Investors usually pride themselves on utilizing data to make the best decisions. But according to a 2014 survey, that isn’t the case. The study of more than 1000 executives found that they relied mostly on gut instinct than data. This misled instinct is costing investors a fortune, as profitable women-led companies are overlooked.
In the 2014 study, Wharton’s Laura Huang and her research team watched executives from five investment firms over a two year period. Investors consciously used data and perception to make decisions. Data included information like financial information and business strategies. Perception, on the other hand, was based on how the executive felt about the entrepreneur. She found that these executives overwhelmingly relied on their intuition and emotions when making decisions.
Data 2011 to 2013 reports that companies led by a woman received $1.5 billion in venture capital, while companies led by a man received a shocking 34 times that amount. But research shows time and again that women-led ventures tend to more profitable. On average, female entrepreneurs in technology fields offered a 35% higher return on investment than male entrepreneurs. Another study found that an increase of women in leadership positions from 0-30% was associated with 15% profitability increase.
Data Vs. Bias
Just a century ago, it was unthinkable for a woman to heal others as a doctor, lead as a politician, or make decisions for a company. Times have changed and doors have opened for women in every field, but the long-held belief that women are less business savvy than men is influencing investors even today.
Even unconsciously, men know that women are unfamiliar in a venture firm and startup environment. His gut instinct tells him that a woman entrepreneur is unfamiliar in the environment and his brain interprets that as she is unlikely to succeed no matter what data she can provide that says otherwise.
While male investors are passing on investment opportunity because of gut instinct biases, they are missing out on quality investments. But research says that these biases can be overcome when one makes a conscious effort to expose themselves to accurate data. Investors can spend more time with successful female entrepreneurs and businesswomen so their brain can establish that women can be effective business leaders.
It may not be easy to overcome biases that have held for centuries, but it can be highly profitable as the data shows. Women-led companies are bringing in cash for those who can overlook the status quo.