Table 5 summarises venture capital firms’ views of the most and least effective actions associated with Pathway 3: Transparency and Accountability.
Table 5
Actions perceived as effective and less effective for Pathway 3
Effective actions
Limited Partners and venture capital firms should design funds that are targeted specifically at diverse entrepreneurs
Limited Partners and venture capital firms should design funds that are targeted specifically at diverse entrepreneurs
Venture capital firms should participate in industry-wide surveys and make D&I data on their investments public
Less effective actions
Entrepreneurs should actively engage on social media to raise awareness of their business/proposition and connect with venture capital firms
Venture capital firms should provide constructive feedback on the quality of propositions and reasoning behind investment decisions
Note: Outlined boxes indicate the most and least effective actions for this pathway. Source SQW
Venture Capital firms aligned with Pathway 3: Transparency and Accountability suggest that the industry needs to be “loud and open” about its challenges. Making themselves accountable for delivering positive change is key but is only possible when the change is measurable. They see participation in industry-wide surveys as a crucial step to enable progress: it will provide better quality data for analysis and will make it impossible to “hide behind meaningless, tokenistic actions."
Venture capital firms aligned with Pathway 3: Transparency and Accountability reported that online communication of their commitment to diversity, and their ambitions to increase the proportion of deals with underserved entrepreneurs online, increased the flow of investment opportunities from those communities, allowing them to back a more diverse group of founding teams.
If people had to make their D&I data on their own investments public, I think you would see a lot more funds focused on it. I think that is because no one does the work to assess it on a fund-by-fund basis, people get away with not particularly worrying about it - Venture Capital Consultee
Venture capital firms that state their commitment to diversity on their website have higher investment in female founders, but no significant relationship was observed with investment in Ethnic Minority founders. These results are mixed but give some indication that external commitments have an impact. Also, around 30% of the top 50 venture capital firms on Beauhurst (by an index of the number and proportion of deals with founders from underserved communities) are Investing in Women Code signatories. Firms in this group were cautious about the value of providing feedback across a high volume of applications for funding. When the volume of applications allows it, the feedback should be (and often is) provided. However, in many cases, the flow of applications is too high for Investment Committees to be able to provide feedback on every application. Consultees did agree that venture capital firms should be conscious of any biases that may exist in provision of feedback, for example a tendency to provide more comprehensive feedback to applicants from a similar background.
We’ve got evidence from our own efforts on our website that the more open and transparent we are about who we invest in, the more we are able to target a more specific pool of candidates who come from all walks of life. - Venture Capital Consultee
In contrast to venture capital firms aligned with Pathway 1: Diversity at the Top, those aligned with Pathway 3: Transparency and Accountability, see designing targeted funds as an effective short-term action for achieving the desired results. Consultees suggested that such funds create clear incentives for investing into businesses with diverse founding teams, and may even increase focus on long-term potential rather than shorter-term high returns. Firms viewed dedicated funds as a catalyst for change, driving accountability for results faster than other actions, ultimately stimulating a diverse venture capital market without the need for such interventions.
- A - Invest in female founders
- B - No investment in female founders
- A - Invest in Ethnic Minority founders
- B - No investment in Ethnic Minority founders
- A - Invest in female founders
- B - No investment in female founders
Case Study: Pathway 3:
Transparency and Accountability: Eka Ventures
Overview of the firm
Eka Ventures invests in early-stage companies building a more healthy, sustainable and inclusive economy. Investment is typically between £0.5m and £3m. To date, Eka Ventures has delivered one (£68m) fund, which began investing in September 2020 and closed in April 2021. Eka Ventures is a British Business Bank delivery partner and a signatory of the Investing in Women Code.
Why is Transparency and Accountability important?
Eka Ventures has a strong ethical ethos and having good Environmental, Social and Governance (ESG) goals is considered to be a priority for the firm. As part of this, it is important that the fund invests in founders from all backgrounds. This is for two reasons: 1) it is ‘the right thing to do’ from an equality and inclusion perspective; 2) it is likely to have positive, wider effects on the levels of diversity within venture capital more broadly.
How has Transparency and Accountability been achieved?
Eka Ventures has developed annual and (based on this) quarterly goals for the proportion of investments in female founders and founders from ethnically diverse backgrounds. The goals are developed at the start of the year and are based on the diversity of the entrepreneur population, industry benchmarks, and the firms’ previous annual performance against goals. Progress against quarterly goals is reviewed by the firm on a weekly basis, as part of a team meeting. The gender diversity of the pipeline is also tracked as part of the weekly meeting to forecast progress against goals. Pipeline tracking includes regularly reviewing the number of engagements with female founders, through to the number of pitch decks received, and the proportion of female founders that successfully receive investment. Only gender diversity is tracked in the pipeline as this information is easily collected at the start of engagement with founders/companies and is not too onerous to complete. As the company progresses through investment stages, more detailed questions are asked of founders. For example, as part of the investment due diligence process, founders are asked to complete a questionnaire (including their ethnicity) and personality assessment, which aims to capture cognitive diversity.
If you don’t know what your baseline is, it’s hard to know whether any changes are actually making a difference
The main challenges Eka Ventures has experienced in achieving its diversity goals include recording the characteristics of founders early in the deal pipeline, and ensuring there are sufficient diversity of founders coming through the pipeline. The firm welcomes propositions from founders from all backgrounds, including mainstream backgrounds, and investment decisions are ultimately based on robust decisionmaking and due diligence processes. However, the firm aims to achieve diversity among its portfolio by ensuring a good proportion of propositions are received from underserved founders.
In terms of capturing and reporting diversity metrics, Eka Ventures emphasises the importance of capturing the percentage of founder shares held by a founder from an underserved background, rather than firms with at least one founder from an underserved background, as this ensures that the reported figures include underserved founders that have ownership in the company.
What are the benefits of Transparency and Accountability to diversity?
Eka Ventures has achieved diversity among its portfolio:
- 30% of investments are to Ethnic Minority founders;
- 17% of investments are to female founders
It was considered that this is due (at least in part) to setting and reporting against quarterly, internal goals. While the fund has always had a focus on diversity, the proportion of the firm’s investments to underserved founders has increased over time. For example, in December 2021 (approximately one year into the fund), 21% and 14% of investments were to Ethnic Minority and female founders respectively.
Following its investment, the firm supports companies and encourages them to recruit diverse teams as they grow. This process, along with the firm’s investment, is expected to support increased diversity in the broader venture capital market.
What are the key tips to achieving to diversity?
Three key factors are highlighted as important in securing to diversity:
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Company buy-in:
Ensure all employees are aware of and/or have responsibility for achieving diversity goals. This can be facilitated through regular team/ company discussions on progress.
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Data collection and systems:
Ensure firms have the relevant processes and systems in place to capture and record diversity data. This is important in order to track progress internally.
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Goals not targets:
Create diversity aims for teams to work towards, but recognise that, for myriad reasons, it is not always possible to achieve. This will ensure that, while diversity is considered in investment decisions, those decisions are ultimately based on the commercial viability of propositions.