Executive Summary

Venture capital investment plays a critical role in starting and scaling innovative companies that shape the economy of today and the future. Equity-backed1  businesses in the UK directly supported 2.2 million jobs and generated 11% of gross domestic product including impact on suppliers and consumers2 . High growth businesses contribute a large share of employment growth in the economy, with some estimates of up to half3 . The UK has long been the birthplace of worldchanging innovative companies – our technology sector alone attracts more funding and produces more startups and unicorns than its peers anywhere in Europe, ranking third in the world4 . Access to the venture capital resources that enable innovative companies to grow can shape the future of our economy.

Despite some progress, diversity in venture capital investment remains extremely low. For example, the share of equity deals made to all-female teams increased from 5% in 2011 to 9% in 20225 , but their share of total equity investment remains at just 2% and hasn’t improved over the period. While there is limited data on the share of investment received by teams in terms of their ethnicity and socio-economic status, estimates indicate that all-Ethnic Minority teams receive less than 2% of UK venture capital investment value, while 43% of seed stage funding goes to graduates from 'elite' universities6 .

However, there are some nascent signs of progress. Information on first-time deals can be a useful indicator of the strength of the investment pipeline and in 2022, 13% of first-time equity deals went to all-female teams and 10% to all-Ethnic Minority teams. All-female teams received 6% of first-time investment, and all-Ethnic Minority teams received 19%. In 2022, teams with at least one female founder accounted for a record 27% of deals (compared to 17% in 2012), while their share of investment reached 15% (compared to 13% in 2012)7 .

The lack of diversity is symptomatic of underlying problems in the venture capital market that are specific or more acute for underserved founders. These include8 : the availability and transfer of information between founders and potential venture capital investors9 , access to investment and business networks10 ,11 , lack of diversity within venture capital firms and funds12 , and founders being unaware of or discouraged from seeking venture capital investment13 .

The scale of under-investment in large demographic groups suggests the UK could have significant untapped talent and economic growth potential. In addition to this growth opportunity, there are numerous potential benefits of greater diversity and inclusion in venture capital investment. Diverse founders and teams in all parts of the economy can bring different perspectives, information, and competencies, which may help to make better decisions. In venture capital this can ultimately improve financial performance, both in terms of fund returns and profitable exits, on average14 . It is core to the British Business Bank's mission and strategic objectives to unlock this growth potential by increasing the distribution of capital across all talented UK business owners and entrepreneurs.

The lack of investment reaching a diverse group of entrepreneurs leading high growth businesses is widely recognised and understood as both a problem and a growth opportunity. Nonetheless, there is limited and sometimes inconclusive evidence on how to achieve greater diversity in investment. In this context, this report provides new evidence on what works to improve diversity in venture capital investment, with pathways and actions that can be adopted by UK venture capital firms.

While there is no ‘silver bullet’ to improve diversity in venture capital investment, this research has found that venture capital firms with the most success reaching underserved founders typically coalesce around three different pathways, which are validated by the other data sources considered in this research.

  • Pathway 1: Diversity at the Top. These firms focus on increasing diversity among key decision makers, particularly the Investment Committee. A broader range of views ‘at the top’ can result in a larger number of investments into underserved founders
  • Pathway 2: Inclusion in the Pipeline. These firms place a greater emphasis on increasing the pipeline of investment opportunities from underserved founders. They actively seek out diverse founding teams in various ways, for example, engaging scouts with their own diverse networks to source investment opportunities, and using incubators and accelerators for earlier stage firms.
  • Pathway 3: Transparency and Accountability. These firms subscribe to the notion that ‘what gets measured gets done’. They view accountability for measuring and delivering progress as essential, supported by strong emphasis on external communication, genuine commitment, and active participation in industry-wide data collection.

These pathways are not mutually exclusive: the most important message for venture capital investors is to choose a tailored approach that works for their firm and commit to that approach with meaningful and consistent action over a sustained period. The evidence base from this research shows that a range of approaches can be effective in improving investment diversity but meaningful action, and avoiding tokenism, is critical to success.

This research was conducted using a thorough methodology that involved: reviewing literature to identify 14 actions for improving diversity and inclusion in venture capital; interviews with 40 venture capital firms and 124 venture capital-backed or venture capital ready entrepreneurs15  to evaluate the perceived effectiveness of these actions; and analysis of secondary data from Beauhurst. The findings were synthesised and tested with industry experts and the British Business Bank.

The fieldwork targeted venture capital firms with the most success in reaching a diverse group of entrepreneurs by share of deals, and those with a clear commitment to diversity as proxied by high levels of engagement with the Investing in Women Code16 . The firms themselves had more gender diverse leadership than the wider market. As such, these firms have particularly valuable perspectives on the relative effectiveness of different actions, and play an important role in sharing best practice with their peers.

The entrepreneur survey targeted a diverse group of founders who had either received venture capital investment (venture capital-backed) or were a private, independent UK company that has received between £50k - £1m in total equity investment – and has not been involved in any announced equity investment deals involving Venture Capital or PE or investors (venture capital-ready).

This research focused on three diversity characteristics: gender, ethnicity, and education as a proxy for socioeconomic status. These characteristics can play an important role in founders’ ability to access venture capital investment, they are often more visible or easily identifiable, and there is sufficient literature and data available to support an understanding of the barriers that founders experience because of these characteristics (and to potentially monitor change). This is not to the exclusion of any other diversity characteristic; the British Business Bank's report 'Alone, Together', published in 2020, set out the profound and intersectional impact on businesses outcomes of not only gender, ethnicity, and socioeconomic background, but also place, income, age, deprivation, disability and ill health. The British Business Bank will continue to lead and commission research on diversity in small business finance with increasing scope, to shape debate and action on this topic.

This report was developed by the British Business Bank and SQW (including an Expert Panel), supported by Beauhurst and Qa Research. In addition, an external Steering Group from the venture capital industry provided guidance throughout the study. (See Acknowledgements).

  • 1

    Venture capital and private equity.

  • 2

    Economic contribution of UK private equity and Venture Capital in 2023, British Private Equity & Venture Capital Association (2023).

  • 3

    The vital 6 per cent, NESTA (2009)

  • 4

    UK tech sector retains #1 spot in Europe and #3 in world as sector resilience brings continued growth - GOV.UK (www.gov.uk).

  • 5

    Small Business Equity Tracker 2023, British Business Bank (2023)

  • 6

    Extend Ventures (2020). Elite Universities include Oxford, Cambridge, Harvard and Stanford.

  • 7

    Small Business Equity Tracker 2023, British Business Bank (2023).

  • 8

    Small Business Finance Markets Report 2023, British Business Bank (2023)

  • 9

    Early-stage investors rely heavily on signals of entrepreneurial quality but little is known as to whether these signals are efficient (Lerner and Nanda, 2020) and lack of objective and measurable information on track record and prospects of success for early-stage founders increases the possibility of unconscious bias (British Business Bank, Small Business Finance Markets Report, 2022).

  • 10

    British Business Bank (2019), UK Venture Capital & Female Founders report

  • 11

    Approaching a Venture Capital firm or fund via their network is of vital importance in terms of reaching Investment Committee and getting funding. British Business Bank (2019), UK Venture Capital & Female Founders report.

  • 12

    Investment teams and Investment Committees with higher female representation fund significantly more all-female teams. Investing in Women Code report (2023).

  • 13

    Awareness of equity finance and Venture Capital is significantly lower among female-led businesses. British Business Bank (2023), Small Business Finance Markets Report 2023.

  • 14

    Gompers, P. and Kovalli, S. (2018) The Other Diversity Dividend. Harvard Business Review.

  • 15

    Venture Capital backed (70%), Venture Capital ready (30%), random sample not connected to the VC firms surveyed.

  • 16