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Action 10

In this section:

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Ranked 10 out of 14 actions

Venture capital firms should use incubators as a referral mechanism to identify and support diverse entrepreneurs.

Overall effectiveness: Medium

Potentially an effective mechanism for venture capital firms to source underserved founders; however, dependent on diversity within incubators.

Target Audience

Venture capital firms seeking alternative sources of deal flow to identify underserved founders.

Relevant investment stage

Seed (and possibly venture)

Ease of implementation

Easy – this action requires venture capital firms to identify and build connections with existing incubators.

Wider considerations

Venture capital firms may wish to consider/identify the levels of diversity within incubators when selecting those with which to connect.

A column graph showing that more than half of the VCs scored this action a 3, and the remaining scores were split between 1, 2 and 4.
Venture capital firm ranking
A bar chart showing that half of entrepreneurs perceived this action as highly effective, while over a third percieved it as somewhat effective, and 13% as ineffective.
Entrepreneur perceived effectiveness

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

Findings by entrepreneur characteristics:

  • Venture capital-backed/venture capital-ready: The response from venture capital-ready entrepreneurs and venture capital-backed entrepreneurs was broadly aligned; (53% compared to 50% stated this action is effective, respectively).
  • Gender: No major variance observed.
  • Education (socio-economic): No major variance observed.
  • Ethnicity: No major variance observed.
  • Age: There was a notable difference in responses from age groups: almost two-thirds (60%) of respondents aged 30-39 years old said this action is effective, in contrast to 43% of respondents aged 50-59 years old.

Venture capital firms’ feedback:

In general, incubators can increase the amount of attention entrepreneurs receive and help them to connect with venture capital firms, for example through ‘demo days’.

However, the extent to which incubators enable venture capital firms to identify underserved entrepreneurs will depend on the level of diversity among supported entrepreneurs; specifically, how incubators source entrepreneurs and their entry criteria.

Given the early stage of businesses likely to be supported by incubators, venture capital firms suggested this action would be more appropriate for seed/venture investment stage.

Existing research:

The evidence on the effectiveness of using incubators as a referral mechanism was mixed. Three papers were identified: two papers suggested the use of incubators to support underserved founders, in response to survey findings; one paper undertook statistical analysis of survey data to test the relationship between incubation and the amount of investments raised by early stage start-ups – but was not focused on underserved founders specifically.

The latter study found that incubators can have a positive effect on the amount of funding that startups attract and the ability of start-ups to attract funding from formal investors and banks. This is partly due to the ‘network broker’ mechanism which refers to the benefits that start-ups enjoy from being connected to external funding sources through the incubator’s network (Van Rijnsoever, Van Weele and Eveleens, 2017).