Tech knows it has a diversity problem. But with the current slowdown in funding and economic growth, many investors and founders are concerned that things could get worse.
According to Atomico’s State of European Tech report, all-female founding teams accounted for 6% of all funding rounds in 2022, but only 1% of the funding raised. It’s a statistic that is getting worse; it was also 1% in 2021, down from 3% in 2020.
“My biggest fear is that people are using the downturn as a smokescreen to backtrack on diversity. When the chips are down, people revert to type and that hits people from typically overlooked or underestimated backgrounds the hardest,” says Eleanor Kaye, executive director of the Newton Venture Program, a training course for VCs.
“And yet there’s so much data to show that diverse teams outperform homogeneous ones. Funds that want to thrive in a tough market need diverse investors backing diverse founders. Now is not the time to pull back, but to keep pushing forward.”
The data suggests that despite increasing efforts by VCs and tech firms to encourage diversity, nothing much has changed. Many VCs have hired more women investors — but women are still lacking in senior decision making positions. Plenty of mentoring programmes for underrepresented founders have launched, but those founders still lack funding opportunities.
And while there’s not a lot of data out there about the impact of the slowdown on people from other kinds of underrepresented backgrounds, everyone agrees that the picture is likely bleaker.
VCs retreat to “network investments”
The Atomico data also shows that things are harder for women at the earliest stages of their entrepreneurial journey. While mixed-gender teams raise average rounds roughly on par with all-men teams at the seed stage, women raise significantly less.
Eva-Valérie Gfrerer, CEO and general partner of Morphais VC, says that it could become even harder for female founders because VCs will be making more cautious bets now. For them, less risky investments means backing serial founders or “network investments” — investing with other VCs with good track records, generally backing founders who are already in their network.
“We expect to see an increased focus on rather homogeneous network deals,” she says. Although, she adds, if VCs really wanted to tread carefully, they should do the exact opposite. “ [They] would actually manage risk better by having a diversified portfolio.”
56% of minority ethnic founders (versus 41% of white founders) and 36% of female founders (versus 24% of male founders) find that getting access to capital has been the biggest challenge in the last 12 months, according to Atomico’s survey.
The importance of diversity-focused funds, angels and solo GPs
Many investors feel that it will take a new generation of investors that are more representative of society’s diversity to change the status quo and direct more capital to diverse founders.
“It’s clear now that for the best returns, VCs need to look outside their comfort zones and fund the best teams for the problems they’re working on — which, given the world isn’t simply composed of white men, are often diverse,” says angel investor Sarah Drinkwater.
“This is where angels and small solo funds, who often have distinctly different networks, can win — by funding diverse teams at fair valuations while the larger firms seek deeper proof points.”
There are numerous examples of these funds, including:
- Sweden’s Unconventional Ventures, which launched a €30m fund this year for underrepresented founders.
- Austria’s Fund F, which is raising a €20m fund for startups with female founders.
- France’s Sista, which is targeting a €100m fund to back startups with women founders.
- Germany’s Auxxo, which raised a $15m fund at the end of 2021 to invest in companies with female founders.
- Other funds, like the UK’s Ada Ventures, are testing new ways to find and invest in underrepresented founders. Ada launched a scout programme in 2018 specifically to try and access diverse talent, and says it has seen its approach pay dividends. One quarter of the 28 companies it backed with its first fund were scout referrals — 55% of those had female founders and 30% had founders from ethnic minority groups.
This rise in funds focused on underrepresented founders gives some people hope that the tide will soon turn.
“2022 saw the sprouting of a new wave of contrarian emerging managers in the Nordics, France, Austria and the UK, emboldened with a thesis that greater diversity yields higher returns. The virtuous circle of attracting and funding more diverse teams has begun and we will start to see incremental changes [at the earlier stages],” says Vera Baker, a venture partner at Unconventional Ventures.
Profitability is queen
There’s also hope for underrepresented founders in VCs’ increased focus on profitability, some say.
“This should translate into more funding for female founders,” says Amber Ghaddar, founder of decentralised finance startup AllianceBlock and female founder accelerator The 200BnClub. “It is well documented that despite women receiving less than half the funding received by male founders, they generate twice as much revenues per dollar invested. Female founders are good business, and the current recession and resulting shifts in VC requirements means funding should organically flow towards them.”
Mimi Billing is Sifted’s Nordic correspondent. She tweets from @MimiBilling.
Sifted’s deputy editor Eleanor Warnock and editorial assistant Sadia Nowshin contributed to this piece.
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