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VC funds have a diversity problem

The past decade has supported the venture capital market generally, but there has been a disproportionate impact on female-founded companies seeking funding…

The past decade has supported the venture capital market generally, but there has been a disproportionate impact on female-founded companies seeking funding…

Venture capital fundraising in the US reached an all-time high of USD330 billion in 2021. But through one lens, things look very much the same as they did 10 years ago. The capital is still not finding its way into female-led start-ups. 

Though they received an additional USD3 billion in venture capital in 2021, compared to 2020, this was still only 2 per cent of the total raised that year, according to PitchBook. In the US, women-led start-ups have not received more than 3 per cent of the total venture capital raised at any point in the past 10 years. 

The data is important because research shows that start-ups in the US with at least one female founder will employ 2.5 times more women than start-ups with all-male founders, according to industry association Kauffman Fellows, compounding diversity through the wider economy and supporting financial performance. 

Companies in the top quartile for gender diversity (30 per cent minimum women) on executive teams are 25 per cent more likely to have above-average profitability, and ethnically diverse organisations are 36 per cent more likely to outperform their peers, according to McKinsey’s most recent diversity study, in 2020. 

A study from employment service provider, Monster in 2020 showed that, for 83 per cent of Gen Z candidates, inclusivity is a significant factor when choosing an employer. 

“When I speak to GPs who are doing ESG well, have a diversified board, company, they tend to also be the ones making good returns and having higher valued funds,” says Rhonda Ryan, head of EU private equity, Mercer. 

Simon Hopkins, co-founder and COO of UK-based investor Angel Acadame, says: “It seems really obvious, but if you want your product to appeal to a diverse group of consumers, it’s probably helpful to have a diverse management base.” 

Seeking a partner

The under-representation of female-led start-ups is of course a reflection of the VC industry itself. 

More than one third of Europe’s top VC firms are yet to hire a female partner, despite the pressure on the industry to improve on diversity and the commitments it has made, according to data platform Sifted. 

In 2021, only 15 per cent of US GPs in venture (VC firms with more than USD50 million) were women, according to PitchBook.

“I think the alts space has a long, long way to go in terms of diversity – they’re very much trying to catch up,” says Ryan. “Even only three years ago, I don’t think GPs had much awareness of the lack of diversity.” 

According to data from Morgan Stanley, traditional male-led VC funds are currently doing the least work towards improving diversity issues, with only 41 per cent appointing more women, more racially diverse (African American, Hispanic, Latino, Asian and all other non-white) LPs, GPs, partners or board members, compared to 63 per cent of racially diverse VCs and 64 per cent of female VCs doing so. 

“The bigger funds who aren’t diverse risk ‘groupthink’,” says Ryan, “if you’ve been to the same university, you look the same, you often think the same and you’re likely to miss things that you would otherwise pick up on with a more diverse team. You can’t know what your consumer wants if you don’t relate to them in any way.” 

In Europe, one barrier blocking more female partner representation is the fact that Europe’s top VC funds tend to hire from a pool of existing investors, narrowing the talent pool. “There seem to not be enough potential female candidates for senior roles that tick all the boxes – ie, having started at McKinsey or Goldman, then done a Harvard MBA, then two years at a startup before joining VC,” said Julia Dous, founder and CEO of Grow Diverse (talent advisory firm) in an article recently published by Sifted. 

Next generation

Perhaps in response to this, there is now a growing number of female-led or more diverse VC funds with mandates for changes. According to the Inclusive PE & VC Index Score 2021, published last year by the Equality Group, the three highest scoring VC firms were Sweden’s Kinnevik, UK-based Bethnal Green Ventures and UK-based Atomico Partners. According to their websites, all three still have male CEOs. 

Revaia is a women-founded growth equity firm, based in France, that invests in a diverse range of tech start-ups with an ESG angle, and looks to grow these companies’ ESG practices further. It places emphasis on the fact that it leads by example, rather than highlighting the fact that it’s Europe’s largest women-led VC and growth equity investor, as it believes that this is the way to instigate real change throughout the industry. 

Bettina Denis, Revaia’s COO and head of sustainability, predicts that companies who do not pay attention to the importance of diversity and who don’t diversify their teams will no longer exist in 10 years’ time. 

“Five years ago, it was just the beginning, but it’s become very clear in recent years that clients are increasingly prioritising sustainability and diversity when investing in a firm. There’s currently a real acceleration on this point, and the next generation values this even more,” she says. 

“There’s a sense of urgency for GPs to actually change,” says Ryan, “and it’s up to us – LPs, GPs, investment consultants – to mentor and support women and ethnic minorities and change the current landscape. It’s going to take time, and it’s going to take big money to stop committing to those who aren’t changing.”

The opportunity to back women and minority-owned firms “has never been greater”, claims investment advisory Fairview Capital’s latest Market Review. The investment advisory found that the number of woman- and minority-owned venture capital and private equity firms grew by 25 per cent between 2020 and 2021, and that 280 woman- and minority-owned firms raised capital during the year, up from 234 firms in 2020.

“There are a lot of great early-stage companies out there with women founders, and I suspect that ten years ago that wasn’t the case,” Hopkins notes. 

Can female-led start-ups capture more than 3 per cent of the venture capital raised this year, or next? 

According to Morgan Stanley data, two thirds (68 per cent) of VCs surveyed in 2020 said they were more likely to invest in racially diverse founded companies in the coming year. The same figure could not be found for female-led companies. 

Ultimately C-suite leaders must address barriers to diversity in their companies too. 

People spoken to for this article cite examples of companies and managers they have worked with who previously used the description ‘diverse’ because the managers came from a different region or industry, or an example of other companies simply not being aware of their reputation as a non-diverse and predominantly male-led company. 

While this article mainly focuses on diversity from the perspective of gender, this is not to say that the inclusion issues concerning non-white and LGBTQIA+ peoples are not just as important or prevalent in the industry.

“What I genuinely hope is that, in ten years’ time, we’re not even talking about this,” says Hopkins, “it would be great if our organisation was redundant. I think that there will still be all-male founded companies, but I think it will be quite unusual. This needs to be a non-conversation.”

Read the rest of the Private Equity Wire Insight Report: Creating Values: Behind the ESG Revolution in Private Equity

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