Founders from minority backgrounds are being excluded from venture capital funding in the UK, a new study has warned.
Around 3% of founders who had received VC backing in London identified as Black, while 7% described themselves as Asian, according to new research from angel network Cornerstone Partners and strategy group Engage Inclusivity.
This compares to the wider population of London, where more than half of the firms eligible for VC investment are based, which is 24% Asian and 16% Black.
The so-called “pipeline problem” is often cited by funding groups as an excuse for the lack of diverse founders in their portfolios.
But Rodney Appiah, the chairman and cofounder of Cornerstone, said his company “doesn’t buy” that argument.
“Our own experience at Cornerstone tells a different story, where we see between 300 to 400 diverse founder-led businesses a year,” he said.
“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.”
Appiah said his research suggested that there was a “healthy pipeline” of diverse VC-ready businesses but that they struggled to secure institutional investment. The Cornerstone cofounder said that around 95% of the hundreds of business proposals put to the company each year came from Black and diverse founders.
The researchers conducted two surveys into the investment landscape in 2019.
They quizzed both businesses that had not raised funds but showed all the hallmarks of being “VC-ready”, as well as companies that had announced their own fundraises during the year. Companies that had secured equity investment of between £100,000 and £1 million in 2019 and had a headcount of more than 10 were dubbed “VC-ready”.
The study, which included more than 1,800 businesses across the UK, also found that 75% of both pre and post VC-funding founders came from advantaged socioeconomic backgrounds. Only 2% of founders said they came from families whose main household income was casual work or welfare entitlement.
The vast majority of those quizzed said they had started their business while in a comfortable financial position, tallying with earlier research from venture capital firm Atomico, published in 2020, which showed founders tend to be well-educated and already wealthy.
The Cornerstone report also stated that the majority of founders were graduates from prestigious universities. Almost a quarter of all startups that had received VC funds had emerged from Oxford, Cambridge or an equivalent international institution.
Men also made up the vast majority of both pre-VC and VC-funded companies, at 74% and 82% respectively.
The report, which was also drafted with research group Beauhurst and industry group Diversity VC, encouraged investors to “recognise the tacit use of networks for risk mitigation”.
Cornerstone called on backers to develop an “open VC model” that would eradicate exclusionary practices and enable groups with less social capital to gain access to investors.
It also outlined the need for more research around early-stage firms to find where founders from underrepresented groups were hitting a glass ceiling.
Henna Zamurd-Butt, director of Engage Inclusivity and author of the report, said investors’ processes were in need of change.
“This reliance on social capital — be that through schooling, university or familial connections is a self-fulfilling prophecy — any founder who is a part of these fairly closed networks is much more likely to be able to get investment,” she said.
“To step out of this cycle we need investors and policymakers to first, acknowledge these processes exist and are exclusionary, and second, engage in an honest and open discussion to determine how to better mitigate risk.”
The report tallies with other research into the diversity of the funding landscape in the UK. In February, the Telegraph reported that just 1% of the government’s startup bailout money had gone to female founders.