titled “Smarter Systems: How tweaking your diligence process can unlock overlooked opportunities,” partnered with startup accelerator and investor Village Capital to test a surprisingly simple approach to reducing gender bias in the investor due diligence process.

Prior research indicates that investors tend to ask men promotion-focused questions (e.g., how do you plan to acquire customers?) and  women prevention-focused questions (e.g., how many active users do you have?) In short, investors seek to gauge the potential of male-led businesses and the risks of women-led businesses.

To prompt investors to ask more balanced questions, the researchers ran an experiment testing two interventions. In the first one, investors were given a systematic evaluation framework with a balance of promotion and prevention questions. The second one included a set of periodic evaluations assessing each business’s progress in both growth and risk mitigation strategies.

These fairly simple interventions had surprisingly powerful results. The investors randomly assigned the systematic evaluation framework or periodic evaluations rated women entrepreneurs significantly higher than the investors not presented with these tools. The result was that women entrepreneurs were rated equally, and sometimes higher, than their male peers.

Measuring discrimination in business lending

In the second study—”Discrimination and Access to Capital: Experimental Evidence from Ethiopia,”— the authors collaborated with Ethiopia’s Entrepreneurship Development Institute (EDI) to conduct a business plan competition nationwide. To serve as judges, they enlisted loan officers from different financial institutions.

The researchers conducted a study using authentic business plans but with randomized gender on the applications. They aimed to test if gender bias existed in the judges’ scores. Surprisingly, the study found no evidence of gender bias in the investment recommendations made by loan officers.

This outcome was unexpected, as in Ethiopia, men typically have a higher chance of securing loans – and in larger amounts – compared to women.

What does this mean for the SGB sector?

What can these two studies, with seemingly counterintuitive results, tell us about reducing gender bias in financing?

One potential explanation could be that investors exhibit more gender bias when they lack information, such as when evaluating new companies with little track record. Village Capital investors were scoring startups, while the Ethiopian loan officers were assessing existing companies seeking growth capital. It is also possible that gender bias diminishes when evaluating entrepreneurs on paper. The Ethiopia study used a business plan competition, while the Village Capital experiment was face-to-face.

Offering investors an equal amount and type of information about companies run by men and women is a promising and cost-effective avenue to leveling the playing field.

To learn more about these studies and other research supported by the SGB Evidence Fund, read our early insights brief or  visit our webpage 

The SGB Evidence Fund is a partnership between the Aspen Network of Development Entrepreneurs (ANDE) and the International Growth Centre that supports collaborations between researchers and practitioners to understand the most effective ways to support small and growing businesses (SGBs) and the economic and social impact of SGB growth. The fund is made possible by the generous support of the Argidius Foundation, the International Development Research Centre (IDRC), the American people through the United States Agency for International Development (USAID), and the Foreign, Commonwealth and Development Office (FCDO).