Action 6

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 6 out of 14 actions

Limited Partners and venture capital firms should design funds that are targeted specifically at diverse entrepreneurs.

Overall effectiveness: Medium

Effective in the short term in enabling underserved founders to access finance; however, it is unlikely to address structural market failures.

Target Audience

Limited Partners and venture capital firms

Relevant investment stage

Seed, venture and growth

Ease of implementation

Medium – several targeted funds exist; this would require LPs/ venture capital firms to change their investment strategy/ criteria for funds.

Wider considerations

This would require careful communication and marketing of the fund to ensure it is framed in a positive way, rather than reinforcing existing biases.

A column graph showing that more than half of the VCs scored this action a 2 or 3, more than a quarter scored it a 2 or 4, and the remaining scores were split between 1, 4 and 5.
Venture capital firm ranking
A bar chart showing that half of entrepreneurs perceived this action as highly effective, while under a quarter perceived it as somewhat effective, and 18% as ineffective.
Entrepreneur perceived effectiveness

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

Findings by entrepreneur characteristics:

  • Venture capital-backed/venture capital-ready: Half (50%) of both venture capital-backed and venture capital-ready entrepreneurs said this action was effective.
  • Gender: A greater proportion of female respondents said this action is effective (63%) in contrast to males (41%).
  • Education (socio-economic): No major variance observed.
  • Ethnicity: Ethnic Minority respondents were more likely to say this action is effective (64%), in contrast to White respondents (46%).
  • Age: Nearly two thirds (64%) of respondents aged 30-39 years old said this action was effective, compared to just over a third (35%) of  espondents aged 60 or above.

Venture capital firms’ feedback:

Venture capital firms that supported this action said that this would provide a clear route to ensuring underserved founders can access venture capital finance, and this would ultimately have a positive impact.

However, while recognising the benefits in the short term, various firms said this could reinforce the inherent biases in the system, and continue to support the narrative that underserved entrepreneurs require specific, targeted funds. If the right processes are in place, underserved entrepreneurs should be able to secure support through mainstream funds.

Existing research:

  • There was limited evidence on the impact or effectiveness of targeted funds for underserved entrepreneurs.
  • A number of papers were identified which include examples of targeted funds and sets out their performance; however, the overall impact on diversity within venture capital is unclear. Example funds include: Impact X – a UK venture capital firm, founded to support underserved entrepreneurs across Europe; Fearless Fund – an American venture capital firm created for women of colour, by women of colour.