3.3 Pathway 2: Inclusion in the Pipeline

Table 4 summarises venture capital firms’ views of the most and least effective actions associated with Pathway 2: Inclusion in the pipeline.

Table 4

Actions perceived as effective and less effective for Pathway 2

Effective actions

Venture capital firms should take steps to increase the diversity among those involved in the identification of potential propositions

Venture capital firms should use accelerators as a referral mechanism to identify and support diverse entrepreneurs

Venture capital firms should use ‘office hours’ to network with and provide support to diverse entrepreneurs

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 clearly communicate their investment strategies and commitment to diversity via their website and social media

Note: Outlined boxes indicate the most and least effective actions for this pathway. Source SQW

Venture Capital firms aligned with Pathway 2: Inclusion in the Pipeline focus on various ways to actively identify diverse founding teams and give them a chance to secure funding. In the view of these venture capital firms, by increasing diversity at the Investment Committee level, venture capital firms try to have an impact “too late in the chain” – if very few diverse teams are considered for investment, there will be fewer deals with underserved founders than there should be.

Office hours were seen by this group as an effective way of increasing access to networks, with some consideration for hours to accommodate family care being important, in contrast to more typical evening networking events.

Following entrepreneurs that attend accelerators was considered an efficient way to identify high-potential business propositions from underserved groups, since accelerators tend to do “some legwork” for venture capital firms. This can include screening out low performing businesses and keeping those that attract grants and have high potential. Around one third (35%) of venture capital-backed firms that secured venture capital funding between 2018 and 2022 attended an accelerator. From a statistical perspective, founding teams of venture capital-backed firms that attended accelerators were more diverse though in absolute terms, the differences are minor. However, a substantially higher proportion (54%) of businesses with founding teams that included both women and Ethnic Minority members were among accelerator attendees (the dataset contains records on 176 such companies), in comparison to all venture capital-backed businesses.

The actual team on the ground doing the work as opposed to the investment committee is the highest impact opportunity. They are the frontline, they are going out [and] originating opportunities to broaden the funnel as much as possible. Venture Capital Consultee

The views on using incubators in a similar way to accelerators were more mixed: it may be appropriate for venture capital firms focusing on seed investments, but the ‘early stage’ focus of incubators means they provide a less reliable indication of quality. Analysis of Beauhurst data confirmed that founding teams of venture capitalbacked companies that attended accelerators were more ethnically and gender diverse than those who did not. Even though the differences are on average small (a few percentage points) they are statistically significant. These findings (on accelerators and incubators) are more relevant for early-stage venture capital firms.

We found that 65% of venture capital firms interviewed do not approach their search for investment opportunities any differently when they seek to identify underrepresented founders. They stick to a typical mix of approaches such as: considering inbound applications; reaching out through established networks; using automated algorithms to ‘web-scrape’ publicly available information about businesses; and participating in conferences and other networking events. The minority of venture capital firms that do alter their approach do it ‘slightly’ for example by using the same general methods but “focusing their attention” on underserved founders, or by stimulating the inbound flow of propositions by setting up dedicated office hours.

Using social media to identify investment opportunities was criticised by these firms for reinforcing the biases existing within the networks supported by the social media. However, signalling venture capital firms’ commitment to diversity via their website or social media posts was seen as an obvious, though important, first step: 75% of interviewed venture capital firms that identified this as a relatively ineffective action, representing 60% of the overall sample, have themselves publicised their commitment to diversity. However, consultees voiced concerns that, if this action was presented as a key recommendation, it would likely fail to generate any noticeable impact unless followed up by other actions.

Interview with Fearless Adventures

Case Study: Pathway 2:

Inclusion in the Pipeline: Fearless Adventures

Overview of the firm

Fearless Adventures has been operating for almost two years and invests in growth stage companies typically in e-commerce. Alongside its investments, Fearless Adventures offer wraparound support to founders in areas such as talent sourcing, marketing, business intelligence and accountancy. Fearless Adventures is a signatory of the Investing in Women Code.

Why is inclusion in the pipeline important?

Fearless Adventures was set up by three founders that wanted to build a venture capital fund that would be different in the investment space by offering wraparound support to founders and by being committed to supporting a wide range of founders from different backgrounds. The intention was that the additional support would help founders who may be less familiar with or confident in seeking venture capital investment, and thus appeal to a wider range of founders.

In the field of e-commerce, success hinges on founders who possess a deep understanding of their market and a genuine connection with consumers. Fearless Adventures recognises this imperative and places a strong emphasis on diversity of thought when selecting entrepreneurs to support. They actively seek out founders with diverse perspectives and experiences. Going beyond financial investment, Fearless Adventures fosters a collaborative community among their portfolio companies, encouraging founders to connect, provide peer support, and offer guidance to one another. This approach not only amplifies collective knowledge but also nurtures a network of empowered entrepreneurs, propelling their individual and collective achievements in the e-commerce landscape.

Fearless Adventures defines diversity in terms of gender, ethnicity, sexuality and location.

How has Inclusion in the Pipeline been achieved?

Fearless Adventures has an Investment Director who is responsible for sourcing propositions, but there is an open and collaborative process in order to decide which propositions to take forward. They have large volumes of propositions coming in and each enquiry Even small changes can make a massive impact.” 3.3 Pathway 2: Inclusion in the Pipeline British Business Bank45 Finding What Works: Pathways to Improve Diversity in Venture Capital Investmentis summarised and shared with the whole team at their regular staff meetings. Everyone is encouraged to attend these meetings and share their views on the propositions that have been received.

In terms of outreach and deal sourcing, the firm uses various approaches that it has found to be effective in sourcing propositions from a diverse group of founders:

  • Accelerators have been found to be a useful source of propositions. Using accelerators offers several advantages, such as fostering connections with earlystage ventures, sourcing founders from diverse socioeconomic backgrounds, and staying attuned to emerging business trends.
  • Team members from across the firm regularly attend events where founders are speaking, and the firm also hosts its own events. These events are designed to build confidence in founders, especially those unfamiliar with the investment process, and cover topics such as ‘building your personal brand’.
  • Fearless Adventures works with Fund Her North, an initiative designed to improve access to funding for female-led businesses in the North of England through start-up, scale-up and exit. Fearless Adventures have supported the initiative by attending steering group meetings and supporting their events. This allows Fearless Adventures to grow its connections and tap into different groups and networks.

Fearless Adventures provides clear and constructive feedback to founders who it has engaged with but not invested in. This includes a comprehensive list of resources and signposting founders to accelerators or other programmes that might be of interest.

The firm makes itself internally accountable by regularly monitoring investment data. Diversity data is discussed, debated and used to inform decision making at quarterly management meetings.

Fearless Adventures is committed to removing barriers to investment for female founders and engages in various activities to achieve this. For example, Fearless Adventures actively invites more female leaders to be guests on its podcast ‘The Summit’ in order to create an additional platform to improve visibility of female founders.

What are the benefits Inclusion in the Pipeline?

Fearless Adventures has achieved strong diversity among its portfolio companies and within the firm:

  • all of its portfolio companies have female founders or co-founders;
  • approximately 17% of its portfolio companies have Ethnic Minority founders or co-founders; and,
  • 53% of staff are female, including its Managing Director and Investor Relations Director.

In addition, it actively supports investment into areas of the country that have traditionally been underserved. While the firm has some investments in London, its investment portfolio is primarily focused in the North West.

Whilst Fearless Adventures was purposefully set up to be inclusive, Fearless Adventures welcomes and supports propositions from all founders regardless of their background

What are the key tips to achieving Inclusion in the Pipeline?

Fearless Adventures would encourage other firms to review and reflect on the diversity of their portfolios, try new and different ways of sourcing founders, and look for ways to expand their networks and connect across their community.