Ditching male, pale and stale: how bridging the diversity gap in VC funding lifts the bottom line
When I look around at the VC ecosystem in the UK, Europe and beyond, the almost universal lack of diversity, whether in gender, ethnicity or less visible areas, is glaring. There are a few, though, who are leading the way.
In this first of a three-part series, I propose that VCs can and should be tackling the diversity gap head-on, not just in fine words but in actions … and I show why. In parts 2 and 3, I’ll look at how.
In this first long-form piece, I’ll set out:
- The extent of the issue — and how it affects the bottom line
- The European picture — the VCs worth paying attention to in this area
- What more you can do as a VC
- Why you should be tracking data — no excuses
- Look at your own backyard
“There is clearly a drive from multiple angles for companies that have more of a purpose, and it is all converging towards doing business in a way that’s more impactful. As an investor, it’s not just something you do because it’s nice but because there is data showing that purpose-driven businesses and more diverse teams outperform. There is no trade off any more — ethical, responsible investment is a must and it also leads to the right impact.” — Catherine Dupéré, partner, Isomer Capital
Lucy Stonehill, co-founder and CEO of education startup BridgeU, founded the company when she was 25 and went on to swiftly raise $14m in venture capital. She is also, as she points out to me, “visibly, obviously female”. And, as such, she’s in a tiny minority of VC-funded founders.
The figures are staggering: women-led startups received just 2.3% of VC funding in 2020 (from an ‘all-time high’ of 2.8% in 2019) according to Crunchbase data. Svenia Busson recently noted that, in edtech, 3.8% of funding went to female founded startups while mixed teams got 15.6%.
“I’m a bit unusual, right? If you were to typecast the average founder, raising from a tier-one European VC, they typically wouldn’t be running an education technology business and it’s highly unlikely they’d be female or as young as I was,” says Lucy. “There is a small percentage of female founders within founding teams that have raised venture capital. There is an even tinier percentage of founder CEOs who are female — and the CEO is typically the capital raising member of a founding team.”
There is also a differential in the amount of funding. In 2021, according to Brighteye Venture’s European Edtech Funding Report 2022, the average European female founding team secured $1.8M in investment while the average male team raised $9.4M, and mixed founding teams achieved $8.3M on average.
The diversity gap is a wide one
The figures may be stark for the gender gap in VC funding but the diversity deficit also applies to other traditionally underrepresented groups.
While venture funding to Black startup entrepreneurs in the US remains “woefully small”, it is at least showing signs of improvement, hitting nearly $1.8 billion through the first half of 2021 — a more than fourfold increase compared to the same timeframe the previous year: in all of 2020, the total was only $1 billion, and the year before that it was only $1.4 billion. And that represents just 1% of US funding.
The UK situation is even more dismal. Between 2009 and 2019, just 0.24% of venture capital went to teams of Black entrepreneurs — 38 businesses in total. Out of those, only one Black female founder raised Series A or B funding across the 10-year period. In comparison, 194 white female entrepreneurs gained funding at Series A or B in the same period, 76% of investment went to teams of all white entrepreneurs and 23% went to mixed teams.
All-female teams with ethnically diverse memberships have fared particularly badly. In 2021 they had 158% more meetings than in 2020 — and 57% more than their peers — but still raised the least. In fact, in the Funding Divide 2022 report, they are revealed to be the only teams not to break the $1M mark in average funding in 2021.
Not all underrepresentation is as visible as gender or ethnicity. Backstage Capital has estimated that LGBTQ+ founders receive less than 1% of VC funding. And more than a third feel the need to keep their sexual orientation hidden while fundraising, according to a survey by the nonprofit Start Out.
And then there’s class. Although as a middle-aged, bearded white man I look very much part of the establishment, I’m invited onto diversity panels surprisingly frequently because, unusually in the VC world, I come from a working-class background. It’s clear that access to VC investment remains easier for those from particular educational backgrounds, with 43% of funding at the seed stage going to founding teams with at least one member from Oxford, Cambridge, Harvard or Stanford, which further impacts the opportunities available to those from underrepresented groups.
How is Emerge doing? We’re generally atypical in that our team is overwhelmingly first-generation university and from a wide range of heritages. 20% of our team is female and 40% are people of colour which beats the averages, but is still not as balanced as we want it. We certainly are diverse from an age, education and heritage background perspective, but we can do better on female representation, ethnicity and LGBTQ+. In our fund 1 portfolio, of the 18 high-impact portfolio companies we have supported, 50% have at least one female founder and 50% of the founders are people of colour. This is market-leading, but we still think we can do better.
The gap on the cap table
It’s easy to pigeonhole VCs’ deep diversity deficit as a problem ‘only’ for underrepresented groups who are missing out on funding but it’s a foundational problem for the whole VC ecosystem. Research in 2011 began to point clearly to the difficulty — that over 90% of venture funding and angel funding goes to white men in six cities across the world. Ten years on, everyone agrees that that is not only a fundamental moral imperative but that there are now clear commercial reasons to change the system as, put simply, investing in diversity is good for business.
As Yael Kaufmann, co-founder and COO of upskilling platform Learn In, describes: “While it is disappointing that only 2.3% of VC funding goes to women-led startups, it is not entirely surprising given that only 2.4% of VC firms have female founding partners. The network effects and pattern-matching of the ecosystem lend themselves to unintended consequences, but it does not mean that women have only 2% of the most brilliant ideas, or that people even necessarily think that.
“What it does mean is that we all have to do better, whether investing or hiring, to look beyond our backyards to seek out the best and brightest, and that is true across gender, race, religion, ethnicity, geography, sexual orientation, socioeconomic upbringing, you name it. There are a lot of smart people out there with a lot of great ideas, and there is money to be made in backing those entrepreneurs and their ideas. The more people that you have presenting different perspectives from different backgrounds, the more that you will be able to respond to the needs of your customers, understand different stakeholders, and be able to see around corners.”
The figures bear this out. Research by Harvard’s Paul Gompers and Silpa Kovvali finds that VCs who increased their proportion of female partner hires by 10% saw, on average, a 1.5% improvement in annual fund returns and a nearly 10% increase in profitable exits.
Clearly, there’s a good chance that more diverse teams will create better products that serve their customers more effectively. For striking evidence of how this is currently failing to happen, just take a look at Caroline Criado Perez’s excellent work on how the gender data gap makes the world less safe and less comfortable for women, from PPE designed for men’s bodies to women’s greater risk of injury in car accidents due to the use of crash test dummies based on male body dimensions.
What are VCs doing about this?
In established VC firms there’s a lot of lip service paid to diversity — Deloitte suggests that the number of venture firms with diversity initiatives increased from 24% in 2016 to 43% in 2020 — but less actual action. The figures speak for themselves with little change in the number of female or Black partners. Diversity charters may be a meaningful first step to acknowledging the issue but, in most cases, it doesn’t seem to be a transformative commitment.
Where the visible change is happening is in the rise of new women and minority-led funds, investing from small first funds and heavily focused on seed and early-stage deals. Women in VC reports a spike in women-led funds in the US with 140 new women-led investment funds launched in the last four years.
However, while often inspiring, these funds may not offer the whole answer.
“My challenge and my issue with those funds is because of their nature, the stage of where they are: they are very, very small funds,” comments Lucy Stonehill. “That’s the right kind of capital for a certain stage of founder. The challenge is that across different stages of a company’s life cycle, across different stages of financing, the percentage of Black, Latinx or minority and the underrepresented groups gets smaller, the further up the funnel you get. These micro seed funds can write a lot of small cheques, but what they can’t do is support founders as they scale.
“Then the big funds, which are the ones that have the most capital to deploy, might say, ‘Oh, we co-invested with this fund supporting underrepresented founding groups. That means we tick the box of being this, that or the other…’ instead of taking on that responsibility internally to build their own process for investing in, say, female or Black founders, pledging that of X number of companies we invest in this year, we want Y to have a female founder or a minority board member.”
The European picture
We’ve surveyed the situation in Europe to highlight the VCs in this area that we think are worth paying attention to, as they are super focused on diversity. As you’ll see, they concentrate on funding a broad range of founders, from women and the Afro-Caribbean diaspora to entrepreneurs with disabilities, and take a variety of approaches to building more diverse portfolios.
1Ada Ventures
A VC focused on investing in overlooked founders and in overlooked markets
2 Anthemis VC
A fintech VC fund guided by diversity and inclusivity as one of its three principles
3 Atomico
A Europe-focused investor with 25% of its active portfolio companies led by founders from underrepresented backgrounds and a goal to increase that to 40%
4 Bethnal Green Ventures
An early-stage ‘tech for good’ VC focusing D&I initiatives within its own team (63% identify as female), founders and their teams
5 Borski Fund
A VC fund that only invests in companies with gender-diverse teams with at least one female founder
6 GoodSoil VC
An early-stage venture capital firm investing in under-represented exceptional founders across sub-Saharan Africa and Europe
7 Impact X
A double bottom line VC, founded to support underrepresented entrepreneurs across Europe, particularly the Afro-Caribbean diaspora
8 Kaleidoscope Investments
An investment fund focused on entrepreneurs with disabilities
9 Pact VC
An all-female led, early stage fund investing in technology that positively reshapes the future
10 Playfair Capital
A pre-seed and seed investor in tech companies, with a focus on collaborations and initiatives to support female founders
11 Sie
A capital platform that supports female founders
12 Unconventional Ventures
An early-stage investment firm that invests in impact tech startups founded by underrepresented founders (women, LGBTQ, POC)
13 We are Jane
A fund founded by three women, investing in companies headed by a female CEO or with a majority of female shareholders
This comprehensive list of Europe’s 200+ female VC partners is also a useful resource.
What more can the established VCs do?
For Lucy Stonehill, VC support that demonstrates an understanding of the growth process and focuses on skills development is key, from mentoring and coaching to the broader sharing of experiences.
There are formal programmes — for example, London & Partners’ Beyond HERizons, a 12-month business support programme for 15 female entrepreneurs, focused specifically on targeting the funding gap at the Series A stage and beyond.
However, there is also an important role for more informal process sharing and mentoring within funds.
“I raised my first round of capital, two and a half million dollars, from Octopus Ventures,” explains Lucy. “Most portfolio founders at Octopus were, at that stage, more experienced than me, and were very open to me knocking on their door and saying, ‘Nick, can I buy you a coffee? I’d really like to learn about how you think about product-market fit.’ I proactively sought out advice from a broad range of later-stage Octopus founders and was very welcomed by a lot of people to pick their brains and learn from them. Those communities are very, very important for that knowledge share and knowledge transfer.”
Yael urges fund managers to consider mentoring promising founders who show the character traits needed to succeed but may not have a nuanced understanding of the fundraising process or the ‘rules of the game’:
“If you, as a fund manager, care about diversity in your portfolio because you know the numbers — for instance, that businesses founded by women ultimately deliver twice as much revenue per dollar invested — then you may want to focus on characteristics like resilience and adaptability over whether the first pitch was perfect. What you’re trying to optimise for is the person who is determined to make it at all costs. You know that this person just needs to understand how the game is played in VC, and you take them that last mile. If you spend some time with them and invest in them, you will watch them succeed and flourish.”
Another good step forward for VCs is to sign up for training, adopt appropriate policies and make a public commitment with organisations such as Diversity.vc and SISTA. And, like VCs and founders, LPs must find and support the underrepresented potential investors who are not necessarily connected to the usual networks, and encourage their existing portfolio to improve their teams. This starts to create a culture where VCs feel comfortable meeting with the LP, knowing they won’t be at a disadvantage for not fitting in any ‘profiles’.
And, always, data
There’s no excuse for VCs not to know who they are funding — and who they are rejecting. Track gender and other data across your deal flows. Only by doing that can you monitor how effective, or not, are any diversity initiatives.
Frontline started tracking its data in 2016 and it’s made a tangible difference, as partner William McQuillan explains:
“When Frontline first began measuring data around gender in our deal flow process we found ourselves in the mid-single-digit percentages. Over the last five years, through a number of different methods, we’ve been able to bring those percentages to 20% — and often above 25% — on any particular month. This represents a 3–4 times increase and has had a direct correlation on the percentage of female-founded companies we have invested in.”
He sets out the process in this analysis and notes that 18% of Frontline’s portfolio investments were female-founded companies and the average across the whole deal flow process was 19%:
“I’ve heard many investors place the ‘blame’ on their pipeline for not investing in more female-founded companies. In reality, perhaps they should be doing more to improve their pipeline. Assuming you have an unbiased process, then increasing the percentage in your pipeline should also increase the number in your portfolio — as we have seen. Blaming pipeline as the problem is the easy answer. It is not the right answer!”
“It’s not so much a pipeline problem as a network problem,” adds Catherine Dupéré, partner, Isomer Capital. “And we’re in the business of people and networks, so I really don’t buy this lazy ‘we’ve looked, they don’t exist’ answer. Ask your team, industry colleagues, LPs, specialist recruiters…”
“You actually hear some quite prominent venture capitalists saying, ‘If only I could invest… I’d love to invest in more female founders, but we just don’t see them.’ Well, then open your eyes — we’re here!” says Lucy.
Our own back yard
It’s clear to us at Emerge that there’s no magic bullet but there are steps every VC can take, including us. For real change to take place, the roots need to be deep and institutional rather than one-off initiatives, deeply embedded in your culture to succeed. Crucially, we think these initiatives must take less of a deficit-model approach, which is concerned with fixing ‘what’s wrong’ with founders from underrepresented groups rather than fixing the system that holds them back. The key message here is basically don’t blame your pipeline — look at everything you do in creating your pipeline and optimise it for the widest deal flow possible.
As Yael suggests, “I don’t think it’s an easy change, because what we’re talking about is unpacking a lot of structural barriers, a lot of hidden bias, a lot of things that have been the way they have been for aeons. It’s not just the couple of decades that VC has been around. It’s all of the things that came before it. When you think about who has the capital, who has the ability to start something, who doesn’t have a safety net to fall back on? It’s incumbent upon all of us to start thinking, what are my biases? What are the areas where I might be able to make an impact, where I might be able to help someone?”
We’ve embarked on a conscious diversity journey here at Emerge. For the last eight years, we’ve had an open application policy, but there’s a lot more we can do consciously to improve the diversity of our deal flow. Plus, we want to help our portfolio to create diverse teams from the start.
If you are interested in this topic, do follow me to get the next parts of the series.
IN PART TWO of this series, in a few weeks time: practical guidance for founders on how to build in diversity from the start and avoid building up a diversity debt
IN PART THREE of this series, practical guidance for VCs on how to build diversity into their pipelines and teams — all the non-obvious things you need to consider.
Emerge welcomes inquiries from new investors and startup founders. For more information, visit emerge.education or email hello@emerge.education.
Thank you for reading… I would hugely appreciate some claps 👏 and shares 🙌 so that others can find it!
Nic
Nic Newman
