Why diversity matters

Embracing diversity has been shown to benefit businesses significantly.

Any well-run business should seek to widen its talent pool as much as possible. So it should come as no surprise that encouraging diversity can actually benefit your bottom line.

Indeed, analysis from management consultancy McKinsey has, in its words, “reaffirmed the business case for both gender diversity and ethnic and cultural diversity in corporate leadership”.

In a 2019 study, McKinsey found that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than businesses in the fourth quartile.

In the case of ethnic and cultural diversity, its business case findings were equally compelling. In 2019, top-quartile companies outperformed those in the fourth quartile by 36% in profitability.

As the study had found previously, the likelihood of outperformance continued to be higher for diversity in ethnicity than for gender.

Entrepreneurs +

It’s therefore depressing to find that business owners and entrepreneurs from ethnic minority backgrounds face persistent disparities in business, with disadvantages inherent in the system playing a key role.

This was the main finding in a recent report, Alone, together: Entrepreneurship and diversity in the UKLink opens in a new window, published by the British Business Bank and management consultants Oliver Wyman. The report was based on a survey and follow-up interviews conducted in 2020 with 3,727 people who are either aspiring entrepreneurs or running a business they started themselves.

The report identified two key areas as barriers to success:

  1. Access to capital
  2. Access to business networks – so-called ‘social capital’

Entrepreneur Piers LinneyLink opens in a new window, a non-executive director of the British Business Bank, argues that social capital is “the biggest invisible obstacle” holding back ethnic minorities.

“Access to social capital can be synthesised to a degree through groups and communities and outreach, but it will take generations to really develop an equal playing field.

“Access to finance is also obviously key. Just look at the impact schemes like the British Business Bank’s Start Up Loans programmeLink opens in a new window can have in under-represented communities — one in five of its loans go to people from ethnic minority backgrounds.”

Linney is keen that the Government does everything it can to foster equality of opportunity.

“Of course, the Government can and must do more. The British Business Bank’s ‘Alone, together’ report will feed into the Commission on Race and Ethnic Disparities, established by the Prime Minister, which will hopefully drive further progress at a national level.”

He is equally passionate that businesses also play their part.

“Businesses of all shapes and sizes need to work harder to access under-represented talent. The investment community needs to do the same, and not expect founders of colour to know how to approach them, or even that they exist at all. Too many are using the same lazy old networks, only hiring or investing in people who look like them or share a similar life experience.”

Shockingly, Extend VenturesLink opens in a new window, in a report entitled Diversity Beyond GenderLink opens in a new window, corroborates this failing.

“Black founders received just 0.24% of venture funding and female founders only 11% of venture funding in the last 10 years. However, Black people and women represent 3.5% and 51% of the UK population respectively.”

This report analysed data on venture capital investments into companies that were founded and received funding between 2009 and 2019. It then presented findings based on the perceived gender, ethnicity and educational background of some 3,784 entrepreneurs who have started 2,002 companies and received that funding.

This data-led research also showed that Black female entrepreneurs experienced the poorest outcomes. A total of 10 female entrepreneurs of Black appearance received venture capital investment (0.02% of the total amount invested) across the 10-year period, with none so far receiving late-stage funding.

Indeed, there was just one early-stage (series A or B) venture capital investment recorded for a Black female, compared to 194 early-stage investments in white female entrepreneurs.

“Businesses of all shapes and sizes need to work harder to access under-represented talent. The investment community must do the same, and not expect founders of colour to know how to approach them, or even that they exist at all.”

Quote logo Piers Linney Entrepreneur and non-executive director of the British Business Bank

Prejudice +

None of this surprises Wilfred Emmanuel-Jones, better known as The Black FarmerLink opens in a new window.

“It’s really, really difficult for people from ethnic or Black backgrounds to get funding. There’s a real prejudice toward those sorts of customers and I think it’s something that needs to be addressed… the people right at the bottom of the pile are Black.

“The thing about money is to understand the language and if you’re not educated or are unfamiliar with the language you’re at a huge disadvantage.”

A person’s educational background clearly also has an impact. Emmanuel-Jones points out that those people who have been educated in public schools have networks that give them a head start. As he puts it:

“There is something about how those people ‘know’ each other and that ‘knowing’ gives them an advantage. Something that people from my working-class background don’t have.”

Extend Ventures’ study, Diversity Beyond GenderLink opens in a new window, provides hard data that confirms Emmanuel-Jones’ experience.

“Our findings indicate that a substantially disproportionate amount of capital is being poured into the UK’s super elite at seed stage. More than 40% of the total capital invested at seed stage between 2009 and 2019 went to founding teams with an elite education [Oxford, Cambridge, Harvard and Stanford, and their associated business schools].”

Erika Brodnock, co-founder and head of research at Extend Ventures, adds:

“We found that more than 70% of the funding that is deployed at seed level goes to founding teams that include graduates from one of the top 10 universities across the UK and US.”

Brodnock makes a very telling point in relation to the lack of opportunity afforded to Black women entrepreneurs.

“The ‘Alone, together’ reportLink opens in a new window found that more than a third (37%) of Black female business owners and 36% of female business owners from Asian and other ethnic backgrounds report making no profit last year, compared to 15% of White female business owners.

“Still, I think that what our ‘Diversity Beyond Gender’ report starts to show is that the comparison made there is not like for like. If Black females actually started from the same position as their White peers and were less profitable, that would be one thing. Yet they don’t, and aren’t afforded the same opportunities. As we can see, their peers are 194 to 1 having seed capital invested in them.

“As they can’t get seed capital, the Black founders are either taking interest bearing loans to start their companies – meaning they have debt to satisfy from day one – or they’re scraping money together from friends or family.

“However, nine times out of 10 they are from lower socioeconomic tiers and aren’t going to have access to the networks that other peers have. If they start from nothing and have debt to pay, literally from the first month, the fact that they are less profitable than their White peers actually means that they are still in the game and still running their businesses against all the odds.”

Brodnock is firmly of the opinion that it would be wrong to conclude that Black founders’ being less profitable is because of a lack of skill or business acumen.

“There’s a systemic issue, leading to those founders not getting the same opportunity as their peers. Nonetheless, it would appear that they’re still fighting against those obstacles and still running businesses, although there is a way to go.”

“If Black females actually started from the same position as their White peers and were less profitable, that would be one thing. Yet they don’t, and aren’t afforded the same opportunities. As we can see, their peers are 194 to 1 having seed capital invested in them.”

Quote logo Erika Brodnock Co-founder and head of research at Extend Ventures

Solutions +

So what are the solutions? Erika Brodnock of Extend Ventures points out that, in their Diversity Beyond Gender report, they called for the Government to create an Ethnic Founders Code to mirror the Investing in Women CodeLink opens in a new window, to ensure that all ethnic entrepreneurs are able to access capital.

Such a code would encourage:

  • gender and ethnic diversity at partner and decision-making level at investment firms
  • the implementation of minimum quotas to ensure that funds are investing 14% of the funds under management (including a minimum 4% for Black founders) for ethnic-led companies

Wilfred Emmanuel-Jones broadly agrees with Brodnock, placing the spotlight on banks:

“I do think there needs to be some sort of measurement. There isn’t going to be change until banks are made to take responsibility and conduct an annual audit. There should also be a general target, which gives them something to aim for.

“It’s important to look at board level and the composition of the non-executive board, because it’s only when you change cultures that you’ll no longer need audits or quotas. Until you have a better balance, there’s always going to be a problem.”

More controversially, Emmanuel-Jones argues that there are certain issues around the diversity mix that are fashionable.

“The gender issue, in a sense, has hijacked the whole diversity argument. Companies and institutions find it easier when they are looking at diversity to do a lot more to fix the issue for women. Then the issues for Black and Asians are left very low down the list of priorities.

“The truth is this: women have benefited greatly from this diversity awareness. In a sense, the balance being brought up for them has meant that Blacks, especially, have been further ignored. That’s not to say there aren’t issues to be resolved regarding gender. I do think they need to be separated. Rather than put it all into the diversity mix, it should be a percentage for women, a percentage for Blacks, a percentage for Asians.”

Emmanuel-Jones also believes that banks remain biased against people of colour. He cites a recent example where his bank, NatWest, refused him a company credit card, despite the fact he runs a company with a turnover of £10 million.

“My frustration is that there’s a lot of talk. It’s a bit like people think, we’d better tick this ‘ethnic’ box. What they are not doing is realising that it takes a lot more than words to bring about change.”

The hope is that with further action, driven by a committed government, the UK will move decisively towards becoming a true meritocracy, where race, class and gender don’t hinder your opportunity to build a successful business in the 21st century.

Additional reading +

Alone, together Link opens in a new window

The British Business Bank's report into entrepreneurship and diversity in the UK.

Invest in Women Hub Link opens in a new window

Run by the Council for Female Entrepreneurs (CfiFE), this is a one-stop-shop information and guidance resource created to help the UK Government achieve its ambition of increasing the number of female entrepreneurs by almost 600,000 by 2030.

Diversity wins: How inclusion matters Link opens in a new window

The third report in a McKinsey series investigating the business case for diversity. It shows not only that the business case remains robust but also that the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time.

Diversity beyond gender Link opens in a new window

This report by Extend Ventures analyses the extent of the UK funding gap to understand if bias beyond gender exists in the UK venture capital market and what opportunities lie ahead to make access to innovation and entrepreneurship more equitable.

Deconstructing the pipeline myth and the case for more diverse fund managers Link opens in a new window

An analysis by Kauffman Fellows of the influence of ethnicity in startup teams.

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