By Catherine Lewis La Torre, CEO, British Patient Capital
Low talent diversity, a lack of professional development and barriers to entry may hinder the development of the next generation of senior UK venture capitalists, says a new report.
It’s no secret that the world of venture capital (VC) lacks diversity and that it needs to change. The UK needs to attract world class venture talent and global VC investors that will make better, more creative decisions leading to higher returns and ultimately more available capital.
The British Business Bank’s Small Businesses Equity Tracker shines a fresh light on the problem that was first highlighted by the Government’s Patient Capital Review of 2017. It reveals less than a third of junior and mid-level venture capitalists are female. At higher levels the problem is even worse, only 13% of senior venture capitalists are women.
This lack of diversity has a clear impact on the investment decisions being made in the small business finance ecosystem. Earlier this year the British Business Bank’s UK VC Female Founders report found that for every £1 of venture capital investment in the UK, all female founder teams got less than a penny.
The Bank’s Equity Tracker also suggests that VC talent disproportionally comes from wealthy backgrounds. It found more than 60% of the General Partners (fund managers) surveyed invested more than £100,000 of personal savings into their first fund. Almost all GPs used personal wealth to fund their first commitment, narrowing the potential pool of new GPs to those individuals with existing, large, personal wealth.
Why is this a problem?
Going beyond the issue of social mobility, more diverse teams make better investment decisions. The McKinsey & Company Diversity Matters research shows companies in the top quartile for racial and ethnic diversity are 35% more likely to have higher financial returns than their respective national industry medians, and companies in the top quartile for gender diversity are 15% more likely to have higher than average financial returns.
Having female and BME executives in investment decision-making positions in VC firms increases the propensity of these firms to back female-led and BME-led founded businesses.
What is hampering diversity in the VC talent pipeline?
The British Business Bank research shows that referrals through professional and personal networks are the most common way into the industry. More than one in three (34%) venture capital analysts and associates entered the industry through a referral via a personal or professional network. The problem is worse at a more senior level with 52% of principals and above entering the industry through the same links. This increases the likelihood of hiring people with similar backgrounds and experiences. That narrow pool of recruitment is seriously limiting the diversity and social mobility of talent.
The British Business Bank’s recent research in UK VC & Female Founders, indicates that networking also has a strong impact on subsequent venture capital investments. Start-up founders who are recommended to a VC firm by someone in the VC’s network, known as a ‘warm’ introduction, are 13 times more likely to get funded than founders who apply without a recommendation. The data shows that all-female teams are less likely to get a warm introduction to a VC firm – although when they do, they progress proportionately.
Developing solutions to improving diversity in VC
British Patient Capital is committed to doing its part to improve diversity in VC. This includes properly analysing the issue and publishing research and recommendations. We are also backing managers who can tap into broader networks and with new approaches.
British Patient Capital has also adopted the recently launched Institutional Limited Partner Association (ILPA) diversity template for venture capital firms raising capital. The new template, part of an expansion of ILPA’s due diligence questionnaire, enables venture capital firms to measure and report on the gender and ethnic diversity of their teams, by seniority and role, and aims to encourage conversations about the benefits of diversity.
We believe that increasing diversity of VC fund managers will be better for performance and could lead to differentiated investment strategies.
More diverse teams could access a wider set of entrepreneurs, sectors and technologies than currently invested in ensuring that companies may secure the investment they need to enable their businesses to prosper and grow.