No improvement in the share of venture capital investment to female founder teams
Recent research from the British Business Bank found there has been no improvement in the value of investment deals to all-female founder teams over the past decade. While the Small Business Equity Tracker 2023 found that 27% of deals went to teams with at least one female founder, the highest proportion ever, all-female teams accounted for 9% of deals in 2022 but only received 2% of funding, which reflects no improvement since 2011.
A new report published today, Finding What Works: Pathways to Improve Diversity in Venture Capital Investment, reveals that despite some progress, diversity in venture capital investment remains extremely low and identifies pathways to enhance diversity in venture capital. Women, people from Ethnic Minorities, and those from lower socio-economic backgrounds (proxied by education) are significantly less likely to receive venture capital investment compared to their male or White counterparts, or those that went to ‘elite’[i] universities.
However, there are some signs of progress in improving the diversity of investment deals. The report reveals that 13% of first-time equity deals, a useful indicator of the strength of the investment pipeline, went to all-female teams in 2022 and 10% to all-Ethnic Minority teams. All-Ethnic Minority teams also received 19% of first-time investment. Further, founding teams with at least one ethnic minority founder made up 42% of investment value of first-time deals in 2022, up from 14% in 2013.
Louis Taylor, CEO, British Business Bank, said: “The journey of raising venture capital can be challenging – but for underserved entrepreneurs, the barriers can be far higher and this needs to change. Our Finding What Works: Pathways to Improve Diversity in Venture Capital Investment report provides clear, actionable, and evidence-based pathways for UK funds to improve diversity in investment, which I hope will stimulate both discussion and action to improve outcomes for diverse entrepreneurs and the wider UK economy. Together, we can create the systemic change needed to unlock the full potential of talented UK entrepreneurs, wherever or whoever they are.”
To continue and accelerate this positive trajectory, and to reduce barriers to investment faced by diverse teams, the British Business Bank has identified three clear, actionable and evidence-based pathways for UK funds to improve diversity in venture capital investment, based on the experiences of 40 VC investors and 124 venture-backed and ready businesses. This research brings together evidence for the first time on effective ways to improve the industry’s track record on investing in a diverse group of entrepreneurs.
The British Business Bank recommends firms consider the pathways set out in this report, make a commitment to consistent action over a sustained period, and to track and monitor progress. Joining initiatives such as the Investing in Women Code is a further means to take action with support from others in the industry on a similar journey.
Promoting diversity at the top
Just 3% of those in senior investment and non-investment roles are women from an Ethnic Minority background, with no senior Black women identified in a BVCA UK survey.
The first pathway identifies that the lack of diversity within venture capital portfolios in terms of characteristics of founders is a reflection of low diversity within venture capital firms themselves. Findings from the survey suggest that increasing diversity at the top can lead to better investment decisions, free from biases that may be typical for a single homogeneous group. Implementing such changes can lead to development of a culture of inclusion both for diverse founding teams, who will find it easier to communicate with people they can relate to, and for venture capital staff at all levels.
Fostering inclusion in the investment pipeline
The survey revealed that 65% of venture capital firms admitted they do not approach their search for investment opportunities any differently when they seek to identify underrepresented founders.
Focus on a variety of ways to actively identify diverse founding teams, giving them a chance to secure funding, will lead to a more diverse investment pipeline. Networking within office hours is described as an effective way of increasing diversity, with some consideration for hours to accommodate family care being important, in contrast to more typical evening networking events. Attendance at accelerators is also considered an efficient way to identify high-potential business propositions from underserved groups.
Embracing transparency and accountability
Increased transparency and accountability among venture capital firms is key to delivering change and enhancing diversity in venture capital investment. Survey data of venture capital firms in the report finds that the industry needs to be ‘loud and open’ about the challenges, making themselves accountable for delivering positive, measurable change. This can be enacted by participating in industry-wide surveys to provide better quality data for analysis, ensuring clear communication of their investment strategies and commitments to diversity, and their ambitions to increase the proportion of deals with underserved entrepreneurs.
Venture Capital investment can play a critical role in starting and scaling innovative companies across the country that shape the future of the UK economy. According to the report, equity-backed[ii] businesses in the UK directly supported 2.2 million jobs and generated 11% of gross domestic product[iii]. The scale of under-investment identified in the report suggests the UK could have significant untapped talent and economic growth potential. To maximise its impact, it is crucial that this investment reaches a diverse group of entrepreneurs.
[i] Extend Ventures (2020). Elite Universities include Oxford, Cambridge, Harvard and Stanford.
[ii]Venture capital and private equity
[iii] Economic contribution of UK private equity and Venture Capital in 2023, British Private Equity & Venture Capital Association, April 2023