Two-sided Discrimination in an Entrepreneurial Financing Setting: Experimental and Theoretical Evidence

Abstract

Women's participation rate in the high-growth entrepreneurship has been consistently lower than in other high-skilled jobs for previous decades. This paper aims to explain this unique persistent gender gap in both the US venture capital industry and the US entrepreneurial activities from the point of view of gender discrimination on both sides of a two-sided matching market (i.e., the US entrepreneurial financing market). We invite real US startup founders to evaluate multiple randomly generated venture capitalists' and angel investors' profiles. Despite knowing all investor profiles are hypothetical, startup founders are willing to provide truthful evaluations to receive a data-driven investor recommendation list. This experiment provides the following findings. (i) Male entrepreneurs have implicit gender discrimination against female investors, who are perceived as lower quality and with fewer investment intentions. However, gender discrimination does not exist among female entrepreneurs. (ii) Implicit gender discrimination mainly exists among attractive investors and senior investors, suggesting the existence of a glass ceiling for women in the financial industry. (iii) The magnitude of implicit gender discrimination is stronger when startup founders' internal thresholds are higher, and investors need to compete for great deals. Together with Zhang(2020), this paper completes an experimental system that identifies gender discrimination on both the investor side and startup side in the US entrepreneurial finance system. Built on this experimental evidences, we provide a theoretical framework to explain several novel findings in recent experiments and how this two-sided gender discrimination can lead to a long-lasting low participation rate for women in the US entrepreneurial community.

Keywords: Venture Capital, Entrepreneurship, Matching, Discrimination, Field Experiments

JEL Classification: C78, C93, D83, G40, G24, J15, J16, J71