More than two years after the murder of George Floyd and statements from venture capitalists, among others, about their support for DEI, there is still not much diversity of capital in the VC biz or among those who fund venture capital. And limited partners continue to explain their lack of diversity-focused funding by pointing to barriers that, in fact, can likely be addressed with enough commitment to change.
Those are some of the findings The share record, a recently released report that surveyed more than 200 VCs and examined the diversity of capital in venture capital, both in limited partner venture capital fund funding and VCs’ investments in startups. Specifically, less than 2% of total assets under management of $31.8 billion are allocated to DEI-related investments.
“There seems to be a strong correlation between how much is available for such investments and how much is actually invested in various companies,” said Sarah Millar, COO at Diversity VCwho collaborated with economists and researchers at Penn State University to trace the flow of capital into and through venture capital funds.
Previous studies conducted by Diversity VC in 2019 and 2021 showed that companies led by women, people of color and the lower educated were underfunded. With that in mind, they decided to look “one layer up,” Millar says, and focus on the larger financing ecosystem. More specifically, as more funds were established with the mission of investing in DEI, they turned their attention to the sources of money for these funds and what their portfolios looked like, as well as whether more capital had been allocated to such funds and founders in the aftermath of the murder of George Floyd.
In general, according to Millar, they tended to hear similar explanations from VCs for the problem. “What we regularly heard was that our LPs don’t ask us to do this, or that we don’t think investing in diverse ventures is our financial responsibility,” she says.
As for those funding VC funds, the research also revealed the conundrum of DEI investment. Many of the funds raised by various funds are on the small side — an average of $57 million versus $345 million for more traditional entities. But many institutional investors who invest in venture capital funds, such as pension funds, don’t consider funds under $500 million. As a result, DEI-focused funds managed by diverse GPs struggle to tap the capital they need, even from potential financiers who claim to be interested in backing such investments. “When you raise a $50 million fund, there’s a barrier to entry,” says Millar.
Other findings were:
— Underrepresented fund managers or managers with a DEI focus were more likely to say their capital came from high net worth individuals and funds of funds rather than from sources such as endowments, foundations and pension funds.
—100% of funds with a DEI mandate invested in early stage companies. That’s partly because, with few friends and family and seed money typically available to founders who don’t come from privileged backgrounds, these funds see that’s where they can make the most impact, Millar said.
—Funds with some or all of their capital allocated to DEI investments were more likely to have a woman or person of color in the general partnership.
The plan is to conduct the survey annually, with the first serving as a benchmark. Ultimately, Diversity VC will be able to create an index that, says Aisling Carlson, Diversity VC’s leader in marketing and partnerships, “will show whether funds are walking the talk.”