Entrepreneurship can be extremely rewarding. The opportunity to be your own boss, making money doing something you love or getting the chance to meet like-minded people — these are just the tip of the iceberg when it comes to the benefits of being a self-employed entrepreneur. But with these perks come the challenges too. It takes several years of hard work, long hours, lonely days and continuous perseverance to get to the point where you can reap the rewards and achieve lasting success. In order to get past these hurdles, entrepreneurs need solid business support and the access to coaching, mentorship programmes and training that will help them succeed, as well as funding and access to ongoing financial support.
Sadly, this access to funding and support isn’t always available for many entrepreneurs, especially those from diverse or underrepresented backgrounds, including women, black or minority ethnic individuals or those from the LGBTQ+ community. A study looking into how venture capital (VC) in the UK has been invested over the past 10 years according to race, gender and educational background highlights some shocking statistics. According to the research, all-ethnic teams received an average of just 1.7% of the VC investments made at seed, early and late-stage over this whole period. And while women account for a half of the population, female-only founders received less than 6% of VC funding.
The current inequality in VC funding for diversity entrepreneurs is extremely frustrating. Firstly, talented entrepreneurs with brilliant business ideas are being completely overlooked, meaning we’re missing out on the huge benefits their innovations can bring to both our lives and the overall economy. Secondly, investors are missing out on great opportunities to put their money behind these ventures and receive superior returns. In fact, start-ups with ethnically diverse founders are able to raise more operating cash and higher returns for capital investors, and even outperform others by 30% when they go public or acquired. Diversity has been an important discussion in the UK for a long time now and more and more companies are announcing initiatives aimed at promoting diversity and inclusion within the business. So why is it that we’re still seeing such a huge diversity problem in venture capital?
The pipeline issue
60% of VC firms say that their portfolios hold too few diversity-led businesses, with nearly a half putting this down to a “pipeline problem”. But there is certainly no shortage of excellence when it comes to entrepreneurs from underrepresented backgrounds, so investors need to stop blaming the lack of diversity in their portfolios on this so-called issue. If we are to ever make progress in levelling the playing field for diversity-led businesses, we need to stop just talking about the problems and putting the blame elsewhere, and actually start doing something about it.
Education is key
Making a positive difference in the world of VC funding should start with education. If we look at executive programmes in university for example, the benchmark for any student wanting to be an entrepreneur is generally the CEO and it’s more than likely to be a male benchmark. But if one were to study an MBA, female CEOs would probably be featured as a standalone course or module, but this shouldn’t be the case. We’re currently seeing a domino effect of self-belief as a result and more women entrepreneurs are suffering from ‘imposter syndrome’ a lot more than their male counterparts, due to a lack of role models to look up to. That’s not to say there aren’t many brilliant women in business, but more that they aren’t being showcased in these environments and institutions. The entrepreneurship journey is quite cumbersome, especially for an out-of-university entrepreneur when it comes to things like preparing a business plan. Business education needs to start earlier than at university level. There’s so much around a lot of subjects being taught in schools or colleges to have a well-rounded young adult, but this goes beyond entrepreneurship; we need to be teaching people how to save and about pensions, which are the things we’re never taught about.
The diversity problem is entrenched in the current funding model, and it won’t be solved by trying to overthrow decades of established practices. We need to make it much simpler for diversity entrepreneurs to receive the funding they need to start and grow their business. However finding the right investor can be an overwhelmingly difficult and lengthy process for many, and the competition today is rife. We need to ensure that these entrepreneurs have the right tools and support in place to successfully widen their professional network and find the right types of investors who believe in funding positive social change. But while making it much simpler for diversity entrepreneurs to receive capital is key, we also need to focus on creating greater equality from both sides by making sure investors also have the support and tools they need to find and connect with exceptional entrepreneurs that will help them to convert socially conscious investment into high-value returns. There’s no doubt there’s still a lot of work to do in levelling the playing field for diversity-led businesses, but by embedding entrepreneurship into education, reimagining the entrepreneur experience and creating new opportunities with the right kind of investor, we’re much more likely to succeed in creating greater equality in entrepreneurship.