Why ‘warm’ intros hold back diversity in VC – UKTN

If VCs truly want more diversity in their portfolio, they’ve got to drop the ‘warm’ intro bullshit.

Diversity statistics within venture capital in the UK – and globally – make for grim reading.

In 2017, landmark research from British Business Bank, the BVCA and Diversity VC found that for every £1 of VC investment in the UK, female founder teams got less than 1p. More recent data suggests this figure has seen a small increase since, but it still remains embarrassingly imbalanced.

And it is the same, or worse, for founders who are Black or Asian; so god knows how it feels to be a Black, female founder looking for VC funding.

And the reality is that the old habits of seasoned venture capital firms aren’t doing anything to help matters. That VC firms in 2022 still suggest, quite openly, that they favour deals bought into them via warm intros from their close network and trusted advisors shows just how little many VCs focus on improving those stats.

Either they don’t care, or they are too closed-minded and set in their ways to consider an alternative way.

VC has been an ‘old boys club’ too long

Because, let’s be honest, VC has been a bit of an ‘old boys club’ for too long. Most VCs are, either by design or through omission of thought, non-diverse.

Women make up only 10% of the VC workforce and often don’t sit in investment teams, let alone act as partners within firms. And in 2019, Diversity VC’s data found that just 3% of UK venture capital staff identified as Black.

This is, by any measure, outrageous and something that the entire VC industry should be embarrassed about.

Further, studies show that these same homogenous, non-diverse teams tend to have narrow and non-diverse networks.  This inevitably means that the pool of diverse founders who can negotiate the prescribed path to them will be pitifully small.

And even when diverse founders do, somehow, make it through the antiquated ‘friends of friends’ system, they aren’t likely to be given a fair shot at securing investment.

Because no matter how objective and sophisticated a VC’s review process is, the experiences of the team will impact the decision-making process.

And if the entire team is drawn from a small, homogenous pool with similar life experiences, investments will tend to be made into a small pool of individuals who share similar backgrounds, ethnicities, and life experiences as those making the investment decisions.

How to fix broken warm intros

So how do we change things for the better?

Firstly, VCs need to engage and recruit more diverse people into their teams. Inherent bias is powerful and difficult to overcome through awareness and training. And to get true diversity of thought, a team needs to be diverse in its makeup.

This will, by definition, mean that VCs need to look outside the closed loop of VC to bring in talent. VCs should be looking to other industries to attract talent with a broader range of lived experiences and work history. Younger people report how difficult it is to break into VC, but it shouldn’t be like this.

VC should be embracing people with varied backgrounds because those varied backgrounds lead to better decision-making.

Not only do I think this will lead to greater returns, but the research proves it. According to McKinsey, teams in the top quartile of cultural and gender diversity were 33% more likely to have industry-leading profitability and 11% more likely to realise an exit on investments.

Secondly, VCs should be doing everything in their power to make contacting them easy and straightforward – for all founders, from whatever background. The idea that their network should act as a form of gatekeeper needs to be relegated to history.

After that, VCs have a duty to assess those opportunities on their potential, whilst trying to manage any inherent bias they may have. This is the only way we can make VC more equitable and available to all.

And, as with recruiting more diverse teams improving decision making, surely increasing top-of-funnel when looking to back exceptional founders will increase a VCs opportunity to find and back the very best opportunities.

VC backing for all – not just those with connections

At Praetura, 25% of our portfolio is female-founded and over half of our investment team are non-white and/or non-male.

We’re not perfect, by any stretch of the imagination, but we’re actively looking for ways to improve and our team is guiding my thinking. We generally look to recruit from outside of VC and this is something that we, as a firm, are passionate about. We are looking for people from all backgrounds who are smart, intellectually curious and with a passion for helping founders to build great businesses.

Accordingly, we were immensely proud that one of our investment team, Tania, who has joined us having previously been a serial entrepreneur, was invited to meet and speak with Rishi Sunak in Number 10 a few weeks ago (whilst he still had a job) about the importance of diversity in the investment world.

VC has always liked telling people how it, as an industry, changes the world. And in 2022, perhaps now the industry needs to focus on changing itself for the better, as well as the world.

VC backing should be available to the very best founders and companies.

Not just the ones that can get warm intros.

David Foreman is managing director of Praetura Ventures, a Manchester-based venture capital firm that invests in early-stage, high-growth businesses across the UK, with a particular focus on supporting entrepreneurs across the North of England.