Action 1

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 1 out of 14 actions

Venture capital firms should ensure senior decision makers, including Investment Committees, are made up of people from a diverse set of backgrounds.

Overall effectiveness: High

Expected to have a positive impact on the number of diverse founders securing investment

Target Audience

Venture capital firms seeking to increase investment in diverse groups of founders

Relevant investment stage

Seed, venture and growth

Ease of implementation

Medium - this Action requires venture capital firms to appoint and empower diverse senior decision makers

Wider considerations

It is important for senior decision makers to have relevant experience, which is valued and taken into account

A column graph showing that around half of the VCs scored this action 4, around a quarter each scored it 3 and 5 respectively, and there was one score each of 1 and 2.
Venture capital firm ranking
A bar chart showing that nearly three quarters of entrepreneurs perceived this action as highly effective, while 14% percieved it as somewhat effective, and 9% as ineffective.
Entrepreneur perceived effectiveness

Perceived effectiveness score 1 = Least effective, 5 = Most effective

Findings by entrepreneur characteristics:

  • Venture capital-backed/venture capital-ready: Nearly three quarters of both venture capitalbacked and venture capital-ready entrepreneurs said this action is effective (74% and 71%, respectively).
  • Gender: Four fifths (80%) of female respondents said this action is effective, compared to over two thirds (69%) of male respondents.
  • Education (socio-economic): No major variance observed. –Ethnicity: No major variance observed.
  • Ethnicity: No major variance observed.
  • Age: There was some variation in responses among age groups: 80% of respondents aged 30-39 said this action is effective, in contrast to 65% of respondents aged 60 or above.

Venture capital firms’ feedback:

Diversity at the top can create challenge, diversity of thought, and lead to better investment decisions. Diversity among senior decision makers can also create a virtuous circle – a diverse group of decision makers may back a more diverse group of founders, who go on to build more diverse teams, who then create more diverse and inclusive products and services.

However, firms must be careful to ensure that action is meaningful, and does not represent tokenism or a tick-box exercise.

Decision makers at the top, who sit on investment committees and are ultimately making the investment decisions; they need to be diverse or else we will never reach where we want to get to. Venture Capital firm consultee

Existing research:

  • There was relatively good evidence on the effectiveness of increasing diversity among senior decision makers in venture capital firms. Nine papers were identified, based on surveys, author opinions and statistical analysis of firm demographics and performance. The majority of the analysis was descriptive (5 out of 6).
  • Research has found that syndicates with femaleled General Partners are better able to evaluate female-led startups. This implies that venture capital financing influences the performance gap between female- and male-led startups, primarily through differing abilities of venture capital firms to evaluate female-led startups (Raina, 2021).
  • Analysis on companies in the US has found that venture capital firms with women partners are twice as likely to invest in companies with a woman on the management team and three times more likely to invest in companies with women CEOs (Brush, 2014).

Data Analysis:

Since 2018, businesses that raised money from a women-led venture capital firm (proxied with gender of key contact – typically a CEO, partner or founder, and for robustness with at least 50% of key contacts being women), on average attracted more in total investment (controlling for the year of first investment). This holds where at least 50% of the key contacts are women. We note that this result concerns: a) businesses that secured the funding from a women-led firm rather than from a fund (led by a woman) designed specifically for investments into underserved founders; b) the total amount raised rather than the probability of attracting follow-on investment.