Black entrepreneurs in the UK are being excluded from venture capital (VC) funding according to a new report.
The Cornerstone Report: Access to Venture Capital found that only 7.3 percent of founders who identified as Asian and 2.9 percent of founders identified as Black successfully raised funding in 2019.
The research, produced jointly by Cornerstone Partners, which focuses on investing in minority-led businesses, consultancy Engage Inclusivity, Diversity VC, and Beauhurst said that minority founders are “often excluded at the pre-VC and VC stage of funding and are subsequently underserved by traditional providers of VC capital.”
It pointed to a number of factors as possible reasons for exclusion including what it called “exclusionary selection practices and inadequate bridging capital in the market” adding that “the jury’s still out on this”.
What was clear, it concluded, was that class, education, and social capital networks play a pivotal role when fundraising which place minority founders at a significant disadvantage.
According to the report three-quarters of founders who successfully received funding come from advantaged socioeconomic backgrounds. VC funding is more likely to go to founders who have been to the most exclusive universities.
Hardly any founders who received funding hail from families living on welfare entitlements. The report was commissioned in May 2020.
Taking 2019 as the year of study, the team that produced it ran two surveys, the first with businesses that had not raised VC but showed all the hallmarks of being ‘VC-ready’ in 2019.
The second survey was shared with businesses that had announced a VC raise that year. Researchers also undertook a total of 12 founder interviews in order to get deeper insights into the survey findings, which in turn inform the recommendations.
Among the recommendations the report makes is that funding schemes should be created that support the work of angel groups, accelerators, and managers that invest in businesses led by diverse founders.
It also calls for the UK to establish an “Open VC” model which sees equity providers work with “relevant trade bodies to create guides that abolish exclusionary practices and enable businesses with less social capital to gain access to investment networks.”
Another key recommendation is the introduction of early career development programs that increase the exposure of venture capital to diverse audiences.
In the foreword to the report, Rodney Appiah, chairman of Cornerstone Partners, pointed to what he described as a “silver lining”.
He wrote: “A nascent but emerging cohort of funds, angel groups, P2P lending platforms, accelerators, networks, and other community groups are proactively growing the funnel and increasing investment activity into this area in an effort to close the equity gap.
“Cornerstone is pleased to be playing a key role in the development of the diverse funding ecosystem but recognizes more work needs to be done.”
He went on: “Whilst further research is required into understanding the opportunity pool, we don’t buy the argument of the pipeline problem’, a reason often cited by traditional funding groups to excuse the lack of diverse founders in their respective portfolios. Our own experience at Cornerstone tells a different story, where we see between 300-400 diverse founder-led businesses a year.
“Coupled with deal flow generated by other diversity-focused VCs and angel networks, where overlap tends to be limited, it becomes apparent that the so-called pipeline problem is more a perception than reality.
“Our quantitative data and research parameters suggest a healthy pipeline of “VC ready” businesses led by diverse teams that are successful in raising seed capital but struggle to secure institutional investment.”