Investors must avoid tokenism to improve VC diversity

VC diversity

Entrepreneurship thrives in the UK, thanks in large part to the crucial role played by venture capital investment. Our VC market is the largest in Europe, bigger than France and Germany combined.

It delivers essential funding for high-growth potential businesses in software, fintech, the life sciences, deep tech and other R&D-intensive sectors.

Equity-backed businesses in the UK directly support 2.2m jobs and generate 11% of gross domestic product

However, when you look into the detail of these investments one troubling fact emerges: you are far more likely to attract funding if you look and sound like me.

Women, people from ethnic minorities, and those from lower socio-economic backgrounds are significantly less likely to receive VC investment.

Recent research from the British Business Bank reveals the share of total equity investment for all-female founder teams has remained stubbornly stagnant at just 2% for more than a decade.

A useful indicator of the strength of the investment pipeline is first-time equity deals, with all-female teams receiving just 13% and all-ethnic minority teams receiving just 10% of these in 2022.

Systemic change needed to unlock potential

Raising venture capital is always challenging for entrepreneurs but for people from underserved communities, the barriers can be far higher. That must change.

Systemic reform to break down structural barriers within our industry is needed to unlock the full potential of talented UK entrepreneurs, wherever and whoever they are.

Our report, “Finding What Works: Pathways to Improve Diversity in Venture Capital Investment”, suggests three clear, actionable and evidence-based pathways for UK funds to improve diversity.

It is based on the experiences of 40 VC investors and 124 venture-backed and ready businesses.

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.

We found the lack of investment in diverse founders is a reflection of low diversity within VC firms themselves.

Increasing diversity at the top can lead to better investment decisions, free from biases that may be typical for a single homogeneous group.

It will also create a culture of inclusion for VC staff at all levels and make it easier to relate to and communicate with diverse founding teams.

Fostering inclusion in the investment pipeline

When it comes to searching for investment opportunities, 65% of VC firms said they do not change their approach when seeking to identify underrepresented founders.

However, entrepreneurs from underrepresented communities rarely have the kind of networks that come with an elite university education.

More proactive activities such as attendance at accelerators, especially outside of the South East, is an efficient way to identify high-potential business propositions from underserved groups.

Networking within office hours, rather than evening events, to account for founders with childcare or other care commitments is another effective way of delivering a more diverse pipeline.

Embracing transparency and accountability

Entrepreneurs from underserved communities rarely have the kind of contacts that can help them navigate the investment landscape.

VC firms should work harder to provide constructive feedback on the quality of proposals and the reasons behind investment decisions.

The industry should also be ‘loud and open’ about the challenges it faces, making itself accountable for delivering positive, measurable change.

They should embrace industry-wide surveys to provide better quality data for analysis, ensuring clear communication of their investment strategies and commitments to diversity.

Effective change, not tokenism

Interviews with VCs warned the sector to ‘avoid tokenism’ by making a commitment to meaningful action when trying to deliver diversity.

As the largest domestic investor in venture capital the British Business Bank takes its role in encouraging diversity very seriously.

Unlocking growth by ensuring entrepreneurs can access the finance they need regardless of where and who they are is one of the British Business Bank’s key objectives.

We are a founding signatory of the Investing in Women Code and we encourage others in the industry to do the same.

The lack of diversity in VC investment represents a missed opportunity for the UK, leaving significant untapped talent and economic growth potential.

VC firms now have a blueprint to deliver effective change, not tokenism.

Louis Taylor is the CEO of the British Business Bank.