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1.1 Why diversity and inclusion matters

In this section:

Finding What Works:

Pathways to Improve Diversity in Venture Capital Investment

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Venture capital investment into high growth companies helps shape the economy of today and the future.

In this context, Brodnock and Lenhard (2023)1  state:

  • 1

    Brodnock, E. and Lenhard, J. (2023) Better Venture – Improving Diversity, Innovation, and Profitability in Venture Capital and Startups. Holloway.

VCs are the kingmakers of our digital age. They filter who gets money to build companies and bring ideas to market. Better Venture 2023

Similarly, the British Business Bank emphasises the value of diversity and inclusion in the economy:

Breaking down structural barriers within our industry is not only the right thing to do but also leads to improved outcomes. As the largest domestic investor in venture capital firms, we take our responsibility as a Limited Partner very seriously. We recently became a signatory of the Investing in Women Code, one of the first institutional investors to do so. This initiative supports the advancement of female entrepreneurship in the UK by improving access to finance. We are committed to using our position as an LP to drive greater diversity within General Partners’ teams as well as in the wider ecosystem of businesses we invest in. Catherine Lewis La Torre CEO, British Patient Capital, 2023

Diversity and inclusion matters in venture capital because of the benefits that it can accrue to investors, companies, and the economy. Diverse teams can bring new insights, perspectives, information, and competencies, which may help them make better decisions and financial returns in an often uncertain and competitive environment (Financial Reporting Council, 2021; Harvard Business Review, 2018).2 ,3  While it can be challenging for diverse teams to process different perspectives and information, those that are actively managed and exhibit high levels of inclusion can lead to positive performance (Peterson, 2020).4  For example:

  1. Diversity can improve financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns (Harvard Business Review, 2018)5 .
  2. There is also a positive and statistically significant6  association between board diversity and firm innovation; in this, the interplay between cognitive diversity (experience and expertise) and demographic diversity (e.g. gender, ethnicity) is important (Makkonen, 2022)7 .

The benefits of diversity and inclusion are widely recognised, but the evidence is mixed and often inconclusive on how to achieve them. Giving venture capital firms a blueprint for how to improve could have a major impact on the UK economy through the latent potential not yet attracting the investment it should.

  • 2

    Board Diversity and Effectiveness in FTSE 350 Companies. Financial Reporting Council, London Business School Leadership Institute and SQW (2021).

  • 3

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

  • 4

    Peterson, R. (2020) The science behind successful teams. London Business School Leadership Institute

  • 5

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

  • 6

    We generally used the 5% threshold for statistical significance, but where the sample sizes were small, we investigated whether the results significant at a level between 5% and 10% fit into a pattern that would further support the finding.

  • 7

    Makkonen, T. (2022) Board diversity and firm innovation: a meta-analysis. European Journal of Innovation Management.