Venture capital has resisted the push towards diversity and remained an elitist club
We can thank the television programme Dragons’ Den for popularising the process of entrepreneurs pitching for investment. Since its inception in 2005, 18 deep-pocketed dragons have appeared on the show, all vying to secure a piece of the next world-beating venture. Of those 18 dragons, seven – or 40 per cent – have been women. But if the show’s lineup truly reflected venture capital firms in the UK, the number of female dragons would be just two, or 13 per cent.
Outside of stylized TV studios, the reality is that raising capital remains a small and exclusive club, reserved for those that look a certain way and operate within a certain circle. Although diversity in venture capital is a work in progress, we remain a long way from equal representation.
The statistics show it helps to be male, white and a Russell Group university alumnus if you want a job in investment. There’s a small pocket of similar people who decide which companies are able to grow and which will fall at the first fundraising hurdle. In 2019, Diversity VC revealed that only 10 per cent of senior VCs roles in the UK are taken by females.
This disparity presents a problem: why should this one specific type of person decide which startups deserve funding? Or – perhaps more importantly – why should they decide which problems are worth finding solutions for? Crucially, the diversity bias is then borne out in which businesses raise money. A report by Extend Ventures found that between 2009 and 2019, 68 per cent of funding went to all-male teams, 29 per cent to mixed gender teams, 3 per cent to all female-teams, and an average of 1.7 per cent to all-ethnic teams. Of course there are other factors that perpetuate this inequality, but there’s no denying that consciously or unconsciously investors are backing founders in their own image.
These biases are then ingrained within the sector’s own framework. Investment teams are largely incentivised by carry fees and securing deals, and as a result will typically look for businesses similar to those that have previously succeeded. Underrepresented founders can be considered more “risky”, due to a lack of past successful precedents. The trend becomes a self-fulfilling prophecy.
These statistics would be a cause for concern in any industry. But within a sector that brings about such radical, accelerated change, and directly informs the way we live, this data is deeply problematic. The businesses that raise significant capital are the ones that quadruple their headcounts in a year. Their founders will build multi-million pound businesses, sell them and then often move into the investment space. And so the imperfect cycle continues.
This closed ecosystem of venture capital traps funding within a sealed loop, inaccessible to the majority of entrepreneurs. And because the sector is opaque, so are the processes and insights. A scientist with a green alternative to petroleum should not need to be an expert in creating pitch decks in order to raise funding for her or his business. The process of raising capital becomes a cryptic, esoteric language that only a certain type of person knows how to speak. The more insular the sector is, the less meritocratic it becomes.
While humanity faces some of its biggest challenges to date – from climate change and resource depletion, to the war on plastic and growing social inequality – these challenges also present us with our biggest opportunities, many of which can be addressed with innovation and technology. By balancing the boardroom of venture capital, we can alleviate the effects of bias and instate funding as a process based on merit and vision, rather than knowledge and network. By levelling the playing field, the best ideas will succeed and deserving startups will achieve what they often talk about achieving: genuine, meaningful change.