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Frontiers of Entrepreneurship Research
Volume 33 | Issue 8
CHAPTER VIII. WOMEN ENTREPRENEURSHIP
Article 1
6-8-2013
THE ROLE OF GENDER IN
ENTREPRENEUR-INVESTOR
RELATIONSHIPS: A SIGNALING THEORY
APPROACH
Gry A. Alsos
Bodø Graduate School of Business, [email protected]
Elisabet Ljunggren
Nordland Research Institute
Recommended Citation
Alsos, Gry A. and Ljunggren, Elisabet (2013) "THE ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS: A
SIGNALING THEORY APPROACH," Frontiers of Entrepreneurship Research: Vol. 33: Iss. 8, Article 1.
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Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS
WO M E N E N T R E P R E N E U R S H I P
THE ROLE OF GENDER IN ENTREPRENEUR-INVESTOR
RELATIONSHIPS: A SIGNALING THEORY APPROACH

Gry Agnete Alsos, Bodø Graduate School of Business, University of Nordland, Norway
Elisabet Ljunggren, Nordland Research Institute, Norway
Abstract
This study takes a gender perspective to analyze funding decisions made by a venture capital fund.
Prior research has indicated that there is gender skewness related to risk capital investments, and
that this skewness should be understood as a result of a combination of demand and supply side
issues. By applying a signaling theory approach, this study look at the interface between demand
and supply side to understand gender biases related to risk capital investments. To examine these
issues, the study uses decision documents from a regional investment fund in Norway. For the
purpose of this study, documents related to four investment cases are analyzed. We show that
gender play a role in the signals that is communicated in an investor-entrepreneur relationship
prior to funding, and that this may influence the investment decision.
Introduction
Most business ventures with high degree of innovation and high growth potential require
significant amounts of external funding to reach their potential. This risk capital is sought obtained
from informal and formal risk capital investors, such as business angles, seed capital funds or
venture capital (VC) funds. The Diana Project has demonstrated that risk capital investments are
highly gender skewed, and that women business owners seldom acquire sufficient funds to grow
their businesses extensively and hence reach their full potential (Brush, et al., 2006). It has been
suggested that this skewness in business financing result from the combination of women’s poorer
accumulation of social and human capital and stereotypical ascriptions (Carter & Marlow, 2007).
Consequently, women entrepreneurs may perceive lower initial legitimacy when approaching
VC funds, and will seek to overcome this disadvantage by communicating information about
attributes of their ventures which investors are assumed to value.
This study takes a signaling theory approach to investigate the way women and men present
their venture concepts when approaching investors, and the way these signals are interpreted by
the receiver. Signaling theory focuses on the credible communication of positive information to
convey positive organizational attributes in situations with asymmetric information (Spence,
2002), and has been applied in studies on entrepreneur-investor relationships (Busenitz, et al,
2005; Davila, et al 2003; Elitzur & Gavious, 2003). Entrepreneurs can communicate credible
signals regarding the prospects of the venture and their commitment in order to attract the
interest of venture capitalists and other potential investors (Busenitz, et al., 2005). For instance,
individual reputations of founders, based on previous performance (Ebbers & Wijnberg, 2012),
the entrepreneurs own investment (Prasad, et al., 2000), top management team legitimacy (Cohen
& Dean, 2005), social capital of founders (Khoury, et al, 2013), and engagement in trust-based
behaviors (Maxwell & Lévesque, 2011) can be important signals to investors.
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There are at least three ways in which signals between entrepreneurs and investors can
be gendered. First, as there may be differences in financial, human and social capital between
male and female entrepreneurs (Carter, et al, 2003), there may also be gender differences in the
information they can signal. Second, investors and investment funds are typically more familiar
with some industries and types of ventures than others, due to their experience background and
due to strategic investment choices (Greene, et al, 2001). As there are relatively large differences in
relation to the industries and venture types of male and female entrepreneurs (Elam, 2008), women
with ventures in feminine industries may have increased needs to find suitable and transferrable
signals that can be received and interpreted positively by investors. Third, as women have not
occupied entrepreneurial roles as frequently as men, signals of their legitimacy as entrepreneurs
are harder to communicate as gender will always be a part of this evaluation (Murphy, et al., 2007).
Consequently, women face stronger needs to signal their own and their venture’s legitimacy to
compensate for lower legitimacy related to being women.
This paper makes the following contributions to the literature. First, while previous research
has documented a gender gap when it comes to VC funding (Greene, et al., 2001), this paper
takes steps to illuminate some of the mechanisms through which this gender gap occurs by
focusing on the process leading to investment decisions. Second, by taking a gender perspective
to signaling theory, this paper puts focus on the gendered nature of the signaling process between
entrepreneurs and VCs, and identifies some of the different ways in which this process gendered.
Third, the study is based on unique archival data including information on the signal sent by
entrepreneurs as expressed in business plans and investment prospectuses, as well as information
about how these signals are perceived and interpreted as expressed in prepared documents for the
investment fund board. Utilizing these data this study is able to focus on gendered issues related
to the signaler and the receiver which influence the received signals and thereby the investment
decision. The following research questions are addressed:
1. How is gender embedded in the way entrepreneurs signal quality of their venture in
business plans and investment prospectuses presented for investors?
2. How is gender embedded in the way signals are perceived by the investor, and how does this
influence on investment decisions?
Theoretical Framework
Access to financial capital has been a core issue to researchers seeking to bring light to gendered
aspects of entrepreneurial activity (Marlow & Patton, 2005). While there is little evidence of
direct discrimination (Orser, et al, 2006; Verheul & Thurik, 2001), gender differences remain
in entrepreneurs’ access to financial capital (Alsos, et al, 2006; Carter, et al, 2007). Structural
dissimilarities between male- and female-owned businesses explain parts of, but not all gender
differences in funding profiles (Carter, et al., 2007). This illustrates the importance of analyzing
gender not as an isolated factor, but as embedded in structures and processes important to
financing new ventures. The Diana team raised our awareness of gendered issues related to
risk capital, demonstrating that the proportion of women receiving venture capital funding is
disproportionate to the number of women entrepreneurs (Brush, et al, 2002). External equity
capital seems to be even more gender skewed than other sources of finance (Orser, et al., 2006).
Thus, there seem to be both demand and supply side issues related to gender and venture capital.
Further, as access to funding by new and early stage ventures frequently follows a “pecking order”
where the entrepreneurs’ own resources provide the initial funding (Myers, 1984), gender based
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differences in access to venture capital may reflect differential access to financial capital at the
earlier stages in the funding pipeline (Harrison & Mason, 2007).
Greene et al. (2001) suggested that the lack of venture capital funding of women owned
businesses may result from structural barriers, barriers related to human capital as well as a
result of strategic choice. Structurally, the venture capital industry is male dominated both when
it comes to venture capitalists and to VC backed companies. Women do seldom have access to
the formal venture capital network, and women-owned businesses may be considered as less
relevant to venture capitalists due differences in industries and organization types, differences in
how ventures are presented, as well as due to stereotypical prescriptions. Human capital-wise, the
occupational segregation by industry and managerial level result in women having less of the types
of experiences which are highly valued by investors. Further, women may have fewer professional
role models, which make it more difficult to learn how to engage in equity financing practices.
When it comes to strategic choice, Greene et al. (2001) ask whether women more often choose
not to seek venture capital. On the one hand, women may choose to pursue debt financing rather
than equity to retain control over their business. On the other hand, women may choose not to
grow their businesses to the same extent as men, and therefore more seldom become relevant
to venture capitalists seeking fast growing ventures. So far, the literature on gender and equity
capital has looked at women as business owners (Becker-Blease & Sohl, 2007; Orser, et al., 2006)
or leaders (Brush, et al, 2006), and in a few cases, as investors (Harrison & Mason, 2007). These
have all given valuable insights into the gender issues of venture financing. However, as noted by
Carter, et al. (2007) when examining bank lending to entrepreneurs, gender can be embedded in
financer-entrepreneurs relationships in more complex ways as well. First, there are often teams
in growth ventures, and there may be mixed gender teams both within the venture and in the
venture capital fund. Second, gender is mutually intertwined with for instance human capital,
social capital, industry context, technology, and venture ideas. Accordingly, gender should not only
be isolated as a separate variable, but embedded in the relations in which entrepreneur operate.
Signaling Theory
Signaling theory has recently gained prominence in studies of investment decisions and
entrepreneur-investor relationships. In this context, the theory is fundamentally concerned
with reducing information asymmetry between entrepreneurs and investors through the use
of information signals. The management literature has particularly been concerned with how
information asymmetries about latent and unobservable quality can be resolved (Connelly, et al.,
2011). Entrepreneurs have access to extensive information regarding the venture, its economic
potential etc., which potential investors do not have access to (Leland & Pyle, 1977). This
information asymmetry leads to less than perfect information to potential investors (Downes &
Heinkel, 1982), which increase insecurity in decisions. Consequently, investors demand reliable
signals of venture quality to reduce insecurity in investment decision. However, information
asymmetry is not only a problem to investors. Entrepreneurs, who are not able to transfer viable
information to investors about their ventures to ensure legitimacy and potential earnings for
investors, will experience problems in receiving investor funding. It is therefore in the interest of
the entrepreneur to signal venture quality to increase the chance of being funded. Connelly, et al.
(2011) identifies four key constructs of signaling theory: signaler, receiver, signal, and feedback.
Signalers are insiders who have information that outsiders cannot directly access. In this context
they are entrepreneurs (Elitzur & Gavious, 2003) or managers of ventures seeking equity capital
(Lester, et al, 2006). Receivers are outsiders who lack information that they would like to achieve, in
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this context business angles (Prasad, et al., 2000), venture capitalists (Busenitz, et al., 2005; Mueller,
et al, 2012) or IPO investors (Cohen & Dean, 2005; Lester, et al., 2006) considering to invest in
the venture. Signals are the information sent from the signaler to the receiver to communicate
information which otherwise is unobservable for the receiver, in this case information about
venture quality. Signals may be strong or weak, more or less honest and reliable, and vary in their
correlation with unobservable quality (Connelly, et al., 2011). They may vary in terms of richness
and relevance (Busenitz, et al., 2005). While signals can be both negative and positive, intentional
and unintentional, signaling theory focuses mainly on actions taken by insiders to intentionally
communicate positive but imperceptible qualities of the venture in question (Connelly, et al.,
2011). Feedback is the response to the received signal given by the receiver back to the signaler
indicating the effectiveness of the signal. Hence, feedback can serve as the basis for signalers to
adjust or refine their signals, and re-signal them to investors.
Studies on information signals in entrepreneur-investor relationships have examined various
types of signals, see Table 1 for an overview. The effectiveness of signals depends on their
observability and how costly they are for the signaler. For instance, investors have been found to
not value weak signals, and to consider costly signals as more credible (Lee, 2001). However, the
extent to which signals are valued as intended by the signaler also depends on receiver attention,
interpretation and perception (Connelly, et al., 2011). Signaling can be used to compensate for
constraints in relation to obtaining investor capital. Hence, signals sent by entrepreneurs to
investors may differ depending on the spatial, cognitive or social proximity constraints experienced
by the entrepreneur in relation to investors (Mueller, et al., 2012). Entrepreneurs can deliberately
use signals of quality to overcome factors related to their ventures which they expect investors
to consider as disadvantages, such as legitimacy constraints related to women business owners
(Murphy, et al., 2007). Hence, there can be differences in the signals sent by male and female
entrepreneurs to attract interest from investors.
Gender, Venture Financing and Information Signaling – an Analytical Framework
Acknowledging the embeddedness of gender in entrepreneur-investor relationships, there are
several ways in which gender plays a role in this context. First, even though studies constantly have
found that there are more similarities than differences between male and female entrepreneurs
(Ahl, 2002; Brush, 1992), some studies have pointed to differences in human and social capital
as one explanation for the gender gap in venture financing (Carter, et al., 2003; Greene, et al.,
2001). Women have been found to have less of some types of experience such as entrepreneurial
experience or experience from business financing. Further, variations in social capital can impact
negatively on women’s entrepreneurship (Renzulli, Aldrich, & Moody, 2000). Further, investors
and venture capitalists are dominantly men (Brush, et al., 2002). Due to homophily, this may
cause women entrepreneurs to be less likely to include investors and venture capitalists in their
networks and less often engage in investor network activities (Becker-Blease & Sohl, 2007). Hence,
as signalers women and men may differ in the human and social capital they are able to signal as
well as in experience from signaling. Further, variations exist also in relation to financial capital.
Studies have found women entrepreneurs to establish firms with significantly less financial capital
compared to men (Shaw, Marlow, Lam, & Carter, 2009). As entrepreneurs’ own investment serve as
important signals to investors on entrepreneur commitment and venture quality (Leland & Pyle,
1977; Prasad, et al., 2000), this may have consequences for the evaluation of venture prospectuses
made by potential investors. Second, gender is not only related to the sex of the persons involved,
but is also embedded in structures and constructions of phenomena and practices. For instance,
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there are gender differences in industries of men and women-owned ventures (Elam, 2008). As
investors and investment funds are typically more familiar with some industries than others, due
to experience and to strategic investment choices, these structural differences imply that investors
have more knowledge about male dominated industries (Greene, et al., 2001) and are better to
judge credibility of signals related to ventures in these industries. Consequently, entrepreneurs
with ventures in feminine industries may have increased needs to find suitable and transferrable
signals. Further, stereotypical ascriptions may imply that women entrepreneurs are perceived as
having different goals, resources and behaviors from men, which investors may interpret as riskier
investments (Greene, et al., 2001). Consequently, women face stronger needs to signal their own
and their venture’s legitimacy to compensate for structural barriers and stereotypical ascriptions.
For the purpose of empirical analyses, we have developed an analytical framework as illustrated
in Figure 1. The framework includes the key elements of signaling; signaler, signal, receiver and
feedback (Connelly, et al., 2011), as well as the key categories of signals found in previous literature.
Following the argument above, gender is embedded in all these elements: Signalers may be male or
female entrepreneurs, or teams consisting of both males and females. As women has not occupied
entrepreneurial roles as frequently as men, signals of their legitimacy as entrepreneurs are harder
to communicate as gender will always be a part of this evaluation (Murphy, et al., 2007). Signals
may be gender connoted. Potential gender differences in human, social and financial capital may
play a role. To compensate for lower legitimacy, female entrepreneurs may send stronger and more
positive information signals by showing that they are socially linked with high-credibility others
which do not suffer from the same legitimacy constraints. Murphy et al. (2007) found that female
entrepreneurs who utilized expert capital relationships, i.e. contacts with experienced professionals,
to signal legitimacy where more likely to procure funding through formal channels such as banks
and venture capitalists. Moreover, Becker-Blease and Sohl (2007) argued that the gender gap in the
VC market could be partly explained by women business-owners’ lack of business angel involvement.
Having a business angel ‘on board’ may serve as a strong signal of venture quality and expected
returns on investment. Signals are only valuable in the way they are interpreted by the receiver.
Through experiences of the investor and stereotypical ascriptions, gender may influence on the way
receivers are interpreting signals. Finally, receivers may send countersignals. This feedback can give
entrepreneurs awareness of potential lack of legitimacy and allow them to adjust and refine their
signals to compensate for this. However, differences in experience among entrepreneurs and their
teams may influence on their ability to interpret this feedback and re-signal effectively.
Method
The Norwegian VC industry is growing, but still small in relation to GDP compared to many
other European countries (NVCA, 2011). According to the Norwegian private equity and venture
capital association’s annual report (NVCA, 2010) there were 105 funds and 51 investment trusts
in Norway in 2010. In addition there are approximately 4500 business angles (Menon, 2011). The
venture capital/private equity industry in Norway is, like in many other countries, highly gender
skewed at both support and demand sides (Ljunggren & Foss, 2012). Further, VC-funds are usually
aiming at male-dominated industries. The sector distribution of VCF portfolio companies in 2010
showed that ICT was the far largest group, followed by life science, petroleum and sustainable
energy (NVCA, 2011).
Data for this study consists of archival data from a small regional venture capital fund (VCF)
in Norway. This unique data set is the full archive from the fund, and includes business plans and
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investment prospectuses presented by entrepreneurs seeking funding, analyses and documents
presented for the VCF board, the VCF manager’s informal notes with background material, as well
as minutes from board meetings. The VCF is a private-public partnership with a capital base of
approx. 35 million NOK (€ 4 millions). The official purpose is “to make commercially motivated
investments and/or subordinated debt in the early stages of innovative companies in the region
based on the possibility of return” (VCF Articles, §3). It has no specific industry profile, and can
hence invest in all types of ventures except real estate. In total the VCF had considered 50 cases for
investment from its start-up (2005) and until we finished our data gathering (2012). These include
of all cases that have been in contact with the VCF and have been regarded as interesting enough
for the fund to do some evaluation of the case. The investment fund has an investment limit on
3 mill NOK (€ 380 000) for each case, and to hold a maximum of 30 % of the shares. The fund
has one employee, the VCF manager. During the time period of this study there have been two
different VCF managers. The first manager, a female, was active from start-up in 2005 and until
2008, the next manager, a male, from 2008 until 2013. The VCF had during the same period two
male trainees. The trainees were employed at separately time periods. The VCF board consists
of seven appointed members. They are appointed by the VCF’s regional stakeholders. The board
composition changed once during the period of our study.
Data was gathered by the two authors. The archival material with the all the case documents
were divided between them and each researcher made notes on one case at a time. To secure data
validity, field notes were compared after 1/3 of the data collection to secure that both researchers
focused on the same issues. The researchers made electronic notes on dates, relevant information
on the entrepreneurs, the businesses’ boards, the considerations of the amounts to be invested and
other judgments made by the investment fund manager. For the purpose of this paper four cases
(Table 2) are analyzed in detail by applying theoretical concepts from the literature (Eisenhardt
& Graebner, 2007) as represented in the analytical framework. We looked for expressions and
articulations that represented each of the signal categories both in the documents presented by the
entrepreneurs (business plans, investment prospectuses) and in the documents presented by the
VCF including interpretations of these signals (board documents, analyses, notes, minutes). The
four cases have all received funding from the VCF, they were all in the early phase of establishing
and it was possible to identify the individual entrepreneurs. Further, the four cases consist of two
cases with female and two cases with male entrepreneurs. The cases are made unrecognizable to
secure anonymity.
Analysis and Results
Table 3 summarizes results from the coding of the data. It shows the signals sent as presented
in business plans and financing prospectuses sorted along the signal categories presented in the
analytical framework. Further, it presents signals perceived and interpreted by the VCF as presented
in analyses, board documents, notes and minutes from board meetings. Finally, where applicable,
the VCF feedback in the form of countersignals is presented, together with the entrepreneurs’
response re-signaled to the VCF. In the following, we will discuss how gender is embedded in the
signals sent and received.
Gender Embedded in Signals Entrepreneurs Send
The first research question deals with how gender is embedded in the way entrepreneurs
signal quality of their venture. All entrepreneurs signal their own competence as relevant, and all
signal industry experience. The two female team cases also signal relevant education and relevant
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work experience from the public sector. Case D signals entrepreneurial experience. In all cases
the team, particularly the board, is used to signal competence. Both female team cases emphasize
the competence of their male chairman of the board, and focus upon relevant experience of
board members. The male team cases also emphasize competence their male chairman of the
board. Case D signals limitations in team competence (lack of international experience, lack of
heterogeneity) and signal aim to change board to address these limitations. Hence, the female and
the male cases take somewhat similar approaches to signaling related to entrepreneur and team.
As the entrepreneurs have different human and social capital, signals appear as different. Female
entrepreneurs compensate for lack of legitimacy as entrepreneurs (no entrepreneurial experience,
limited private sector experience/management experience) by specifically emphasizing relevance
of the experience they have, and by underlining board members with such experience, particularly
related to the male chairman of the board. Male entrepreneurs also focus upon competence of
board members. Case D seems to have the team with the strongest human and social capital, and
pinpoints weaknesses to increase credibility of signals and the legitimacy of their venture. Thereby
they also show that they ‘know what it takes’, and hence confirms the value of their experience.
All cases signal that other investors are interested in their ventures. Case C and D already have
other investors ‘on board’, which have invested in the venture and which have expressed interest
in increasing their investment through the new share issue. This increase credibility, compared to
the female Case A which signaled that they had interested investors who had not yet invested. This
compared to Case B who had only a small ownership post from another small investment fund. All
cases received countersignals from the VCF that they needed to get more equity in place. Case C
responded by approaching existing and potential new shareholders to increase equity capital. Case
D ran parallel processes with the VCF and a seed fund, and secured increased investments from
existing shareholders. Case A responded by securing investments from two informal investors, but
had to ask for more time to get the second investor in place. Case B chose a strategy of trying to
secure a public grant to cover the capital requirements, and used some time to secure the capital
needed to respond to the VCF conditions for investment. In these cases, the male entrepreneurial
teams had come longer in the process of securing investment capital when approaching the VCF
and seem to have clearer strategies on how to secure the funding required. However, also the
female case A were able to secure relatively large funding from investors and brought this in place
before further negotiations with the VCF.
When it comes to the characteristics of the venture, the two women-owned ventures are both
related to feminine industries (female work force, female customers), while the two men-owned
ventures are within the .com industries which are predominately male (but with a gender mix
among customers). As such, the signals of femininity is strengthened with the combination of
female entrepreneurs and a feminine industry in the two first cases, while the two latter signals
masculine cases in line with the gendered understanding of the ‘entrepreneur’. Case A and C are
directed towards the consumer market, case B towards public sector, while case D is a businessto-business concept. Case A and D both signal very clear – and ambitious – prognoses of future
sales, and a clear sales strategy to increase credibility of the venture. Case D clearly signals strong
international growth potential. Also Case B indicates ambitions by signaling the opportunities to
expand nationally. Case C appeals to societal needs of breaking a market monopoly and the value
of the product locally. Case B focus on the innovativeness of the product and how it will solve user
needs. None of the cases put any emphasis on strategic alliances or partners at this stage. However,
in the re-signaling, women entrepreneurs in our cases respond to perceived legitimacy constraints
by initiating activities to get partners in place, especially to help testing market interest.
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To sum up, we find that gender is embedded in signals sent in several ways. First, due to actual
differences in human and social capital, women and men in our cases chose different strategies in
presenting signals and compensating for limitations by focusing on other signal groups, especially
the team/board. Second, while the male entrepreneurs follow a homophily strategy by engaging
competent males who are similar to themselves as chairs of their boards, the women entrepreneurs
chooses a compensation strategy by engaging male chairs with experience and competence which
is complementary to their own competence. Third, gender is embedded in the characteristics of
the ventures. Women entrepreneurs start feminine ventures in feminine industries, while the men
in our cases are involved in the more masculine .com businesses. However, the gender role in
variations with relation to ambitions and signaling growth potential is more unclear. Fourth, the
two male cases seem to have come a bit further with business angles and other shareholders before
approaching the VCF, compared to the two female cases. This makes them look more ‘professional’
and gives a faster response to VCF countersignals with demand of more equity capital in the firms.
Taking the finding in table two into account it is possible that male entrepreneurs having a better
network towards investors, a shorter way to go, and this also indicate the gender embedded in the
VCF-industry.
Gender Embedded in Signals the VCF Interpret
The second research question deals with how gender is embedded in the way signals are
perceived by the investor, and hence in how they influence on investment decisions. Table 4
indicates that not all signals sent are picked up by the VCF, and that lack of signals also may
be interpreted as (negative) signals. This is for instance visible when it comes to human capital,
particularly related to entrepreneurial experience. In both the two female cases it is specifically
noted in decision documents that the entrepreneurs lack entrepreneurial experience. However,
in case C, where the male entrepreneurs do not have entrepreneurial experience either, this is not
commented upon. Instead the VCF documents focus upon the strong industry experience of the
entrepreneurs and that they are enthusiastic, but without mentioning that the technology is new
to the entrepreneurs. In case D, the entrepreneurial experience and track record of the male lead
entrepreneur is emphasized as a key argument for investment, hence gives strong legitimacy. His
track-record is mentioned several times in the documents. He is considered as serious, honest and
with staying power, based on his entrepreneurial experience.
Other types of experiences are also interpreted. In case A, the sales competence of one of the
female entrepreneurs is valued – she is described as “a good sales person”, something which the
VCF board also has seen in practice when she presented the venture for them. Hence, it seems
that they can build legitimacy through these male chairmen. However, experience from public
sector, education, and experience from bank, is not emphasized as something particularly positive.
Similarly for case B, the entrepreneurs experience as nurses is mentioned, but not treated as
important. In both these cases, VCF documents highlight the chairman of the board as having
a “good reputation” or being “well known”. In case A it is specifically noted that there is limited
experience in the team (management and board). In a seemingly equal board in Case C, the board
is described as having complementary competences to the entrepreneurs. Here, it is specifically
noted that “the chair has start-up and funding experience”. In case D, where the entrepreneurs
have signaled lack of international experience in the board, the VCF rely upon this judgment and
point this constraint out. It seems to give them legitimacy that they have spotted this limitation
themselves. In case D the industry experience of the entrepreneur is experience from being a
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customer to this industry. This is not pointed put by the VCF. Instead it is regarded positive that he
understands the market and the customers well and that he has focus on market and sales.
The VCF is positive to the venture ideas in all four cases pinpointing that there is a growing
market in case A and D, and that there is a need for the product in case B and C. On the downside,
the strength of the competition is particularly emphasized in case A. A similar situation is related
to Case C interpreted as a need to break the market monopoly that exists locally. However, also
in this case, the VCF points to strong competition in the local market but regard it as positive
that they work with a clear market strategy. It is further held against this case that the sales
development has not been according to plan. Case D is interpreted as a venture which represents
something new and has high growth potential; global market, market growth, exit options and the
fact that the entrepreneur has ideas for further development contributes to this judgment. The
board document further state “This is probably the most interesting business case in the region
at the moment”. The VCF has noted that the entrepreneur has mentioned IPO as an exit option.
Case D already has investors in place, and is in dialogue with a seed fund and increased
investments from business angles. This is considered as positive by the VCF. Also case C has
investors already involved in the venture, though in much smaller scale. Also in this case this
increases legitimacy as the VCF judge it as likely that the entrepreneurs are able to raise more
capital. The two female cases have come shorter when it comes to investors, something which in
case A seems to increase the insecurity for the VCF. After showing that they are able to raise investor
capital (re-signaling), this is regarded as positive. In case B the VCF seems to have no belief in the
ability of the entrepreneurs to raise investor capital, so they do not demand it. Instead they accept
that the entrepreneurs plan to build the business step by step and accept public grants as a way to
raise capital, i.e. without new owners on board. The cases give indications that pre-understandings
of what can be expected from women entrepreneurs in female industries as compared to male
.com entrepreneurs, influence on the expectations the VCF have to the venture and, hence, to what
they demand from the entrepreneurs. As mentioned, no of the cases emphasize alliances in their
signals, and this is not focused by the VCF initially. However, when both women-led cases re-signal
initiating new alliances after the feedback, this is interpreted positively by the VC. Hence it seems
that signals on alliances can increase legitimacy and signal quality of female business cases.
To sum up, gender is embedded in the way signals are interpreted by the VCF. First, as there
are some differences in signals sent, e.g. related to human and social capital, the emphasis put on
board members, the ambitions of the venture and the involvement of investors, the cases are also
evaluated differently. The VCF consider signals that are sent by entrepreneurs. Related to this is the
fact that the women entrepreneurs have no track record and are not previously known by the VCF
manager or board. They are hence evaluated by the signals they sent. While the male entrepreneurs
were (more or less) previously known, and hence are also evaluated by other knowledge the VCF
has about them. Second, the findings indicate some differences in how similar characteristics
are interpreted dependent on gender, particularly related to human capital of the entrepreneur,
and compensatory human and social capital for board members. Third, gendered expectations
related to the entrepreneurs influence on the demands put forward and hence on the judgments.
The women entrepreneurs seem to be less aggressively evaluated and face less strong demands, as
demands are adjusted to what the VCF think they can achieve. This is especially apparent in case B.
Being evaluated less aggressively has the advantage of less strong demands, but does also mean that
their signals are taken less seriously, as they do not fit to the understanding of ‘real’ entrepreneurs.
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Conclusions and Implications
This study has applied signaling theory on gender related investment decisions made by a
small venture capital fund. The paper set out to shed light on how gender is embedded in the way
entrepreneurs signal quality of their venture in the written material they present for investors, and
how gender is embedded in the way signals are perceived by the investor. The findings indicates
that gender plays a role in venture capital funding both related to how entrepreneurs signal quality
and legitimacy of their ventures and in how the receiver is interpreting these signals. The results
thus shed light on some of the issues that can help explain the gender gap in venture financing.
Taking a gender perspective to signaling theory prove to be a promising theoretical approach.
When the investment fund evaluates the cases it highlights the entrepreneurs/teams’ human
capital. Gendered judgments of the entrepreneurs’ experience which might be explained by
valuing men and women differently. We find that the women entrepreneurs send stronger signals
of their human and social capital to be viable as entrepreneurs, for instance by strongly signaling
human and social capital of the ‘extended team’, i.e. including board members. Especially the
chair of the board is considered important, and it seems to be sought for a good and trustworthy
man in this position as men with a good reputation bring human capital and legitimacy to the
venture. Further, when a venture has other investors ‘on board’ it increases legitimacy as others
has judged the case and found it investable. The decision made of other investor confirms or
strengthen the human and social capital valuation made by the investment fund. These findings
indicate that gender plays a role, not only as differences between male and female entrepreneurs,
but, more importantly, as embedded in venture types, human and social capital, investor and
partner relations, etc. When women entrepreneurs present ventures in feminine industries in ways
expected from the stereotypical ascriptions of women entrepreneurs, the interpretation of feminine
ventures are strengthened. However, when women entrepreneurs compensate by signaling more
‘masculine’ elements such as growth ambitions, or by including competent men in their teams,
this influences interpretations, and seem to strengthen their legitimacy. Women seem to be able
to partly overcome legitimacy issues by signaling this way. However, in the cases we analyzed, they
still appeared as female cases in VCF evaluations.
One important limitation with this study is that it is based on one investment fund and four
cases. Hence, future studies are needed to validate the findings from this study. Further, different
types of entrepreneur-investor relationship in different context should be studied. Despite its
limitations, this study has implications for researchers wanting to understand how gender is
embedded in entrepreneurship and how this affects the behavior and results of decisions making,
as demonstrated here in the decisions made by a VCF. Specifically, the study contributes to the
knowledge on gender and risk capital, including how the gender gap in risk capital investments
persists to exist. The paper contributes to signaling theory and show how entrepreneurs’ signals and
receivers interpretation of these are gender embedded. This should be taken into account in future
studies. Implications for investors are found in the need to become aware of the embeddedness
of gender in their decisions to avoid losing good business cases. They do also need to market the
VCF to a broader group of entrepreneurs, i.e. also women entrepreneurs, and be aware that they
risk throwing away good cases due to stereotypical ascriptions in interpretations of signals. When
analyzing the cases it seems like recruiting cases is dependent on the network of the investment
fund and that this in itself inhibit a wider range of cases to choose among.
CONTACT: Gry Agnete Alsos; [email protected]; (T): +4775517651; Nordland University, 8049
Norway.
Posted Bodø,
at Digital
Knowledge at Babson
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Figure 1 Analytical framework (developed from Connelly et al., 2011)
Table 1 Categories of signals sent between entrepreneur and potential investors
Type of signal
Entrepreneur
- Human and social capital
- Reputation and previous performance
- Trust-building behavior
- Displayed passion
- Entrepreneurs’ own investment
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
Investors
- investors equity ownership
Studies
Kotha & George, 2012; Mueller et al, 2012
Ebbers & Wijnberg, 2012
Maxwell & Lévesque, 2011
Cardon et al, 2009
Leland & Pyle, 1977; Prasad, et al., 2000; Bruton et al., 2009
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 and Boivie, 2004; Daily et al, 2005
Zhang & Wiersema, 2009
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
- investors experience and reputation
- private equity placements
- publicly backed equity finance
Venture
- products/services characteristics
- name
- size and age
- firm growth
- patented IP
- trading volume
- (expected) returns
- corporate governance characteristics
Alliances and partners
- strategic alliances
- endorsement relationships
Mueller et al, 2012
Lee, 2001
Daily et al, 2005
Davila et al, 2003
Mueller et al, 2012
Lee, 2001
Lee, 2001; Daily et al, 2005
Sanders & Boivie, 2004
Gulati & Higgins, 2003; Park & Mezias, 2005; Khoury, et al., 2013
Gulati & Higgins, 2003; Higgins & Gulati, 2006; Khoury, et al., 2013
Table 2 Description of the four cases
Entrepreneurial
team
Business idea
Business
start-up
Venture stage
Case A
Two females
Health farm
2007
Not yet sale or production
Case B
Two females
Health equipment
2009
Developing product and test sales
Case C
Two males
Web site
2008
Has customers, at an early stage
Case D
One male
On-line service
2005
Developing technical solutions
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Table 3 Key elements of signaling in the four cases
SIGNALER
SIGNALS SENT
SIGNALS INTERPRETED
FEEDBACK
Case A: Health farm
Two female
entrepreneurs
Entrepreneurs
Industry experience
Relevant education
Management experience
Sales experience
Entrepreneur
No entrepr. experience
Good sales person
Management experience
Public sector experience
Countersignal
Informal investors a condition –
each need to invest as much as VCF
Entrepreneurs should reduce
ownership to less than 50%
Team/board
2 external board members:
- Male chair experience from
oil and gas industry
- Female auditor and manager
of accounting firm
Team/board
Limited experience in
management and board
The chair has a good
reputation – “good man”
Investors
Initial contact and interest
from two informal investors:
- male entrepren. (property)
- female entrepren. (retail)
Minor public grant
Investors
Male investor owns premises
–vested interest
Female investor is entrepr.
and married to a doctor
Minor public grant
Re-signaling
Positive market response
before opening
Possibly increased grand from
governmental support agency
New female investor replaces
the previous suggested
Two investors increase amount
invested, equal to VCF
Entrepreneur ownership down to
55% but will be reduced to 46%
by selling shares to employees
Venture
Unique concept targeting
growing high end segment
Specified compet. advant.
Specified sales goals
Venture
Strong competition locally
Good strategy
Acceptable risk
Partners/alliances
Agreement with property
investor about premises
Partners/alliances
Landlord also (potential) investor
Case B: Health equipment producer
Two female
entrepreneurs
Entrepreneurs
Relevant education
Long industry experience
Explicit user knowledge
Unique network
Experienced nurses
No entrepr. experience
Good industry network
Team/board
3 external board members:
- Male chair, lawyer
- Male member, consultant
- Male member, physician
Team/board
The chair is well known
Investors
Small post from private
investment fund in place
Minor public grant
Applied for start-up grant
Investors
More financial capital needed
– grant and/or equity
Venture
Innovative design, IPR
under consideration
Venture
Potential growth company
High risk – early stage
Partners/alliances
In business incubator
Partners/alliances
(not considered)
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Countersignal
Increased equity condition
for investment – more
private equity needed
Stockholder agreement has
to secure the entrepreneurs
engagement and some ownership
Re-signaling
Initial contact made with
possible marketing alliance
Will seek to increase
financial capital
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SIGNALER
SIGNALS SENT
SIGNALS INTERPRETED
FEEDBACK
Case C: Web site
Two male
entrepreneurs
Entrepreneurs
Industry experience,
product knowledge
Entrepreneurs
Know the trade
Enthusiastic
Countersignal
CVF invest under condition
of more external capital
Team/board
Male chair (business consultant)
Female business angle
Two males and the entrepreneurs
Team/board
Chair has start-up and
funding experience
Board and management have
complementary competencies
No external board members
Re-signaling
Secure more external capital
through new and existing investors,
including family and friends
Investors
9 investors, small shares
Venture
Local market need
Attractive for advertisers
Increasing no. of visitors
Breaking monopoly
Partners/alliances
None
Investors
Positive to have investors on
board but not emphasized in
relation to e.g. competence
Venture
Local market
Strong need locally
Strong competition on
advertising income
Product welcomed in market
Case D: On-line servic
One male
entrepreneur
Entrepreneur
Portfolio entrepreneur
Has extensive network
Knows the industry
Team/board
Male chair, investor
Three males (owners)
Emphasize competence and seek
competent board. Seek new,
critical, bright and international
experienced board members
to increase heterogeneity
Investors:
4 investors ‘on board’
2 new investors with good
track record have shown
interest in new replacement
Venture
Interesting market segment
Innovative business model and
with little used market strategy
Growing market
Large international potential
Entrepreneur
The entrepreneur is trustworthy,
has a good track record. Well
known and media profile. Knows
the industry from the customer
side. Market oriented, but lack
international experience. Have ideas
for further development of venture
Is a stayer, serious and honest
“Success of venture will depend
on lead entrepreneur”
Team/board
Partners and board members
have primarily contributed with
financial capital. Need board
member/manager with experience
from international business.
Countersignal
Board needs to be supplemented
with competence in international
sales and marketing, on-line sales
and should also establish contacts
to industrial actors in the market.
New owners/more equity
capital needed.
Lead entrepreneur need to
focus on this venture
Re-signaling
More equity capital in place,
owners increased their capital
and seed fund invested
Venture
Probably one of the best cases
in the region now. Extremely
interesting case. Global market,
large market opportunities and
market growth. Exit options
present. IPO is a valid option
Partners/alliances
None
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