In a saturated market, diversity is crucial for identifying innovative venture capital (VC) investments that cater to varied consumer groups and market ideas and is increasingly important as younger generations gain influence.
However, even in today’s supposedly forward-thinking society, the evaluation of startups is often subject to bias associated with gender, race and more.
With VCs and angel investors often relying heavily on recommendations from within their networks, which also frequently lack diversity, investment opportunities tend to follow a cookie-cutter approach.
This leads to a narrower range of perspectives and ideas being brought to market, potentially missing out on high-growth opportunities and innovative solutions that could address broader societal needs.
The many faces of VC diversity
Gender diversity is one of the most commonly discussed issues facing the investment landscape, with women significantly underrepresented in technology investments as entrepreneurs and VCs. According to Diversity VC, women represent only about 13% of senior investment roles in UK VC firms. Consciously or unconsciously, female-founded startups received just 9% of 2022’s total UK funding share.
Docsend.com’s analysis reveals a significant divergence in the time allocated to scrutinising female-founded company pitch decks by investors compared to their male counterparts. Women-led startups often receive more prevention-based queries that focus on defending their product’s market viability, while men are more likely to be asked promotion-based questions about growth potential.
However, racial and ethnic diversity is also a problem. Often lacking access to the networks and mentorship crucial for securing investment, startups founded by ethnic minorities typically receive less funding. Black entrepreneurs received only 0.24% of total venture capital invested in the UK between 2009 and 2019. Again, this is reflected in the representation of ethnic minorities in the venture capital industry, with Black, Asian, and minority ethnic (BAME) individuals holding a small percentage of senior roles in VC firms.
Startups in emerging markets are also often neglected, stifling innovation and economic growth in those areas and part and parcel of the wider issue of geographical diversity. A significant portion of UK venture capital is concentrated in London, leaving startups in smaller cities or less developed regions with fewer funding opportunities, or obliged to make frequent trips to try to meet with investors.
However, preferential investment treatment is not just about people. Certain technology types and business models gain better traction with investors than others, with investors often preferring to fund familiar business models and technologies that have a proven track record of high returns. However, this can lead to overfunding in some sectors, such as fintech, health tech or enterprise software, while others remain underfunded. There’s also a tendency to avoid investing in startups that tackle complex, long-term problems due to the higher perceived risks and longer timeframes for returns.
A fresh approach
This situation calls for a shakeup of the investor sector. Investors need to dedicate more time to exploring ideas that may not immediately resonate with their own experiences and consider assorted founder leadership approaches, personality styles and business models to more successfully navigate the dynamic and complex demands of evolving consumer markets.
We are seeing some progress, with government and nonprofit organisations backing diversity through grants, mentorship programs, and policy changes to reduce barriers to entry for underrepresented groups. The European Union supports programs such as Horizon Europe, for instance, which funds research and innovation projects focusing on inclusivity.
Some VCs have also established funds that prioritise underrepresented founders. In the UK, for example, the Angel Academe network is 70% female and invests only in companies with at least one woman in the founding team.
Distill Ventures’ Pre-Accelerator encourages underrepresented groups to apply for early-stage investment. However, even funds held up as the most active in supporting diverse founders still need to achieve parity. Boost Fund, for example, allocated 37.8% of its investments to majority or all-female-founded companies in 2022.
This is a huge step up, considering that only 9% of all deals in 2022 went to female-founded businesses, but there’s still room for improvement.
Prevention not cure
Prevention is better than cure, so it will be vital to see more initiatives focused on attracting a greater variety of investors from different socio-economic backgrounds and educating and training more traditional investors on inclusivity practices. By bringing a wider array of perspectives into the decision-making process, we would love to eliminate the need for minority-specific funds.
However, we cannot lay all responsibility at the investor’s door. While questioning bias contributes to a situation where minority-led startups receive less money from investors, founders can start to turn this situation on its head by reframing their responses.
In a survey by the FE+MALE Think Tank, founders who answered investors’ questions in a promotional rather than a preventive way stood a greater chance of funding. Organisations like Female Founders and Founders of the Future provide mentorship, networking, and support to underrepresented groups in the tech industry, which will help encourage proactive steps to redress the situation.
Addressing diversity in investment is not just a moral imperative but a strategic necessity for fostering innovation and capturing untapped market potential. While current efforts by government bodies, nonprofit organisations, and forward-thinking venture funds are commendable, there remains significant work to be done.
Encouraging a broader spectrum of investors and fostering inclusive practices can catalyse a more diverse and dynamic entrepreneurial landscape. Simultaneously, empowering underrepresented founders through mentorship and supportive networks can reshape the narrative and drive equitable funding distribution.
Ultimately, embracing diversity will unlock a wealth of opportunities, benefiting investors, startups, and society as a whole.
Naomi Owusu is the CEO and co-founder of Tickaroo.
The post Diversity is a competitive advantage for VCs. But too often, we see a cookie-cutter approach appeared first on UKTN.