Action 8

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 8 out of 14 actions

Venture capital firms should use scouts to access diverse networks and identify quality propositions.

Overall effectiveness: Medium

Potential for venture capital firms to access a diverse group of founders and broaden deal flow; however, success is dependent on quality of scouts

Target Audience

Venture capital firms seeking to identify diverse networks/underserved founders

Relevant investment stage

Seed, venture and growth

Ease of implementation

Medium – this action requires venture capital firms to identify and build relationships with scouts, particularly those with diverse networks.

Wider considerations

This action is largely dependent on the quality of the scout/s employed; recruitment of scout/s is an important process in ensuring its effectiveness.

A column graph showing that around half of the VCs scored this action a 3, around quarter scored it a 2 and 4 respectively, and the remaining scores were split between 1 and 5.
Venture capital firm ranking
A bar chart showing that 64% of entrepreneurs perceived this action as highly effective, while 21% percieved it as somewhat effective, and 7% 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: Limited variance was observed; a slightly higher proportion of female respondents said this action is effective or somewhat effective (67%), in comparison to male respondents (61%).
  • Education (socio-economic): No major variance observed.
  • Gender: No major variance observed.
  • Age: A higher proportion of respondents aged 3039 years old said this action is effective (80%), compared to just over half of respondents aged 40-49 (53%) or 60 or over (52%).

Venture capital firms’ feedback:

The use of scouts was broadly viewed as positive by the venture capital firms interviewed. In particular, for firms seeking to identify diverse networks, employing scouts with access to different networks and communities can be an effective way of broadening deal flow, which otherwise would have been challenging.

However, for firms that already have diverse networks and/or strong internal processes to source a diverse group of entrepreneurs, scouts may not be required.

Existing research:

  • There was good evidence on the effectiveness of using scouts. Five papers were identified, based on surveys, author opinions, examples of venture capital firms using scout networks successfully, and statistical analysis of investment data.
  • The latter papers found that venture capital firms should build relationships with informal networks that involve Ethnic Minority business leaders, in order to improve access to funding and eliminate exclusionary practices that created barriers to raising capital (London Chamber of Commerce, 2022).
  • Research by Alexy, Block, Sandner and Ter Wal (2012) implies that the functionality of brokerage to enable venture capital firms to access information about investment prospects, as well as future innovation and technological trends, increases their willingness to invest in those firms – and to potentially invest a greater amount.