Ranked 11 out of 14 actions
Venture capital firms and other intermediaries should encourage cross-referrals to other funds that may be interested.
Overall effectiveness: Medium
Potential to connect venture capital firms to a diverse group of founders; however, needs to be implemented in the right way
Venture capital firms seeking to support the development of founders from underserved communities
Relevant investment stage
Seed, venture and growth
Ease of implementation
Easy – this action requires venture capital firms to be proactive about making crossreferrals to other firms.
It is important that venture capital firms are clear in their referral as to why they are not investing in a company, and why it might be a good fit for another venture capital firm.
Perceived effectiveness score 1 = Least effective, 5 = Most effective
Findings by entrepreneur characteristics:
- Venture capital-backed/venture capital-ready: A slightly higher proportion of venture capital-ready entrepreneurs (76%) said this action is effective, in comparison to venture capital-backed entrepreneurs (73%).
- Gender: No major variance observed.
- Education (socio-economic): Respondents who did not go to university were more likely to say this action is effective (78%), in comparison to respondents who have a postgraduate degree (67%).
- Ethnicity: No major variance observed.
- Age: A higher number of respondents aged 20-29 and 30-39 years old said this action is effective (86% and 80%, respectively), compared to 40-49 year olds (76%), 50-59 year olds (69%) and those aged 60+ (70%).
Venture capital firms’ feedback:
Venture capital firms recognised some of the benefits of cross-referrals, but overall did not consider this action to be effective in increasing diversity in venture capital investment. There were two reasons for this:
Firstly, if a proposition is turned down, this is usually for a valid reason that would mean the proposition is unlikely to be of interest to other firms. If a proposition is rejected due to specific criteria set by the firm (e.g. sector focus), then the proposition would be referred onto other relevant firms. It is not clear how often this occurs in practice.
Secondly, the process can promote the existing biases and circularity in the system, as those with connections are arguably more likely to be referred to other firms.
The evidence on the effectiveness of cross referrals in improving diversity was limited. Three papers were identified, one based on an author opinion (focused on underserved founders) and two based on statistical analysis of firm data (and semi-structured interviews), and statistical analysis of interview data, respectively. The latter two studies are not specific to underserved founders.
Research found that a start-up proposal that is referred has a better chance of passing the initial screening process than a ‘cold’ proposal that is not referred (Guenther, Ozcan and Sassmannshausen, 2022), and is more likely to secure funding (Batjardal, 2005).