Uncertain Science, Certain Bias - Decomposing Gender Homophily in VC Health Investment

Does gender bias distort venture capital allocation in health? This paper uses gender homophily— the propensity of general partners (GPs) to fund same-gender entrepreneurs—to isolate inefficient bias from rational selection. This paper does this in two steps. First, a differences-in-differences– style specification is used to exploit within-city, over-time shifts in the share of women GPs while holding pre-investment costs (geographic distance, specialization mismatch) constant. Second, a test of differences in IPO and M&A outcomes is used to assess whether gender-concordant investments systematically outperform non-concordant investments. If not, observed homophily reflects inefficient bias rather than productive synergy. While controlling for pre-investment costs, moving a city’s GP mix from all men to all women increases the share of women-founded enterprises in first-round deals by 11.6 percentage points (95%). Not only do concordant investments not yield higher rates of IPO or M&A, but non-concordant investments are 50% more likely to IPO – evidence that homophily is driven by inefficient bias. Men and women GPs are leaving money on the table. Finally, the homophily effect is sensitive to changes in asymmetric information pointing to stereotyping under uncertainty rather than taste- based discrimination as the source of inefficiency.

Work in progress