Is there a diversity problem in venture capital?
The year 2020 is a year like no other. While data shows the pandemic hasn’t affected the overall amount VC dollars invested in tech companies (on par with previous years; US), it has already had a disproportionate effect on the funds allocated to women-led businesses. Venture checks for female founders are at their lowest since 2017. The broader picture is even grimmer, with a real threat to roll back the last 30 years of economic progress for women (according to the International Monetary Fund).
In the final quarter of the year, we take the time to reflect and understand the diversity problem in venture capital. What can be done to address the heightened existing inequalities female founders now face? Following our ‘Women in Tech’ issue, we turn* to early stage female VC investors – from partner level to analyst, investing across various sectors (including proptech, impact, supply chain), asking what can be done to level the playing female field for women entrepreneurs.
Esha Vatsa, Pi Labs
Since joining Pi Labs, Esha Vatsa has been covering the firm’s investments across a broad range of verticals within PropTech. She spends most of her time talking to founders who are looking to raise seed capital and working with the firm’s portfolio companies.
Siobhan Brewster and Tzvete Doncheva, Amplifier
Siobhan is a Partner at Amplifier, where she is currently managing fundraising and deal sourcing activities. Siobhan has international experience investing and working across Europe, the US and Latin America. Tzvete is a visiting analyst at the firm, supporting the investment deal flow process. She also runs ‘Ecosystem’, a platform (newsletter and online initiatives) bringing together VC investors, founders and operators.
Beatrice Aliprandi, Talis Capital
Beatrice is a Principal at Talis Capital which she joined in 2018 after spending three years working at Jefferies in their Investment Banking division, where she has been involved in several transactions primarily in the Technology, Media and Telecoms space with a combined value of c.$4bn.
Maren Bannon, January Ventures
Maren is the founding partner at January Ventures. She is an entrepreneur at heart who has been building tech businesses for the past 15 years.
Namratha Kothapalli and Emily Meads, Speedinvest
Namratha and Emily are part of the Deep Tech Team at Speedinvest. Namratha is a senior associate at the firm and a software engineer by background, while Emily is an analyst and a physicist by training, with a soft spot for academically inclined start-ups and is working on Speedinvest’s Quantum Thesis.
Is there a lack of diversity when it comes to fundraising?
Beatrice: It’s a fact that female-founded businesses don’t receive anywhere near as much funding compared to their male counterparts. A huge component of this is the fact that there are not enough female investors: it’s been widely studied that investors are more likely to invest in founders that are ‘like’ them: so, when investors are college-educated, white-males, this is reflected in the type of founder that they invest in.We are definitely starting to break this vicious circle, though: increasingly more female GPs are advancing their careers and becoming noteworthy in the VC ecosystem.
Equality, and diversity in all of its forms, is not just something that we should strive for because it’s ‘right’ from a moral perspective: there’s substantial research to suggest that it actually just makes better business sense. More diverse teams are typically more successful, due to the broader diversity of thought and ideas, which ultimately generates higher returns.
Esha: If we just look at gender diversity, according to some recent stats, under 2% of UK VC deal value goes to all-female founding teams while about 90% goes to all-male founding teams.The gap is just staggering, and this might partly be reflective of the lack of diversity in the pipeline but is perhaps more a consequence of lack of diversity within VC teams. Diverse teams can actually do better at finding founders from minority backgrounds through their individual networks but also help reduce unconscious bias which can be a big hurdle for underrepresented founders in making it through various stages of the investment process.
Emily: The question isn’t ‘is there a lack of diversity’, but rather ‘how bad is it’. There is a pressing need for all in the industry to understand the extent of the lack of diversity in fundraising, and act accordingly to improve it. Maybe the numbers need to be repeated again, and again - from a report examining publicly available VC-backed deals over the past five years, polling over 10 000 founders : 77.1% of founders were white—regardless of gender and education, Women-funded startups received only 9% of investments. And this only scratches the surface!
Siobhan: Unfortunately, focusing on the supply chain means that we tend to see more male-led companies fundraising as most founders have spent the first part of their career in traditionally male-dominated sectors such as logistics, maritime and mobility. Internally, we prize different backgrounds and believe that the more perspectives we have on a problem, the closer we are likely to come to a solution.
Tzvete: Diversity is multifaceted - gender, background, experiences. Looking solely at gender, less than 20% of UK’s tech industry is made up of women. This impacts the entire fundraising process – as the number of female decision-makers in investment teams increases, so will the number of VC-backed female-led companies(statistics show women are twice as likely to invest in women!). A big barrier for underestimated founders continues to be the lack of direct investor referrals.
What problems does this create and what sectors are affected the most?
Beatrice: The indirect consequences are, at large, a retaliation of women who on average end up being less successful in their careers than their male counterparts, resulting in them possibly dedicating more time to unpaid work and family care: thereby, earning less and being less independent. The most sinister knock-on effect that this warped ecosystem has is its impact on attracting candidates to VC. If the positions of power are largely filled by white males, there is little diversity in role models for younger generations to look up to: meaning that candidates from underrepresented groups are far less likely even consider VC as a career in the first place. It indirectly creates a world that is created by men, for men, which fails to include women’s perspective and reinforces archaic gender stereotypes. It’s a vicious cycle.
Esha: It can reinforce long standing beliefs that certain types of founding teams – whether from particular education backgrounds or institutions, or of a certain gender – deliver better returns. While we know from research studies that is just not true, repeat experience can just create blind spots.
Emily: The lack of fundraising in diversity, itself further worsens the lack of diversity in fundraising. It’s like a self-fulfilling prophecy. By not funding, or totally underfunding companies formed by underrepresented minorities, the same demographics continue to lack role-models and leaders they can relate to. This only further exacerbates the challenges that are encountered in this area of work, adding unnecessary hurdles to jump. Furthermore, there is undoubtedly a bias towards the same types of companies being funded again and again, and certain sectors ending up with disproportionate amounts of money.
Siobhan: The world is a varied and colourful place and when that isn’t reflected in a team or a solution, it can mean that it isn’t sufficiently addressing the market potential. We could generalise that certain sectors are affected worse than others but that doesn’t allow for the exceptions and can end up compounding the problem and the inherent biases of people. We have a wonderful founder working on a predictive software stack for autonomous vehicle applications - it is besides the point that she is a female, she is the best person for the job.
What changes would you like to see over the next year or so?
Beatrice: I would like all VCs taking tangible action to address the diversity issues that plague our ecosystem. Even if that’s taking small steps, such as participating in unconscious bias workshops, or hosting dedicated Office Hours sessions for underrepresented founders like we are at Talis. This change needs to be driven by not only women or underrepresented ethnic minorities, but by the men who, until this point, the system has benefited. The stats around gender diversity in funding are abysmal, so I want to see real acknowledgement from all investors in recognising that they are largely responsible for this funding gap, and that the power is with them to make a change. The end goal is seeing the gap in funding to female-led startups getting narrower to the point where we reach equality, though sadly, I feel like we may need a little longer than a year for that to happen.
Esha: I would love to see more diversity within senior teams at VCs. At the end of the day, VCs are the decision makers and unless they lead the change within their own teams, it will be hard for them to create a sustained difference in where their money goes.
Maren: Funds need to work at their stats, share and be public about them. The important thing is about setting goals and widening the top of the funnel so that you are seeing founders from diverse segments of the population that maybe you wouldn’t necessarily have access to through your own network. Female and underrepresented founders are over-mentored and under-invested in. Having a more diverse group of investors is a big step in the right direction in terms of having a more diverse set of founders funded.
Siobhan: I would like to see the narrative change such that more people of diverse backgrounds are empowered to build startups and able to manage the risk on the same terms as others. I am heartened by the Black Lives Matter and Me Too movements and hope to see sustained change in the way people address diversity. It should be viewed as a strength and addressed in the same way that we assess complementary skillsets of founders. If they all think and act in the same way, then they will be unlikely to identify their blind spots. Experience is key. We need to work on ensuring that more people have the opportunity to build that in their chosen field in the first place.
Namratha: Raising a fund is insanely expensive. You need to be able to survive for 12–36 months which is the time it typically takes to raise a fund. And then there’s the General Partner commitment and you need to make investments while fundraising so you can prove “your story”, which are essential features of any fund, the costs of which are staggering. Until there is a level playing field for the people raising and allocating the capital, it will not be fair for the founders pitching and receiving that capital. It should be much simpler to start a new fund! Give money to more diverse GPs; that will lead to more diverse investment teams and more diverse investments.
Tzvete: Venture capital investment drives economic growth as it fuels both innovation and job creation. Despite women receiving a fraction of venture funding, data shows female-funded companies outperform male-led businesses (and even exit a year faster than the overall market!). It is not a question of ability but of access – talent is spread equally, opportunity is not (credits to Lolita Taub). A big factor holding female and underestimated entrepreneurs back is the lack of valuable connections and a strong industry network. I would like to see these ‘intro’ barriers in the fundraising process breaking. It is also what inspired me to start the ‘Ecosystem’ project, where founders can not only better understand how the fundraising process works but can get the opportunity to ‘connect’ with venture capitalists in the ‘Ecosystem Giants’ sessions. These online initiatives create the environment of a first common ‘touchpoint’ between investors and founders; and I know many attendees have been successfully able to connect with the speakers afterwards. Beyond that, the change that needs to take place is top-down – firms hiring for diversity will result in different networks being brought together (and a diversification of deal flow pipelines) and will lead to more visible, diverse role models in the ecosystem. When we are designing a world that is meant to work for everyone, we need to have diversity of thought on both sides of the table.