Recent report finds critical diversity issues in venture capital funding

The gender inequality in Venture Capital funding in the UK has been highlighted in a recently published House of Commons Treasury Committee report as the funds are mostly allocated to people of certain ethnicity and gender in the prime investment zone

According to a new report released last month, women-led businesses are at the receiving end when it comes to venture capital funding as there's a lack of both women decision-makers and women entrepreneurs in the business. The situation is more critical in women coming from less privileged and minority ethnic backgrounds.

This vindicates an earlier report that suggested women entrepreneurs face gender bias in venture capital funding.

According to the report, businesses outside of South East England are on the back foot in securing venture capital funding as they take more time to establish themselves and in such cases, the company age limit deters them from the process. Furthermore, the report highlights the lack of domestic venture capital funding in the UK which is forcing major businesses to look outside the country.

The report found critical diversity issues in venture capital funding when they analysed the success of Britain's enterprise investment scheme (EIS) and (Venture Capital Trust (VCT) tax reliefs which support venture capital investments in the country. The EIS and VCT clauses are set to expire by April 2025 and the Treasury has been called to address these inequities when it drafts new clauses.

Most of these schemes have only been found in male-dominated companies and white founders who are based in South East England, giving rise to regional, ethnic and gender disparity in business.

Findings of the Treasury Committee Report on Venture Capital Funding

Some critical disparities in venture capital funding have been highlighted in the report by the House of Commons Treasury Committee. The report highlights:

• The British Business Bank (BBB) noted how women in business, especially women founders or women entrepreneurs are being left behind in venture capital investment. For every one pound of equity investment women founders only receive two pence.

• BBB data also stressed on the regional disparity of venture capital funding allocations as London has 3.49 times more equity value than its SME population. Compared to that, the SME population in Northern Ireland has a 0.08 equity value. According to the Federation of Small Businesses, the ratio should have been one if equitable allocations were made across all regions in the UK.

• An analysis of Extend Venture's 2020 market report revealed that the percentage of ethnic minority businesses getting venture capital funding is less than two per cent.

This comes at a time when a report showcased how UK SMEs are having a difficult time due to late payment.

Measures to tackle venture capital funding disparity

The Treasury Committee has underlined certain ways to address the regional, ethnic and gender disparity in venture capital funding including:

• Gender Diversity promotion: The committee has proposed that Venture capital funds be allocated to companies with gender diversity. The committee thinks that the government and BBB should come together to create specific venture capital funds which will encourage and promote gender diversity.

• Diversity Statistics Visibility: The Committee advises that the Treasury makes the inclusion of diversity statistics mandatory for businesses in order to be eligible for EIS and VCT tax reliefs from April 2025.

• Signatories of Women Charters: The report suggests that organisations and businesses catering to the venture capital funding industry should be signatories to the Investing in Women Code and Women in Finance Charter.

• Company Age Limit Raise:

The committee also called for increasing the seven-year company age limit for businesses outside of Cambridge, Oxford and London which form the golden triangle for businesses in the country. The company age limit of 10 years for knowledge-intensive businesses should also be increased as businesses out of the prime investment zone take longer to establish, said the committee report. According to the report, an increase in companies' age limit would provide the necessary support to regional businesses and reduce the regional disparity in venture capital funding.

• Scaling Up Funding Limit Raise:

The committee also recognized the problem with the scaling up funding limits in the UK venture capital industry which has resulted in the best UK companies looking elsewhere for funding. With a higher funding limit for scaling up, more and more businesses will look for investments from the UK. At present, the top 10 largest companies in the UK haven't been scaled up or founded here. About seven of these top 10 companies were founded in the US in the last 20 years.

So far the UK government has revealed that it intends to extend the EIS and VCT tax relief schemes. However, it isn't clear for how long.

Citing a Wealth Club survey that suggests 88 per cent of venture capitalists invest in companies because of the tax benefits, the Treasury Committee has called for an urgent extension of the schemes.