How can VCs attract diverse employees and unlock better investments?

For many startup owners, Venture capital is THE source of funding they’re gunning for. Why? Because VCs are more likely to invest in ‘high risk’ and potentially ‘high reward’ schemes that only these sorts of young businesses can offer.

What’s the problem with UK VCs?

That crucial early cash injection can mean the difference between a disruptive sounding idea, and a future globally leading business, (Deliveroo, JustEat, and Zoopla all benefitted from VC funding early on).

A lucrative but unequal sector

The UK is a VC leader in Europe and is the fourth-largest market in the world where investors contributed a whopping £6.3bn to early-stage businesses in 2018. But is everyone getting an equal chance at it?

Black and Asian employees make up just 3% and 13% of UK VCs respectively – whilst white employees make up 76%.

UK VCs remain overwhelmingly white and male institutions, where employees commonly hold degrees from the world’s top educational institutions.

Diversity = success

With such non-diverse investors, they’re more likely to leave out more diverse startups. And if investors are only looking at a minority portion of what startup culture can offer, they’re not always going to pick the best.

It’s rooted in statistics too. The success rate of acquisitions and IPOs was 11.5% higher on investments by partners with diverse school backgrounds, and 22.0% higher for those from ethnically diverse backgrounds, according to 2018 findings from Diversity VC, a non-profit organisation. Why diversity is important

Educational privilege

According to the same report, 28% of UK VC employees attended a Russell Group university and 16% went to Oxbridge. In short, the sector has a serious diversity issue, and it’s leaving diverse entrepreneurs as well as diverse candidates for roles in VCs themselves, out in the cold.

A male majority

The report found that 65% of British VCs don’t even have one woman as a senior member of their investment teams. Even worse, some 39% have no women working in them at all.

Male leadership = male investments

Another frightening statistic shows that the predominant ‘gender’ of VC teams can determine who they invest in. The same report found that “93% of all funds raised by European VC-backed companies in 2018 went to all-male founding teams.”

It’s simple psychology that people are more likely to find an interest and invest in others that look like them. If a senior investment team is all male, they’re more likely to connect with and invest in a startup that’s led by men.

Whiteness

According to the report, Black and Asian employees make up just 3% and 13% of UK VCs respectively – whilst white employees make up 76%.

The result of this type of thinking is that diverse candidates can get rejected in favour of candidates who seem more ‘relatable’ to the investor.

What’s more, white employees only make up 59% of the London workforce, yet they account for 74% of all London’s VC employees, which further evidences the overrepresentation of white employees in the sector.

What can VC firms do to change all this?

1. Appoint a diversity specialist

British VCs should appoint a ‘diversity and inclusion’ specialist who sits on the senior team and can speak up and inform others about these policies when firms are making investment decisions.

However, the report makes clear that this move is most effective when the fund’s highest decision-makers support it too. So perhaps it’s time for VCs to recruit diverse candidates for some of their most senior decision making positions, as well as appoint a D&I employee to make it work.

D&I recommendations include everything from making building entrances wheelchair friendly to hosting ‘open events’ for startups that take into consideration different peoples’ cultural and religious dietary requirements.

The report also stipulates the usefulness of using data to pinpoint diversity and inclusion issues and to use it to keep ‘on track’ with ongoing improvements.

2. Review HR policies (flexible working)

Across many financial industries, it’s a fact almost universally acknowledged that many women fall off the pay and promotion cliff due to career breaks for caregiving, including childcare obligations.

If firms introduce better policies such as flexible working hours and remote working options for female staff, they’re more likely to retain female employees and watch them rise through the firm.

3. Train and remove ‘cognitive bias’

No one is saying that these white-male VC firms are intentionally making non-diverse hiring and investment decisions. In fact, it’s most likely down to cognitive biases.

While this is often subconscious, ie) ‘I’m a white and male investor, so I’m not sure how to connect with and support this black startup founder,’ if allowed to continue, it “affects decision-making at all levels,” says the report.

This includes the possibility of diverse candidates for VC roles and startup founders getting rejected in favour of candidates who seem more ‘relatable’ to the investor.

Clearly, work needs to be done to re-wire investors’ brains on the issue, which can include implementing workshops such as bias training programmes.

Firms MUST become more proactive

Many well-meaning funds still aren’t sure of where to find these more diverse founders and businesses in the first place. The report suggests that ‘office hours’ could be useful where firms can informally open their doors to the pitches of diverse businesses as well as offering them tips and constructive advice.

This relaxed approach could make founders from different backgrounds feel more welcome, (especially if they’re put off from formally applying if they’re faced with an all-white/male ‘team page’ on the VC’s website).

The report also recommends that firms research what diverse initiatives are out there that host and support diverse businesses and reach out to them.

After all, if you don’t ask, you certainly don’t get.

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