The British Business Bank’s new report, Finding What Works: Pathways to Improve Diversity in Venture Capital Investment, is a comprehensive assessment of actions that venture capital investors can take to reach a more diverse group of entrepreneurs with their investments. By surveying venture capital-ready and venture capital-backed entrepreneurs, interviewing a breadth of venture capital firms, and analysing UK investment data, we have identified three clear, actionable, and evidence-based pathways for UK funds to improve diversity in venture capital investment.
The British Business Bank is the UK’s economic development bank. Our mission is to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by supporting access to finance for smaller businesses. The British Business Bank delivers a range of both debt and equity programmes, ensuring that small businesses can access finance that is right for their needs at the right time.
Snapshot summary
- Venture capital plays a critical role shaping the innovation economy of today and the future.
- However, there are large demographic groups that receive a starkly low share of venture capital investment, including women, people from Ethnic Minority backgrounds, and those from lower socio-economic backgrounds.
- This significant underinvestment in a broad, diverse community of founders represents huge untapped talent and economic growth potential.
- There is strong appetite in the venture capital industry to drive this change, but a limited evidence base on what is truly effective to improve diversity and inclusion in venture capital investment.
- This research has found three pathways for enhancing diversity in venture capital investment: promoting diversity at the top, fostering inclusion in the investment pipeline, and embracing transparency and accountability.
- These pathways are not mutually exclusive: a range of approaches can be effective in improving investment diversity but meaningful action, and avoiding tokenism, is critical to success.
Understanding the landscape
Venture capital investment plays a critical role in starting and scaling innovative companies that shape the economy of today and the future. Despite some progress, diversity in venture capital investment remains extremely low. While the share of equity deals made to all-female teams increased from 5% in 2011 to 9% in 2022, their share of total equity investment remains at just 2% and hasn’t improved over the period.
Women, people from Ethnic Minority backgrounds, and those from lower socio-economic backgrounds (proxied by education in this report) are significantly less likely to receive venture capital investment compared to their male or White counterparts, or those who went to ‘elite’ universities.
However, there are some nascent signs of progress. An increasing proportion of first-time deals are going to all-female teams and all-Ethnic Minority teams, providing a useful indicator of the strength of the investment pipeline. To continue and accelerate this positive trajectory, and to unlock the potential of all talented entrepreneurs, this research seeks to provide evidence on what works to improve diversity in venture capital investing, setting out pathways and actions that can be adopted by the UK venture capital industry and promoted by the British Business Bank.
13%
of first-time equity deals went to all-female teams in 2022 (6% of total investment value), while 72% of deals went to all-male teams
10%
of first-time equity deals went to all-Ethnic Minority teams in 2022 (19% of total investment value), while 74% of deals went to all-White teams.
Over 40%
of total venture capital invested at seed stage between 2009-2019 went to founding teams with an elite education.
0.24%
of venture capital funding between 2009-2019 went to Black founders.
Share of first time deals by gender of founding team, 2013-2022
Source: SQW analysis of Beauhurst data
Share of first-time deals by ethnicity of founding team, 2013-2022
Source: SQW analysis of Beauhurst data
Pathway 1
Diversity at the Top
These firms focus on increasing diversity among key decision makers, particularly the Investment Committee. A broader range of views ‘at the top’ can result in a larger number of investments into underserved founders.
Pathway 2
Inclusion in the pipeline
These firms place a greater emphasis on increasing the pipeline of investment opportunities from underserved founders. They actively seek out diverse founding teams in various ways, for example, engaging scouts with their own diverse networks to source investment opportunities, and using incubators and accelerators for earlier stage firms.
Pathway 3
Transparency and Accountability
These firms subscribe to the notion that ‘what gets measured gets done’. They view accountability for measuring and delivering progress as essential, supported by strong emphasis on external communication, genuine commitment, and active participation in industry-wide data collection.
Key Findings
Overall, the evidence from this research reveals a range of actions which can be effective if implemented with genuine commitment and meaningful action.
By interviewing venture capital firms with a strong track record, or clear commitment to, improving diversity in their portfolios, and entrepreneurs who have sought or secured venture capital investment, this research harnesses the evidence of real-life experience. Our analysis revealed three sets of common views on the effectiveness of actions to reach entrepreneurs from underserved communities. This suggests that, when it comes to stimulating a more diverse community of venture capital-backed entrepreneurs, there are at least three different ‘pathways’ to success that venture capital firms have taken. These firms were some of the highest ranked in the industry in terms of investment into underserved founders and commitment to diversity.
These pathways are not mutually exclusive. The evidence base from this research shows that a range of approaches can be effective in improving investment diversity but meaningful action, and avoiding tokenism, is critical to success.
Recommendations for venture capital firms, entrepreneurs, and impact measurement
1
Venture capital firms should consider the pathways set out in the report, and choose an approach that works for them
2
Venture capital firms should commit to their approach over a sustained period, and track and monitor progress
3
Entrepreneurs should look for venture capital firms to back their companies that have an investment thesis that matches their business
4
Entrepreneurs should actively seek feedback and further referrals
5
Further evaluation of actions should be undertaken to assess whether they are more/less effective for different groups of entrepreneurs and venture capital firms
6
Actions should be more rigorously evaluated to formally assess their impact on diversity outcomes and to understand barriers to actions
How the British Business Bank is taking action
As the largest domestic investor in UK venture and venture growth capital, the British Business Bank is committed to unlocking potential by ensuring equity in opportunities and support for all talented entrepreneurs and would-be entrepreneurs across the UK. We do this through through the investments we make, through our own internal practices, and through our capacity to shape the attitudes and actions of the wider market. The Bank is committed to a range of actions in line with the findings of this report to help achieve this:
- Sharing the report findings with industry and the wider ecosystem: The Bank will engage with the venture capital industry to disseminate the findings of this report and support our partners and funds across the UK to adopt the right approach to diversity and inclusion for them.
- Further research focused on tracking actions through the Investing in Women Code: The British Business Bank delivers the venture capital arm of the Investing in Women Code, through which signatories make annual data returns on their investments disaggregated by gender and a description of the actions being taken to improve diversity of investment. Actions can now be tracked in line with the recommendations in this report to assess their ongoing impact.
- Transparency on diversity in our investment portfolio: We have begun asking finance providers we work with to report on the diversity of their organisation and their funding recipients and applicants. We ask potential recipients of Bank funding to demonstrate diversity at all levels of their business as part of our investment processes, and view organisations with a clear commitment to diversity and inclusion more favourably in our investment decision making.
- Diversity among our senior leaders: The British Business Bank is a signatory to the Women in Finance Charter and has targets to achieve and maintain 50% gender diversity among senior leaders. We are committed to bringing in new targets on ethnic diversity.
- Diversity in our investment teams: We have launched an internal programme on inclusive leadership to support the progression of colleagues across the business, and recently updated our Diversity, Equity, and Inclusion Policy to strengthen our commitment to internal best practice.
- Internal accountability: We recently revised our corporate performance framework around four strategic objectives, one of which is “unlocking potential in the UK economy by supporting entrepreneurs to access the finance they need, no matter who or where they are”.
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