Diversity levels in venture capital firms deemed ‘unacceptable’

Urgent reforms are needed to address the ‘unacceptable’ lack of diversity in the venture capital sector, according to a report from the Treasury Select Committee which highlights the knock-on effect on funding for women-led businesses.

The report cites evidence from British Patient that looked at the proportion of funding from the venture capital community that went to all-female founded firms. It found that the proportion going to all-female founded teams was just two per cent. The report found a similar lack of diversity when it came to funding going to founders from ethnic minority backgrounds. Extend Venture’s, an organisation that supports diverse entrepreneurs, found that less than two per cent of venture funding went to black and ethnic minority-led businesses.

The lack of diversity in funding extends to the investors themselves. The report cites data showing that only 15–18 per cent of angel investors are women and only about 11 per cent of the existing angel community are from ethnic minorities.

The report also highlighted the lack of transparency and consistency in reporting diversity in the sector. It says many venture capital firms are small and operate on personal networks. They are not legally required to report either their
own employee demographics or the demographic breakdown of the founders in whom they invest. Data that does exist suggests  an average of 32 per cent female representation in their investment teams and 24 per cent on their investment committees, while 35 per cent of their venture capital deals involved at least one female founder.

The report states: “If firms are mostly staffed by white men, this may also contribute to a further lack of diversity in the business connections they make (that ultimately lead to funding allocation.”

It calls for urgent action to improve the transparency and consistency of data, saying the Treasury should make provision of diversity statistics a requirement for eligibility to receive certain tax reliefs from April 2025. And it says firms should be required to disclose the gender and ethnic breakdown of both recipients of their funding and their own staff.

Other recommendations include that  all relevant organisations in the venture capital industry should become signatories to both the Women in Finance Charter and Investing in Women Code. While the report says it is stopping short of calling for compulsory membership, it recommends that the Treasury and the British Business Bank adopt a “comply or explain” policy with regards to both.

Another recommendation is for the Government and British Business Bank to consult on the creation of one or more venture capital funds “with the specific purpose of promoting greater diversity in venture capital allocation”.

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