Overall, the evidence from all the strands of research (literature review, interviews with venture capital firms, survey of entrepreneurs and analysis of secondary data) reveal a range of actions which can be effective if implemented with genuine commitment and meaningful action.
The findings from the literature review set out a breadth of evidence on the lack of diversity in venture capital investment. While suggestions are made on how to improve, there is limited evidence on the effectiveness of specific actions aimed at increasing diversity. Where this evidence is available it tends to focus on gender, which highlights a clear need for further research into actions to support other underserved communities. The literature review suggests that very few actions have been tested in practice and evaluated. Where the evidence reviewed was more robust, this was primarily based on statistical analysis of secondary data (e.g. regression analyses of Crunchbase data).
This research has contributed new evidence by asking investors and entrepreneurs to share their experiences of the most effective actions. By interviewing venture capital firms with a strong track record, or clear commitment to, improving diversity in their portfolios, and entrepreneurs who have sought or secured VC investment, this research harnesses the evidence of real-life experience. Our analysis of interview responses revealed three groups of venture capital firm consultees with common views on the effectiveness of actions. This suggests that, when it comes to stimulating a more diverse community of venture capital-backed entrepreneurs, there are at least three different ‘pathways’ to success that venture capital firms have taken. These firms were some of the highest ranked in the industry in terms of investment into underserved founders and commitment to diversity.
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.
Venture capital firms who informed these findings recognised that current issues with diversity in venture capital investment are not the responsibility of founders, but of the venture capital firms themselves. Furthermore, success could depend more on execution and monitoring than the specific characteristics of each venture capital firm, as there is currently no evidence of consistent characteristics between firms that take a particular approach. This is a clear area where further research would be valuable, that can be taken forward through industry initiatives such as the Investing in Women Code and the Diversity VC Standard. Reporting of actions taken across all three pathways could be analysed in relation to firms with similar characteristics (such as investment stage, for example).
While these pathways have been derived from venture capital firm interviews, survey responses from entrepreneurs validate these approaches and offer further detailed insight for venture capital firms. We highlight the following findings from surveyed entrepreneurs:
- Venture capital firms and entrepreneurs agree on the importance of diversity within venture capital firms themselves and the potential influence it can have on investment reaching a diverse group of entrepreneurs.
- Entrepreneurs place high value on feedback and cross-referrals to other venture capital investors.
- The role of the Limited Partner (LP) community is key to encouraging adoption of actions and accountability.
The nuances highlighted in entrepreneur responses help shed light on which actions could be effective in reaching different groups of underserved founders, although there was more consistency than variance in responses. This suggests actions to improve diversity of investment can impact a breadth of underserved entrepreneurs. The differences are not statistically significant, possibly due to small sample sizes, but provide an indication of views and experiences among different groups of founders.
- Female and younger founders particularly emphasised the importance of diversity among senior decision-makers at venture capital firms, with around 80% of women and 30–39-year-olds suggesting this was effective in improving diversity.
- Female, Ethnic Minority and younger founders were also more likely to highlight the effectiveness of reporting data and monitoring progress.
- For founders who have not attended university, venture capital firms’ communication of investment strategies, provision of feedback and commitment to diversity on their websites along with cross-referrals were seen as particularly effective. This could reflect the importance of building networks for these founders.
'Evidence on Each Action' in section four sets out more detail on differences in responses by gender, ethnicity, educational background, age, and whether an entrepreneur is venture capital-backed or venture capital-ready. Further research would benefit from considering the intersectionality between different groups where sample size allows.
Table 1 summarises the insights from the surveys with venture capital firms and entrepreneurs, with actions listed in order of perceived effectiveness by venture capital firms, combined with the share of entrepreneurs that assessed them to be ‘effective’ or ‘somewhat effective’.
| Action ranked in order of perceived effectiveness | Venture Capital Funds (Rank) | Entrepreneurs (Rank) |
|---|---|---|
| Venture capital firms should ensure senior decision makers, including Investment Committees, are made up of people from a diverse set of backgrounds | 1 | 4 |
| Venture capital firms should take steps to increase the diversity among those involved in the identification of potential propositions | 2 | 1 |
| Limited Partners should encourage venture capital firms to monitor and report progress in supporting diverse entrepreneurs | 3 | 3 |
| Venture capital firms should participate in industry-wide surveys and make D&I data on their investments public | 4 | 5 |
| Venture capital firms should use ‘office hours’ to network with and provide support to diverse entrepreneurs | 5 | 10 |
| Limited Partners and venture capital firms should design funds that are targeted specifically at diverse entrepreneurs | 6 | 13 |
| Venture capital firms should provide constructive feedback on the quality of propositions and reasoning behind investment decisions | 7 | 2 |
| Venture capital firms should use scouts to access diverse networks and identify quality propositions | 8 | 7 |
| Venture capital firms should use accelerators as a referral mechanism to identify and support diverse entrepreneurs | 9 | 8 |
| Venture capital firms should use incubators as a referral mechanism to identify and support diverse entrepreneurs | 10 | 9 |
| Venture capital firms should use incubators as a referral mechanism to identify and support diverse entrepreneurs | 11 | 6 |
| Venture capital firms should clearly communicate their investment strategies and commitment to diversity via their website and social media | 12 | 11 |
| Entrepreneurs should actively engage on social media to raise awareness of their business/proposition and connect with venture capital firms | 13 | 12 |
| Venture capital firms should actively monitor social media to identify strong propositions from a diverse pool of entrepreneurs | 14 | 14 |
Contrasting findings have been found across sources relating to the use of social media. From the review of academic literature, there are two robust studies that show, in the United States, venture capital firms that use social media to engage with potential investment opportunities can see a positive impact on the diversity of their portfolios. These studies contrast with findings from our own venture capital firm and entrepreneur surveys where social media was perceived to be of low value and may potentially even reinforce existing biases. Venture capital firms should be aware of this tension and proceed carefully.
Findings from analysis of Beauhurst data and observations on venture firms collected by SQW support some actions, although need to be considered in context of the depth of insight from the qualitative surveys.
- Firms who make public commitments to diversity – proxied by signing the Investing Women Code – have a higher proportion of investments in both female and Ethnic Minority founders. Firms who state a commitment to diversity on their website have higher investment in female founders, but not Ethnic Minority founders. These results are mixed but give some indication that external commitments have an impact.
- Analysis of the correlation between founder diversity and investor diversity (using the gender mix of key people for the venture capital firms listed on Beauhurst – up to 50 per firm – as a proxy), identified a small, positive correlation. This suggests that more gender diverse founding teams tend to attract investment from more gender diverse investing teams. Although a positive effect exists, the magnitude of the effect is very small. There were no statistically significant findings for ethnically diverse founders1 .
- 1
The 5% threshold for statistical significance (i.e. a 5% chance to being wrong when concluding that a statistical relationship exists) was used in the analysis.