Diversity, equity and inclusion (DE&I) has been a hot topic in the tech and startup world for many years now. But, despite the momentum for change, investment in diverse founders remains low.
Just 1.4% of European unicorns are set up by a founding team entirely made up of minority-ethnic entrepreneurs, and those founders have raised a measly 0.7% of total unicorn funding.
“It’s linked to the lack of representation — you can change anything you want, you can add AI to anything, but people invest in people like them,” says Chanez Djoudi, cofounder of Beev, a French e-mobility startup. “If you have investors who are investing in people like them, it’s going to impact the pool of entrepreneurs who are going to get financing.”
So what’s the way forward — and how can founders and investors work together to build a more inclusive ecosystem?
Tackling inherent biases
Research from Morgan Stanley found that by overlooking the opportunity to invest in women and multicultural-led businesses, VCs are missing out on up to $1trn.
“Diversification is key for financial returns. By not investing in diversity, you're leaving money on the table, and you're also not investing in businesses that, by design, tend to be more resilient because they have a diverse set of viewpoints,” says Sanghamitra Karra, EMEA head of the Inclusive Ventures Group, Morgan Stanley’s in-house accelerator targeted at underrepresented startup founders.
Accelerator programmes should have a cohort of investors who are committed to backing the businesses that come out successfully from the programmes
While some progress has been made, further research from Morgan Stanley found that the energy to close the investment funding gap is dwindling. In 2020, 43% of VCs said it was a top priority for their firm to find opportunities with multicultural-founded companies. This dropped to 32% in its most recent survey.
Despite proven market interest, Mallikarjun Chityala, CEO at Fitabeo Therapeutics, a biotech that develops medicine for some of healthcare’s pressing challenges, says that fundraising has been a "major challenge" to progress.
“Despite winning several competitions where the entrepreneurial ecosystem clearly recognises the impact that our products will eventually have on society, we still don't seem to gain investor backing,” he says.
Like Djoudi, Chityala says turning this around would require making the investor community itself more diverse, because “then they can relate to stories of diverse entrepreneurs”.
He says that accelerators could pave the way for this change: “Accelerator programmes should have a cohort of investors who are committed to backing the businesses that come out successfully from the programmes.”
An inclusive path to success
For Djoudi, it’s also key that startups have a diverse founding team to begin with so that diversity is ingrained in the company culture.
“Have a founding member that's from a minority group or a woman. If the company is already created, make sure that you’re hiring the next top management talent that's diverse, and that's going to help you get where you need to go.”
We've got a really neurodiverse team which creates very different approaches, but I think it leads us to a better end result
Rachel Curtis, CEO of Inicio AI, an AI-powered affordability support platform, adds that any discomfort of having opposing views will only help drive growth: “We've got a really neurodiverse team which creates very different approaches, but I think it leads us to a better end result.”
Hiring diverse talent can also help ensure that you hire the best people for the job. “It's more about making sure we look at the largest available pool of talent that's actually out there — if you’re only focused on one kind of talent, then you're probably missing out on a lot, and you just don't get the examples that you need,” Morgan Stanley’s Karra says.
Inspiring change across the board
Chityala says there should be more of a push for the use of CVs without identifying factors that could lead to bias in the recruitment process. As founders, “we should be looking at hiring people based on what they bring to the business, rather than where they come from or which college they went to”.
Karra says that role models can go a long way in inspiring change. “The fact that we see more entrepreneurs who look different from your typical ones probably has a huge impact — and the same is true for investors.”
To diverse founders who may be struggling to raise, Karra’s advice is to focus on the product and reach out to the right investors. “I'm a big believer that strong products eventually stand out for themselves.”
She adds that it’s also crucial to take care of yourself and your mental health as a founder, especially given the added stresses that can come with being from a diverse background.
We should be looking at hiring people based on what they bring to the business, rather than where they come from or which college they went to
There should be tailored approaches for each group of underrepresented founders. For example, the bias against ethnically diverse founders should be tackled separately from women or other groups.
“I see that there's quite a lot of work being done in supporting women entrepreneurs, and there are lots of investors who are focusing only on women entrepreneurs. But there isn't a lot being done in supporting people of colour,” says Chityala. Just 0.24% of venture capital (VC) in the UK went to teams of Black entrepreneurs between 2009-19.
Accessible spaces and locations
Chityala says that collaboration is key to making progress on diversity and inclusion, giving the example of having disability-friendly facilities at a resource-constrained startup. “As a startup, I would possibly be located in a science or tech park — and the science park would be able to work with individual businesses to create the infrastructure [to make it accessible]. So we all have to be working together.”
Curtis agrees that there’s some less well-known external resources that startups can leverage to have a more diverse team. “We’re investigating the support that’s available from the Department of Work and Pensions, as one of our team members has a condition that causes challenges in a particular element of their work.”
Should the government be doing a better job of making sure that the support is there, or is that down to local councils? It’s just not well coordinated
Where startups are based can also impact the level of access. London tech companies raised $19.8bn last year — that’s double the amount of investment made in any European city in 2022.
Karra says that having localised accelerator programmes is important. She adds that holding pitch competitions in a location such as Scotland, which is usually not the natural go-to place for investors, was a very rewarding experience as her accelerator team met some promising companies.
Curtis says that the support put in place for startups outside recognised tech hubs should be better coordinated. “We were originally based in the East Midlands [of the UK], but really struggled and it forced us to think about operating in other regions. Should the government be doing a better job of making sure that the support is there, or is that down to local councils? It’s just not well coordinated.
“As they say about the postcode lottery of the health service, it's a postcode lottery for business support as well.”
