Diversity must not be sidelined in the distribution of the government’s £1bn start-up support package

Image courtesy of UK Black Tech (https://ukblacktech.com/stockphotos/)

Today, in response to the devastating economic impact of Covid-19, the UK tech community received the welcome news of the government’s new support package for start-ups, providing a £500m injection of capital (£250m in match funding) and £750m in grants which will be distributed by Innovate UK. Details here. At a time when there are so many urgent needs globally for funding it seems like yet more money for start-ups should be a low priority — however, it’s crucial to the future of the digital sector which (pre-Covid) was growing 5x faster than the rest of the economy. The Future Fund is a positive step by the Treasury and has happened thanks to excellent work from a number of people in the ecosystem who’ve helped make it happen — including Dom Hallas from Codec, John Spindler from Capital Enterprise, Brent Hoberman, Matt Clifford, Robin and Saul Klein amongst many others.

As many of us have pointed out today here, here and here, it is critical that investors, government and Innovate UK take steps to encourage diversity and inclusion when deploying this fund. We must ensure that the lack of diversity in funded start-ups isn’t simply exacerbated by this new injection of funding — where start-ups are separated into the ‘haves’ and the ‘have nots’ and the ‘have nots’ are overwhelmingly the ones founded or led by diverse founders.

The issue of a lack of diversity in the senior leadership teams of technology companies is well-documented and I won’t repeat it in detail here. Suffice to say that diverse founders are less likely to have raised at least £250k of funding already, less likely to have ‘warm introductions’ and therefore less likely to have access to this funding.

Constructive suggestions are much better than criticism. So in that spirit, below are some immediate suggestions for what the Treasury can do to ensure that this funding reaches diverse and underrepresented founders.

1. Ensure that any VC fund or angel syndicate taking advantage of the matched funding in these convertible loans signs the Investing in Women Code, otherwise they cannot access it.
2. Ensure that angel syndicates are included within the ‘eligible’ groups which founders can match these loans against as angel syndicates tend to fund more diverse businesses and more regional businesses.
3. Ensure that the convertible loan note instruments that can be matched by government are EIS / SEIS compatible (for example ASAs).

Longer term.

1. Set up a separate early-stage fund specifically for diverse founders which has different parameters than the Future Fund to make it more accessible.
2. Set up a specific Innovate UK grant scheme which is only available to diverse founders.
3. Make the minimum ‘funds raised’ requirement lower for diverse founders.

However — it’s not up to the government alone to address this issue. Angels and VCs must also be proactive about how they deploy this capital. Here are some suggestions for how:

1. Focus on the pipeline. Ensuring that your pipeline of opportunities is as diverse as possible is the biggest factor in determining whether you will invest in diverse founding teams. In 2017 a quarter of VC fund investment committees saw no female founders at all (BBB, Diversity VC, BVCA). If you don’t evaluate diverse founders, you give them no opportunities. Even if you don’t think a company is advanced enough or a close enough fit to your investment strategy, give them a chance to pitch you anyway. If you’re not already collecting and reporting data on the diversity of investments in your pipeline, you should be. If you are — please consider signing up to the Investing in Women Code which we’ve signed at Ada Ventures and we’re supporting through Diversity VC.
2. Remove the need for a ‘warm introduction’. A warm introduction is an introduction through someone in your existing network. Companies which have warm introductions are 13x more likely to get investments and female and diverse founders are less likely to have the networks to get them warm introductions. Instead of insisting on a warm introduction, allow any company to approach you for funding.
3. Build relationships with diverse angels and leaders in the ecosystem. It’s more important than ever that you have diverse networks to both source opportunities through but also help you diligence companies.
4. Publish your investment thesis and your assessment criteria. Diverse founders are more likely to be first time founders and may not have experience pitching VC funds before. Openly and transparently stating what you’re looking for puts them on more of a level playing field with founders who have been through the process before. Publishing your assessment criteria allows diverse founders to better prepare before they pitch you.
5. Don’t just revert to funding people you already know or have invested in before. The temptation in this high risk environment is to mitigate risk by funding founders who are already known to the fund, or repeat founders who the fund has invested in before.
6. Pay close attention to your biases. Take the free Harvard Implicit Bias test. By understanding your biases you can attempt to mitigate them.
7. Assess your reasons for declining investing in companies. Are they objective or subjective? Recently I heard of a VC fund passing on investing in a company because the female founder was ‘cold’ in her pitch to them over zoom. This is the kind of subjective criticism which is particularly dangerous for diverse founders and could mean the difference between that company getting funded and not.
8. Ensure you are seeing companies based outside London. 75% of funding goes to London based companies and the vast majority of Venture Capital offices are based there. Although all VC funds are working from home and investing over zoom, there’s still a regional funding gap with founders from outside London having fewer VC relationships.

Some of the companies that are funded as part of this support package will be the Monzo’s, Deliveroo’s and UI Path’s of the next 10 years. It would be a real missed opportunity if this funding went to companies which had the same diversity challenges as the generation of start-ups we have now. Let’s take these simple steps to ensure that doesn’t happen and that we build a more inclusive future for UK tech.

I’m working on making sure that these ideas get to the government as the details of the scheme are being finalised. If you have other ideas — please let me know on Twitter.