The present study has applied signaling theory on investment decisions made by a small investment fund. The paper set out to reveal how gender is embedded in how entrepreneurs signal venture quality in the written material they present to investors and in what way gender is embedded in how signals are perceived by investors. The findings indicate that gender influences venture capital funding both related to how entrepreneurs signal venture quality and legitimacy and in how the fund (receiver) interprets those signals. The results show that gender plays a role, not only as differences between male and female entrepreneurs, but more importantly, in the interaction between entrepreneurs and investors where venture types, human and social capital, investor and partner relations, etc. are constructed as gendered. From the analyses, we have identified at least three ways in which signals between entrepreneurs and investors are gender embedded.
First, differences in financial, human and social capital between male and female entrepreneurs, give gender differences in the information they can signal. Such differences can be ascribed to gender divisions in education and work experience, and have previously been advanced as a factor leading to gender differences related to venture capital (Carter et al., 2003). This study shows that women seek to compensate for their lack of the most valued types of human and social capital by
following at least two strategies. They signal the value of other types of human and social capital, such as the relevance of the experience they have, and they involve men who hold valued competencies as board members and, particularly, as board chairs (cf. Murphy et al., 2007). The male entrepreneurs seem to have a lesser need to use such compensatory signaling strategies. This is in line with Eddlestone et al.'s (2014, p. 18) findings that “…the gender of the sender plays an important role in determining how signals of entrepreneurial viability and commitment are compensated by capital providers,” and further that men and women's signals of the quality of their ventures are rewarded differently (op cit).
Second, investors and investment funds are more familiar with some industries and types of ventures, due to their experience and strategic investment choices (Greene et al., 2001; Nelson et al., 2009). Since there are relatively large differences in relation to the industries and venture types pursued by male and female entrepreneurs (Elam, 2008), women with ventures in feminine industries (in terms of employees, customers and products) may have an increased need to find suitable and transferrable signals that can be received and interpreted positively by investors. In this study, one example was how industry experience in the “feminine” spa and fitness industry was less valued as a signal than industry experience from the more masculine petroleum industry, despite that the new venture idea was a fitness and spa center. Hence, in line with status expectations state theory, this can be interpreted as the (masculine) competence from the petroleum industry has higher status expectations than the (feminine) competence related to the spa and fitness industry, and that gender is a marker of social status in entrepreneur-financer relationships (Saparito, et al. 2013).
Third, stereotypical ascriptions of women and men influence interpretations of signals. As entrepreneurship remains a masculine domain, women must communicate their legitimacy more strongly to overcome the inherent gender bias in the interpretation of signals. The entrepreneur’s gender and the gendered image of entrepreneurship seem to be part of the evaluation. This finding is in line with gender role congruity theory, explaining how gender stereotypes lead to different standards applied for women and men (cf. Eddlestone et al., 2014). Also, Saparito et al. (2013:854), in their study of bank-firm relationships, claim that “gender as a marker of social status should be considered as a distinct factor influencing” this relationship and that this has consequences for resource acquisition. In the cases presented here, we found that similar lack of experience, such as entrepreneurial experience, was interpreted differently for male and female entrepreneurs.
Correspondingly, a similar signaling of experience was interpreted as a positive signal in one of the male cases but was not valued in one of the female cases. Further, the female entrepreneurs were described very differently from the ‘typical’ entrepreneur, particularly in one case. This is in line with Nelson et al.'s (2009:64) findings that VCs employ a gendered mental model “… in so far as it constructs a hierarchy of order along lines of gender, including notions of venture potential and venture success…”. Consequently, women may have a stronger need to signal their own and their ventures’ legitimacy to compensate for their lower perceived legitimacy related to being a woman. When women entrepreneurs compensate by signaling more ‘masculine’ elements such as growth ambitions or by including competent men on their teams (Murphy et al., 2007), this influences interpretations and seems to strengthen their legitimacy. Further, receivers ascribe meanings to groups of signals, i.e. different signals are aggregated and jointly interpreted (Connelly et al., 2011). Gender is also embedded in the aggregation of signals, in which gendered
attributes are ‘added’ to other attributes, leading to different interpretations of, e.g., industry experience.
The results provide insights into the entrepreneur-investor relationship related to new business ventures and show that this relationship is gendered. Access to unique archival data, including information not only on the signals that entrepreneurs send, but also on how an investment fund interprets these signals, has proven valuable to gain insights into gendered aspects of the investment process. However, the study also has limitations, of which we highlight two. First, the data represent one small investment fund in Norway, and the available number of cases were limited. Hence, further studies are needed to validate and nuance our findings and theoretical contributions. Moreover, different types of investors seek out different criteria (Mason & Stark, 2004), and the gendered nature of the processes may vary among different contexts. Thus, further research is needed to examine other types of investors and other contexts. Second, investment decisions are not solely based on written documents but also include oral discussions among the fund’s board members. Information on the oral communication would have been beneficial to gain even further depth in the analysis. Similarly, to have information on the oral feedback given to entrepreneurs in meetings with the fund would have enriched the data. Studies including observation of meetings and oral dialogues between entrepreneurs and potential investors are warranted.
Despite these limitations, the study has important implications. The findings show that to understand the gender gap in new venture financing, one needs to understand how gender is embedded in the signaling taking place in entrepreneur-investor relationships. This study shows
that the masculine norm of entrepreneurship influences investment decisions. Investors evaluate both male and female entrepreneurs in relation to characteristics more often held by men and neglect signals more often presented by women. Stereotypical gender ascriptions influence the interpretations of signals received, leading investment funds to interpret similar characteristics differently between male and female entrepreneurs. Although both demand- and supply-side issues are important, researchers should also examine the constructions of gender and entrepreneurship that occur in interactions between the demand and supply sides.
Moreover, the study informs signaling theory by showing how entrepreneurs’ signals and receivers' interpretations are embedded in gender. Signaling theory has not previously considered how gender influences the signaling process. The results of this study suggest that a gender perspective can improve our understanding of this process, not only in entrepreneur-investor relationships but probably also in other types of signaling processes. In a broader perspective, signaling theory seldom discusses the social construction of signals that are taking place in the signaling process, which also may be related to other areas than gender, such as ethnicity, or social class.
Implications for investors are that they need to be aware of the embeddedness of gender in the signaling process to improve their decision-making. Such awareness is needed to ensure that funds do not discard good cases due to stereotypical ascriptions in interpreting signals. Furthermore, awareness may also reduce the risk that a fund will develop overly positive evaluations of the signals sent by male entrepreneurs with masculine venture ideas. Entrepreneurs approaching investors need to consider the criteria valued by an investment fund. Women entrepreneurs may
need to be aware that they must signal their and their venture’s quality more strongly to be evaluated similarly to men. Using more masculine signals might be helpful.
* Acknowledgements
This research is partly funded by the Research Council of Norway, project number 180953. We are grateful for constructive comments from Roger Sørheim and two anonymous reviewers.
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Table 1 Categories of signals sent between entrepreneur and potential investors
Type of signal Studies
Entrepreneur
- Human and social capital
- Reputation and previous performance - Trust-building behavior
- Displayed passion
- Entrepreneurs’ own investment
Kotha & George (2012), Mueller et al. (2012) Ebbers & Wijnberg (2012)
Maxwell & Lévesque (2011) Cardon, Sudek, & Mitteness (2009)
Leland & Pyle (1977), Prasad et al. (2000), Bruton, et al. (2009) Team (management and board)
- Aggregated HC and SC
- Top management team legitimacy - Prestige
- Team experience
- Team/board heterogeneity and size - External board members
- CEO background
Certo (2003), Higgins & Gulati (2006), Mueller et al. (2012) Cohen & Dean (2005)
Lester et al. (2006), Certo (2003), Daily, et al. (2005) Lester et al. (2006)
Filatotchev & Bishop (2002), Daily et al. (2005), Zimmerman (2008) Sanders & Boivie (2004), Daily et al. (2005)
Zhang & Wiersema (2009) Investors
- Investors equity ownership
- Investors experience and reputation - Private equity placements
- Publicly backed equity finance
Elitzur & Gavious (2003), Sanders & Boivie (2004), Daily et al. (2005), Bruton et al. (2009)
Janney & Folta (2006)
Janney & Folta (2003), Janney & Folta (2006) Mueller et al. (2012)
Gulati & Higgins (2003), Park & Mezias (2005), Khoury et al. (2013) Gulati & Higgins (2003), Higgins & Gulati (2006), Khoury et al.
(2013)
Table 2 Key elements of signaling in the four cases
Signaler Signals sent Signals interpreted Feedback and re-signaling
Case A: Fitness 2 external board members:
- Male chair experienced in the oil and gas industry
- Female auditor and manager of accounting firm
Investors
Initial contact and interest from two informal investors:
reputation—“ is a good man”
Investors
Male investor owns premises—
vested interest
Female investor is entrepreneur and married to a physician Minor public grant ownership to less than 50%
Re-signaling 46% by selling shares to employees - Male member, physician Investors The chair is well known
Investors Will seek to increase financial capital
Signaler Signals sent Signals interpreted Feedback and re-signaling Chair has start-up and funding experience
Board and management have complementary competencies No external board members Investors
Positive to have investors on board but not emphasized in relation to e.g., competence
Well known and media profile.
Knows the industry.
Market oriented, lack international experience.
Have ideas for further development of venture Is a “stayer,” serious and honest Lead entrepreneur crucial for
marketing and online sales, and should establish contacts with industrial actors in the market.
New owners/more equity
New owners/more equity