VC needs to invest dollars in diversity

Almost all the trailblazers within our fintech ecosystem share a critical commonality: they've successfully secured venture capital (VC) funding. VC is the key to transforming audacious technology-based ideas into world-changing institutions that reshape our financial landscape.

However, a lack of diversity is holding back fintech’s true potential.

The numbers speak for themselves: According to data from McKinsey & Company, teams with different genders and ethnicities can yield a remarkable 30% boost in multiples on invested capital (MOIC) compared to more homogenous groups. MOIC compares an investment’s exit value to its initial investment amount.

Yet, VC-backed start-ups are still homogenous. According to data from Diversity VC, founding teams receiving VC financing are:

• 89.3% men
• 71.6% white
• 35.3% based in Silicon Valley
• 13.7% Ivy League-educated

This lack of diversity represents a missed opportunity. World Economic Forum research shows that companies with above-average diversity scores drive 45% of average revenue from innovation. In comparison, companies with below-average diversity scores drive only 26%.

VCs are catching on—slowly

Encouragingly, there's positive news on the horizon. Limited partners (LPs), the financial backers of VC funds, are increasingly concerned about diversity, equity and inclusion (DEI) efforts within VC firms. Data from Venture Forward, the National Venture Capital Association (NVCA), and Deloitte reveals that in 2022, 47% of firms reported that LPs had inquired about their DEI initiatives within the past year.

Even more heartening is that VC firms are no longer merely reacting to LP demands, but are proactively seeking DEI information from their portfolio companies. In 2022, 38% of firms reported taking this proactive stance, an increase from 30% in 2020 and 19% in 2018.

However, despite these encouraging trends, gender diversity remains a challenge within the VC industry.

In 2022, only 26% of investment professionals were women. However, there has been growth in the number of women in junior-level positions.

Only 19% of the investment partners were female. Even more concerning is that 57% of firms had no female investment partners. This highlights the need for more gender diversity in VC firms, especially among decision-makers.

Regarding racial and ethnic diversity, Black professionals made up just 5% of investment professionals, with only a slight increase from 4% in 2020.

Hispanic representation remained at 6% of investment positions in 2022.

Not surprisingly, younger and smaller VC firms tended to have greater diversity among their investment partners. Those found within the last decade reported higher percentages of Black (8%), Hispanic (8%), and female (22%) investment partners. This suggests that as the industry progresses, it becomes more inclusive and welcoming to diverse talent.

More disparity than diversity

The funding landscape reveals stark inequities. Women-only teams in the US pulled in 2.8% of all venture funding in 2023, the lowest tally in four years. And in the UK, a study conducted by the British Business Bank shows that all-female teams received a mere 2% of financing available.

Funding to Black founders was down in 2023 for the third year. Black founders in the US raised 0.48% of all venture dollars allocated last year, around $661 million out of $136 billion. This number is the lowest it's been in recent history. Between 2009 and 2019, only around 40 Black individuals in the UK were able to secure venture capital funding, which is less than 0.4% of the total funds allocated to founders.

While there are no recent figures available, it’s evident that a lot of work needs to be done to ensure that more people from diverse backgrounds have access to funding opportunities across the globe.

Meanwhile, according to McKinsey, Latino founders secured only 1.5% of total VC funding. Even more concerning, just 0.1% of VC funds went to Black and Latino female founders. This glaring gap persisted across all stages of growth.

Why investing in diverse founders matters more than ever

To build fintech solutions that serve a wide range of user needs, particularly marginalised communities, diversity in leadership is crucial as innovation thrives in diversity and dies in silos.

For example, there’s a positive correlation between the number of females in leadership roles and a company’s ability to attract female customers, according to data from the World Economic Forum.

Fintech companies with over 33% women leaders experience a 12% increase in their female customer base. This positive trend extends to product offerings, with a 30% increase in products designed to target female customers.

To ensure a more diverse fintech community, here's some practical advice synthesised from my years of interviewing venture capitalists and reporting on the fintech space:

1. Hiring is key, but avoid a revolving door: By hiring and promoting women and Black, Indigenous and people of colour (BIPOC) individuals, you ensure greater diversity. But don’t stop there: retaining women and BIPOC investors at leadership levels is just as critical.
2. Break the mould: VCs should approach pitch meetings with an open mind to eliminate bias in the questions asked to founders.
3. Meet them halfway: It's essential to proactively seek out and welcome diverse founders through dedicated outreach efforts. Commit to reviewing cold outreaches and eliminating bias in outreach and due diligence. Forge partnerships with women- or BIPOC-led funds and organisations.
4. It’s not just about money—share your wealth of experience: Offer expertise tailored to underrepresented founders' needs, facilitate meaningful connections, develop programs tapping into organisational strengths and accelerate alternative funding vehicles.
5. Mark your own scorecard, then show it: Establish standardised metrics to drive transparency and accountability, and commit to publicly measuring outcomes.

By actively pursuing DEI strategies and investing in diverse founders, the financial industry can unlock new opportunities, driving success, wealth distribution and economic value for all. Doing so isn’t just a matter of social responsibility; it's a business imperative for a brighter, more innovative future for our fintech industry.

Opinions expressed within the content are solely the author’s, and do not necessarily reflect the opinions and beliefs of Rise, created by Barclays or its affiliates.