Action 2

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 2 out of 14 actions

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

Overall effectiveness: High

Potential to increase the number of propositions from founders from underserved communities being considered

Target Audience

Venture capital firms seeking to source more propositions from a diverse group of founders

Relevant investment stage

Seed, venture and growth

Ease of implementation

Medium – this action involves venture capital firms reviewing their recruitment processes and ensuring diversity is achieved in hiring.

Wider considerations

For some venture capital firms the search for propositions will involve using automated tools. Increased diversity within the venture capital firm may help to tap into wider networks.

A column graph showing that more than half of the VCs scored this action a 4, around a quarter scored it 3, around 1 in 8 scored it 5, 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 19% percieved it as somewhat effective, and 5% as ineffective.
Entrepreneur perceived effectiveness

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

Findings by entrepreneur characteristics:

  • Venture capital-backed/venture capital-ready: No major variance observed.
  • Gender: No major variance observed.
  • Education (socio-economic): A higher proportion of respondents with an undergraduate degree said this action is effective (75%), in comparison to over half of respondents (56%) that did not go to university.
  • Ethnicity: No major variance observed.
  • Age: Over four fifths (88%) of respondents aged 30-39 years old said this action is effective, compared to less than two thirds (62%) of respondents aged 40-49 years old.

Venture capital firms’ feedback:

The team involved in sourcing propositions are an outward representation of the firm and, therefore, greater diversity among the team can help underserved founders feel more comfortable engaging with venture capital, as they see people like themselves. Similarly, a diverse investment team is more likely to source propositions from a diverse group of founders.

From an internal perspective, diversity at all levels means there is greater potential for individuals to progress and for the firm to achieve greater diversity in senior positions.

Really important, you know, making sure that entrepreneurs are coming into an environment where they can see a diverse range of people. And that is giving them comfort that ‘you don't have to adapt yourself to be like us to get this investment, because we are very diverse and we like to think about things in different ways. Venture Capital firm consultee

Existing research:

  • There was fairly strong evidence on the effectiveness of increasing diversity within venture capital firms. Nine papers were identified, based on surveys, author opinions and quantitative analysis, which included statistical analysis of US Small Business Administration’s Small Business Investment Company (SBIC) Program data, and descriptive analysis of fund managers and investments.
  • Statistical analysis of SBIC programme data found that ethnically diverse SBICs make more investments in minority-led and women-led portfolio companies than non-ethnically diverse SBICs (Library of Congress, 2016).
  • Having a diverse investment team has been proven to help a firm source underserved founders (Kapor Capital, 2019).

Data Analysis:

There is a small positive correlation between gender diversity of founding teams and gender diversity of investors (proxied with the gender mix of key people). This relationship is statistically significant, the magnitude of the effect is weak.