The future is inclusive, but investment managers are lagging behind.
In 2019, only 13% of senior people on UK investment teams were women (Diversity VC & BVCA 2019). To make matters worse, 48% of investment teams had no women at all (Diversity VC 2017). At the same time, less than 1% of UK venture funding went to all-female teams and less than 2% went to teams where every founder is part of an ethnic minority.
In recent years, the situation regarding gender and ethnic diversity in UK venture capital has shown some progress, but the overall picture remains concerning. As of 2023, women continue to be significantly underrepresented in senior investment roles, with just 3% of senior positions held by women from ethnic minority backgrounds, and no senior Black women identified in the industry. Furthermore, only 2% of venture capital (VC) funding goes to female-founded businesses, a figure that has seen no substantial improvement over the past decade. Similarly, businesses founded by ethnic minorities receive less than 2% of VC funding.
The situation in U.S. venture capital (VC) regarding gender and ethnic diversity remains challenging, with only slight progress in recent years. As of 2023, startups founded solely by women received just 2% of the total venture capital invested, a figure that has seen little improvement over the years. This percentage mirrors the limited success seen globally, including in Europe, where women-founded startups also struggle to attract significant funding.
When looking at ethnic diversity, the numbers are even more concerning. Black founders, for instance, received less than 0.5% of U.S. venture capital funding in 2023. The broader landscape for ethnic and racial minorities in venture capital shows underrepresentation across the board. While there has been some progress in specific areas—such as the increasing presence of ethnic minorities in investment committees—the overall representation of minorities in senior VC roles remains low.
Overall, while there are some signs of gradual improvement in deal volume for women and minorities, the overall share of funding remains disproportionately low, reflecting ongoing systemic barriers within the industry. Without more substantial and sustained efforts, significant changes in the diversity of U.S. venture capital seem unlikely in the near term.
To help drive diversity and inclusion (D&I) in asset management, Diversio and Diversity VC worked with the Rose Review to create actionable D&I recommendations for investors. Our recommendations focus on everything from investment talent acquisition to unconscious investment bias. Ultimately, as the world moves towards a future that is more diverse than ever before, it’s time that investors step up to foster diversity and inclusion in Venture Capital and Private Equity.
Four key considerations to close the D&I gap in venture capital
- Talent acquisition, retention, and development
- Internal education, culture and policy
- Outreach, access to deal flow, and unconscious investment bias
- Influence, external guidance and portfolio management
Talent acquisition, retention and development
It is only when diverse perspectives are included at the discussion table that teams can overcome group-think, make better decisions, and ultimately maximize profits. However, the challenge of talent management goes beyond hiring. It requires us to think about how to succeed with retaining and developing diverse individuals.
Talent acquisition in Asset Management, Venture Capital, Private Equity
At the talent acquisition level, increasing access to strong underrepresented talent is necessary to create a pipeline of diverse talent. One tactic that investors can use to mitigate the impact of unconscious bias is applying systems and training to clarify evaluation criteria and increase objectivity in decision making.
D&I best practices for talent retention
On the retention side, it is important to recognize that diverse individuals have different needs. Flexible work policies such as a work-from-home program, or policies that allow employees to adapt working hours around commitments, help ensure everyone’s needs are met. In addition to meeting diverse needs, employees also need to feel like they are treated fairly to achieve high retention rates. Conducting analytical studies, such as equal pay analysis, allows funds to proactively identify and tackle potential gaps.
D&I investment requires development of talent
Finally, when it comes to development, the key is to think long-term about talent strategy and create a multi-year plan to achieve measurable outcomes. Initiatives like diverse mentorship programs, where senior-level investors and emerging professionals are paired together, can ensure that diverse individuals feel supported in their roles and have an ear to turn to during any challenges.
Internal education, culture and policy
Creating a truly diverse and inclusive culture is a firm-wide endeavour that requires clear guidelines, policies and training for employees at all levels. Starting with leadership and going all the way to entry-level analysts, it is critical that funds enact internal education initiatives to walk the talk.
From an education perspective, offering different kinds of training helps make sure that employees know how to contribute to a welcoming environment. For firm leaders, training in anti-oppression, accountability and inclusive culture is important to align key values. Beyond leadership, offering cultural competency and anti-harassment training to all employees helps individuals become more aware of their actions and provides insight on how to act as empowered bystanders.
When it comes to policy and organizational culture, accountability is key to achieving D&I outcomes. Bringing on a Chief Equity, Diversity and Inclusion Officer and committing to a public pledge are two strong ways to create accountability towards achieving greater D&I. Internally, organizational culture surveys that assess attitudes and perspectives around culture serve as a measurable way to track progress.
Outreach, access to deal flow, and unconscious investment bias
Beyond striving for more D&I within teams, it is also essential to tackle biases that prevent funds from accessing diverse investment opportunities. At the sourcing level, funds need to invest in outreach and expand their deal flow pipeline to effectively reach diverse investment opportunities. During the investment decision-making process, unconscious biases, which tend to make individuals favour those with shared traits, need to be carefully evaluated and mitigated against.
Powerful D&I tools support diversity in Venture Capital
To start, tracking and reporting demographics is a powerful way to understand diversity gaps in deal flow. Analytical tools like Diversio can help break down diversity among applicants, assessments and portfolio investments. With these analytical tools, funds can compare their current demographics to industry peers as they strive for greater progress.
After taking note of any gaps, programs like a diversity referral program, where scouts receive bonuses to refer underrepresented founders, ensure that team members are incentivized to tackle their diversity gaps. Additionally, proactive outreach programs, such as partnerships with organizations for female entrepreneurs, allow funds to build strong relationships with communities of diverse founders. These foundational relationships will ultimately improve access to diverse deal flow and provide new investment opportunities.
Influence, external guidance and portfolio management
To optimize returns and performance, investment funds should look to foster diverse and inclusive cultures within portfolio companies. In the words of proSapient co-founder Margo Polishchuk, “a high-performance culture…comes hand in hand with a working culture that is rich in diversity, equal opportunities and inclusion”. Helping portfolio companies achieve D&I means setting them up for long-term financial success.
Given that what gets measured gets done, funds can use data to measure and track diversity and inclusion in their portfolios. From a data perspective, encouraging companies to collect diversity and employee engagement data identifies bias and barriers on an ongoing basis. Using this data, it is then possible to implement targeted interventions to support portfolio companies. One tool that funds can leverage is Diversio’s Portfolio Inclusion Assessment, which measures a given portfolio’s DEI against industry standards and uncovers data-driven best practices.
As a role model for portfolio companies, investment funds should also look to provide resources for improving workplace culture. These resources include a standardized code of conduct or templates for mental health policies. For diverse employees in emerging startups, funds can also dedicate themselves to hosting employee engagement events, like an International Women’s Day celebration. With these resources and initiatives, investors can support portfolio companies in their pursuit of a sustainable, high-performance culture.
The first step for greater D&I
The very first step investors can take to improve D&I is getting certified under the Diversity VC Standard. The standard provides investors with the tools and recommended practices they need to open their networks to underrepresented founders, as well as the resources needed to cultivate an environment where founders and colleagues from all backgrounds feel that they belong. The standard provides guidance both for investors who are beginning their D&I journey, as well as those who are further down the process.
- To read the full Rose Review report, please click here.
- To learn more about how you can make your workplace more inclusive, book a demo.
