The Challenge
A report published by the Treasury Committee last year highlighted the issue, the British Business Bank was quoted as saying:
"For every £1 of equity investment in the UK in 2021, all-female founder teams received 2p, all-male founder teams received 84p, and mixed-gender teams 14p."
The report was critical in its assessment of the venture capital sector and also highlighted wider diversity issues within the sector, including significant underrepresentation of ethnic minorities and a disproportionate allocation of investment to London and the South-East of England.
On the other side of the coin, according to an HMRC commissioned report, venture capital investors are predominately male with 90% of investors utilising the Enterprise Investment Scheme ("EIS") being men.
These figures reflect the general picture of wealth within society. Last year, a report found that "men have on average £92,762 more in total wealth than women, a gap of 35%". The main source of wealth for men being an individual source, whereas women's wealth was found to come from property and physical possessions which are often shared and therefore is not readily available for investing.
A potential, unintentional, roadblock to the progression of women into funding circles may have been created by the proposed amendments to the financial promotions exemptions for high net worth individuals. The Treasury proposes to increase the income and net assets thresholds for individuals to benefit from the high net worth individual exemption from the financial promotions regime. This increase will disproportionately affect women by reducing the pool of female angel investors.
However, for the moment things appear to be changing, albeit slowly.
Signs of improvement?
The statistics are bleak but the picture appears to be improving with a record number of women-led businesses being set up last year. Women-led companies account for 17.3% all UK firms, up 0.5% from last year.
According to the British Business Bank's Investing in Women Code report, there is an underlying improvement in the overall picture with signatories to Investing in Women Code outperforming their peers when it comes to investing in women-led businesses. Evidently, those aware of the issue are more likely to make positive change. Highlighting the gender gap therefore will ensure that the venture capital market feels external pressure to improve its diversity.
The ‘Female Foundry State of Gender Diversity in European Venture’ report appears to support this view. 70% of surveyed venture capital investors are collecting data regarding the gender of their investee companies and 40% are "actively seeking more investment opportunities in female co-founded companies".
We consulted with our client, Future Planet Capital, who provided an opinion on how the challenge of underrepresentation should be met and, in particular, they outlined the need for a multifaceted approach to tackling the issue, including:
- acknowledging and supporting the development of talent at a junior level across the industry;
- the importance of social mobility programs, internships, and broader access to opportunities;
- encouraging an inclusive environment, including frameworks that encourage mentorship, provide guidance and networks, and structurally promote diversity which allows voices and unique opinions from women and ethnic groups to be heard; and
- the need for data collection and publication of diversity data to track and showcase tangible improvements and to implementing accountability across the venture capital industry at both VC level and founder level.
Opportunities:
The lack of diversity in the venture capital market presents a significant challenge to businesses led by women and ethnic groups. However, the wealth of these demographics is growing. Some have predicted that the women will hold the majority of the UK's wealth by 2025. This is driven partly by the growth in female entrepreneurship.
Caroline Colliston, tax partner at DWF, sees the challenge for these female entrepreneurs as being how to access the venture capital funding models which have been designed 'by white male accountants for white male accountants'. Pre-existing relationships significantly improve the chances of securing funding and breaking into these funding circles requires effort from those entrepreneurs seeking investment and the investors themselves to look outside their normal parameters.
Evidence suggests that gender diversity at board level can mitigate the risk of insolvency with the insolvency rate being "49% higher for firms with only male directors than mixed boards".
There are signs of improvement and the clear need for the market to change provides an opportunity for those willing to champion the cause of greater diversity within the venture capital market. There is untapped potential that should be targeted and this starts with greater awareness of the problem and more willingness to address the imbalance.
We think the key to addressing the gender and ethnicity imbalance in venture capital funding, is to:
- raise awareness of the funding opportunities;
- address the risk appetite of female investors; and
- shine a light on the diversity issues the venture capital market faces.
