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VC firms have a diversity problem—do they care?

Leah Hodgson

It is undeniable that venture capital has an enormous impact on the economy and society. These investors can transform a small and unknown company into a household name, with the likes of

Uber,

Deliveroo and

Airbnb all benefiting from early investments. And in Europe, the UK is leading the way as the continent's largest VC market and home to most of its unicorns. Despite their reputation for disrupting the status quo, British VCs have a massive problem: diversity.



Homogenous is the word that comes to mind as a damning report from nonprofit Diversity VC and OneTech shows that the UK's venture capital firms are overwhelmingly white, male and Ivy League-educated. Less than a third (29%) of London's VC workforce are women, compared with 46% for the city’s working population. A staggering 65% of firms in the capital had not even one woman as a senior member of their investment teams, and nearly 40% had no representation at all.



The picture is even worse for ethnic minorities. The study, which is based on a survey of 223 venture capitalists, found that the London VC community is disproportionately composed of white individuals when compared to the city's total population. Just around 26% are from other ethnicities; black individuals are significantly underrepresented, making up 3% of the London VC workforce.

The harm in homogeny While many may be tired of hearing this—and the lack of diversity in financial services in general is nothing new—the imbalance has real consequences for startups that need to be addressed.



"VC across the world, UK included, is pretty homogenous and that doesn't really lend itself to diversity of thought," Francesca Warner, co-founder of Diversity VC, told PitchBook. "It's been proven in every different study possible, by every institution possible, that more diverse teams make better decisions and perform better on almost every metric."



Warner continued: "I think without a VC industry that is truly diverse and reflective of the society it is investing in, the startups they're funding can't really be expected to promote and deliver best practice around diversity."



This gender disparity is evident in funding figures and it isn't just a British problem. So far this year, European startups have raised nearly €22 billion (around $24 billion) across 3,000 deals, per PitchBook data. Of that sum, around 0.6% has gone to all female-founded companies. Businesses with male and female founders fared better, securing €2.5 billion in 2019. This of course means that male-only-founded European startups received €19.3 billion in funding from VCs.



The amount of capital that female-founded startups have received has been steadily increasing. This is also true of the number of women working for VCs. Since 2017, the level of junior female investors in the UK has risen 8% but remained the same for senior positions.



So, how are we still at this point? According to Warner, the structural barriers to getting into the VC community are numerous.



"It starts with how education works here in the UK and who gets to study at the top institutions. And then it's typically people who come from banking or consulting who are recruited. In both of those entry points, it's not meritocratic," she adds. "It's very much about where someone was born, income and where they went to school. So, you kind of compound those two things together and it creates a homogenous pipeline into funds."



"I think also, there's this fact that it's much more difficult to get a job in a VC because the cycles of recruitment are that much slower, they only happen really every six months. The firms tend to be small and often there is no HR person, so the recruitment process is very informal," explained Warner. "Again, it's all about the network and recruiting people who are already a part of it. All these things have compound on top of each other creating the perfect storm, whereby it's difficult to make a firm genuinely inclusive."

Driving change The numbers are pretty dire, but what might be worse is that, despite how much awareness there now is on the importance of diversity and inclusion, nearly half of the VC professionals that were surveyed in the report believed they had no recruiting policies in place to promote diversity. Some may blame legacy issues and the lack of diversity in top schools, but it begs the question: do these firms want change?



Warner believes they do.



"Two years ago, I think there really wasn't a very good understanding of why it mattered and why it was important," said Warner. "But I think there's been so much evidence from so many places and VCs very much operate with metrics and data. They now get that this is really good for business as well as just being the right thing to do."



"I think that's a good understanding and enthusiasm for promoting and having a more diverse team," she continued. "I think that where the challenge comes is that it does require kind of slightly different approach, mindset and structure, in order to actually build an inclusive organization. You do need to have quite a lot of focus, you need the budget and the energy, otherwise it's not going to change."



Although it seems like a monumental task, there are simple solutions that VCs can put in place to move toward being genuinely inclusive. Warner adds that it is important for people of different backgrounds to feel that they have a voice and are accepted and included in every aspect.



Warner explains that this can be achieved through simple things like having someone within the firm to ensure an inclusive culture. Also having the right policies, such as flexible working or making sure people can take religious holidays off, can make a big difference.



She concludes: "Really thinking about inclusion and having anonymous feedback within the firm to help them understand like how they're doing and making sure that sort of the senior management is really aware of issues is crucial."



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