Action 3

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 3 out of 14 actions

Limited Partners should encourage venture capital firms to monitor and report progress in supporting diverse entrepreneurs.

Overall effectiveness: Medium

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

Target Audience

Limited Partners

Relevant investment stage

Seed, venture and growth

Ease of implementation

Hard – LPs to include additional reporting in governance structures, and venture capital firms to implement additional data collection.

Wider considerations

Can motivate venture capital firms to take action. However, it may be difficult for venture capital firms (especially smaller ones) to pivot and change their strategy; they may require time to adapt.

A column graph showing that less than half of the VCs scored this action a 3, a similar proportion scored it 4, around 1 in 8 scored it 5 and 2 respectively, and there was one score of 1.
Venture capital firm ranking
A bar chart showing that 60% of entrepreneurs perceived this action as highly effective, while 27% perceived 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: No major variance observed.
  • Gender: Female respondents were more likely to say this action effective than males (69% and 55%, respectively).
  • Education (socio-economic): A higher proportion of respondents with an undergraduate degree said this action is effective (65%), in comparison to respondents that did not go to university (44%).
  • Ethnicity: Two thirds of Ethnic Minority respondents said this action is effective (67%), in contrast to White respondents (59%).
  • Age: A lower proportion of respondents aged 40-49 said this action is effective (41%), in comparison to respondents aged 30-39 (80%). Compared to the average response, a greater proportion of respondents aged 60 or above said this action is ineffective (22%).

Venture capital firms’ feedback:

Leadership and direction from LPs was welcomed as a way to ensure that venture capital firms’ decision making processes prioritise support for a diverse group of entrepreneurs.

However, several respondents emphasised that venture capital firms should be encouraged to support underserved entrepreneurs, rather than be mandated or set targets, , as this could lead to adverse investment behaviours.

If you’re trying to change the [funds] that are less inclined to increase their D&I then you need the LPs to push them because they won’t do it otherwise and it might [not] be something that they monitor. [And] it’s going to take a bit more time to monitor. And unless you've got a LP telling you to do it, it might be something that you don't focus on initially, especially if you're a small fund. Venture Capital firm consultee

Existing research:

There was limited existing evidence to support this action. One paper was identified, based on analysis of US companies that received venture capital funding between 2011-18 (supported by stakeholder interviews). The Diana Report (Brush, 2014) found that teams with women entrepreneurs perform as well as, or better than, firms led exclusively by men. Based on the findings, the report suggests that LPs should request that the venture capital firms in which they invest reconsider their investment approach and, in particular, focus on incorporating diversity as a key factor in their decision making.