Finding What Works: Pathways to Improve Diversity in Venture Capital Investment
Venture capital (VC) investment plays a critical role in starting and scaling innovative companies. The UK has the largest VC market in Europe, larger than France and Germany combined. The ratio of venture investment to GDP in the UK has almost quadrupled from 0.27% in 2015-17 to 0.97% in 2020-2022. This investment is mainly in software, fintech, R&D intensive and deep tech sectors.
This overall growth in UK VC investment masks a wider issue in the market: the investment has been heavily skewed toward groups with common characteristics. There has been some progress over time, but diversity in VC investment remains extremely low. For example, the share of equity deals made to all-female teams increased from 5% in 2011 to 9% in 2022 [Ibid 1], but their share of total equity investment remains at just 2%. The limited data on the share of investment received by teams in terms of their ethnicity and socio-economic status paints a similar picture.
The lack of diversity is symptomatic of underlying problems in the VC market that are specific or more acute for underserved founders. These include: the availability and transfer of information between founders and potential VC investors, access to investment and business networks, lack of diversity within VC firms and funds, and founders being unaware of or discouraged from seeking VC investment.
SQW, supported by Beauhurst, Qa Research, Erika Brodnock (Extend Ventures) and Professor Monder Ram (Centre for Research in Ethnic Minority Entrepreneurship), worked in partnership with the British Business Bank to investigate what works for improving diversity in VC investment – identifying clear evidence-based actions that can and should be adopted by UK VC firms.
We examined three diversity characteristics: gender, ethnicity, and education as a measure of socioeconomic status. The research involved a review of existing literature; primary research with 40 VC firms and 124 VC-ready and VC-backed entrepreneurs; and analysis of Beauhurst and Extend Ventures data. The findings were synthesised and tested with industry experts and the British Business Bank.
Whilst the study found that there is not one solution to improving diversity, VC firms that had been successful in supporting underrepresented founders typically took one of three pathways:
1. 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.
2. 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.
3. 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.
These pathways are not mutually exclusive, instead the research found that it is important for VC firms to choose a tailored approach that works for their firm and commit to meaningful and consistent action over a sustained period of time. Avoiding tokenism is critical to success.
Going forward, more rigorous evaluation of actions should be undertaken to formally assess their impact on diversity outcomes. This should seek to assess the effectiveness of actions for different groups of entrepreneurs and for different types of VC firm. Detailed research with VC firms to understand the barriers to implementing actions and to investing in entrepreneurs from underserved communities would help support and drive the adoption of actions by the industry.
The report is available here.
 Small Business Equity Tracker 2023, British Business Bank (2023).  Small Business Equity Tracker (2022) and Small Business Equity Tracker (2023). British Business Bank, based on PitchBook data.