THE ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS: A SIGNALING THEORY APPROACH

Transcription

1 Frontiers of Entrepreneurship Research Volume 33 Issue 8 CHAPTER VIII. WOMEN ENTREPRENEURSHIP Article THE ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS: A SIGNALING THEORY APPROACH Gry A. Alsos Bodø Graduate School of Business, gry.alsos@uin.no 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. Available at: This Paper is brought to you for free and open access by the Entrepreneurship at Babson at Digital Knowledge at Babson. It has been accepted for inclusion in Frontiers of Entrepreneurship Research by an authorized administrator of Digital Knowledge at Babson. For more information, please contact digitalknowledge@babson.edu.

2 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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. Frontiers of Entrepreneurship Research

3 Frontiers of Entrepreneurship Research, Vol. 33 [2013], Iss. 8, Art. 1 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2013 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 Posted at Digital Knowledge at Babson 2

4 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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 Frontiers of Entrepreneurship Research

5 Frontiers of Entrepreneurship Research, Vol. 33 [2013], Iss. 8, Art. 1 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2013 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, 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, Posted at Digital Knowledge at Babson 4

6 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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 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 Frontiers of Entrepreneurship Research

7 Frontiers of Entrepreneurship Research, Vol. 33 [2013], Iss. 8, Art. 1 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2013 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 ( ) 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 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 Posted at Digital Knowledge at Babson 6

8 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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. Frontiers of Entrepreneurship Research

9 Frontiers of Entrepreneurship Research, Vol. 33 [2013], Iss. 8, Art. 1 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2013 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 Posted at Digital Knowledge at Babson 8

10 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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. Frontiers of Entrepreneurship Research

11 Frontiers of Entrepreneurship Research, Vol. 33 [2013], Iss. 8, Art. 1 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2013 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; gry.alsos@uin.no; (T): ; Nordland University, 8049 Posted Bodø, at Digital Norway. Knowledge at Babson 10

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14 Alsos and Ljunggren: ROLE OF GENDER IN ENTREPRENEUR-INVESTOR RELATIONSHIPS WOMEN ENTREPRENEURSHIP 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 - investors experience and reputation - private equity placements - publicly backed equity finance - 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 Table 2 Description of the four cases 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 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 Entrepreneurial team Business idea Business start-up 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 Frontiers of Entrepreneurship Research