Women have a proven track record of business acumen. A recent study of 22,000 publicly traded companies, for example, showed that an increase of female leadership from 0 percent to 30 percent is associated with a 15 percent spike in profitability. Additionally, female tech entrepreneurs generate a 35 percent higher return on investment than their male counterparts, on average. So why is it that between 2011 and 2013, companies led by female CEOs received 34 times less venture capital than those with male CEOs?
Perhaps, as Jonah Sachs argues in the new book Unsafe Thinking: How To Be Nimble and Bold When You Need It Most, the availability heuristic is to blame.
The availability heuristic is a mental shortcut in which people use immediate examples when making an evaluation. People see lottery wins or murders or shark attacks on the news, for example, and start believing the odds of those events happening to them are far greater than they actually are. (British psychologist Dr. Jeremy Dean proposes changing the motto for the UK's lottery from "It could be you" to "It could be you, but it almost certainly won't be.")
So how does this heuristic affect the world of venture capital? In an excerpt of Unsafe Thinking published by Fast Company, Sachs cites the research of Wharton's Laura Huang and her research team, who studied the business decisions made by five investment firms over the course of two years. These researchers realized investors made their decisions based both on data—e.g. the financials the entrepreneurs provided—and intuition—e.g. the investors' perception of the entrepreneur. And when the investors' data and the intuition didn't align, "intuition trumped any business data they had," as Huang wrote.
Because 9 out of 10 partners in venture firms are male, it's likely a female entrepreneur will have to present her case to a room full of men. And if a male investor in that room is relying on his intuition, he might conclude this woman "doesn't, on the surface, look like, act like, or speak like the previous male entrepreneurs he's invested in," as Sachs writes. At that point, the availability heuristic might take over, and because this female entrepreneur doesn't "match" the entrepreneurs with whom the investor has worked, his intuition might lead him to pass on the opportunity. "While he thinks his gut is recognizing a pattern," Sachs writes, "it's over-relying on trivial or limited information."
Luckily, there are solutions. One female-led VC firm is investing a $36 million fund solely in female entrepreneurs, for example. But men can (and should) shoulder the burden of this change. Intuition is malleable, as Sachs points out, and we can hone our "gut instincts" by exposing ourselves to more data and better data. Male VCs can help close the gender capital gap by acquainting themselves with case studies of successful female entrepreneurs. And VC firms can do their part by bringing on more female decision-makers. "None of this will feel particularly safe," writes Sachs, "but sticking with the status quo is, as the data proves, far more dangerous."