Despite some progress, a recent report from the British Business Bank reveals that diversity in venture capital investment remains extremely low. The report, titled Finding What Works: Pathways to Improve Diversity in Venture Capital Investment, highlights the lack of improvement in the share of venture capital investment to female founder teams over the past decade. The research found that while 27% of investment deals went to teams with at least one female founder, all-female teams accounted for only 9% of deals in 2022 and received a mere 2% of funding, reflecting no improvement since 2011.
In an effort to address this issue and promote diversity in venture capital investment, the British Business Bank has identified three pathways for UK funds to improve diversity. These pathways are based on the experiences of 40 VC investors and 124 venture-backed businesses. The report recommends that firms consider these pathways, make a commitment to consistent action, and track and monitor progress. Participating in initiatives such as the Investing in Women Code is also advised as a means to take action with support from others in the industry on a similar journey.
The first pathway identified is promoting diversity at the top. The lack of diversity within venture capital portfolios is a reflection of the low diversity within venture capital 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.
The second pathway focuses on fostering inclusion in the investment pipeline. The report reveals that many venture capital firms do not approach their search for investment opportunities any differently when seeking to identify underrepresented founders. Actively identifying diverse founding teams and providing them with opportunities to secure funding can lead to a more diverse investment pipeline. Networking within office hours and attendance at accelerators are cited as effective ways to increase diversity.
The third pathway emphasizes embracing transparency and accountability. Increased transparency and accountability among venture capital firms is crucial to delivering change and enhancing diversity in investment. The industry needs to be open about the challenges it faces, communicate its investment strategies and commitments to diversity, and actively participate in industry-wide surveys to provide better quality data for analysis.
Venture capital investment plays a critical role in starting and scaling innovative companies in the UK, contributing significantly to the country’s economy. According to the report, equity-backed businesses directly supported 2.2 million jobs and generated 11% of gross domestic product. However, the report’s findings suggest that there is untapped talent and economic growth potential due to the scale of under-investment. It is therefore crucial to ensure that investment reaches a diverse group of entrepreneurs.
The British Business Bank’s report serves as a call to action for the industry to address the lack of diversity in venture capital investment. By implementing the recommended pathways and committing to consistent action, the industry can work towards unlocking the full potential of talented UK entrepreneurs from all backgrounds. With systemic change and increased diversity, the UK’s venture capital landscape can become more inclusive and foster innovation on a larger scale.
