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According to a report by the nonprofit Diversity VC, only about 1.87% of the $31 billion held by 200 venture capital funds has been allocated to startups with diverse leaders.
In a study looking at capital allocation with Penn State, Diversity VC focused on how much money went to minorities and underrepresented women.
The report found discrepancies between the diversity, equity and inclusion (DEI) investments that were promised and the assets actually committed at the general partner and limited partner levels. The sample of 213 companies represented more than $31.6 billion in combined assets under management, and $582 million, or 1.87%, was dedicated to DEI investments.
The bottom line is that funds related to DEI, underrepresented minorities, and women are still underfunded, despite more institutional investors and venture capitalists claiming otherwise.
The report captures the first previously uncollected data set directly correlating ongoing inequities in DEI-related funding, across the venture capital ecosystem.
Diversity VC partnered with Penn State researchers and economists to evaluate the survey, which focused on fund size, DEI mandates, gender and race, and more. Silicon Valley Bank and AWS supported Diversity VC in the development of the report and its market launch, which includes an upcoming series of exclusive events with industry stakeholders.
Diversity VC has been around for five years with the goal of building a more diverse and inclusive VC ecosystem around the world. It examined the teams that received venture capital funding in 2018 and 2020 from the most active funds in the US.
“What we found was that venture capital-backed startups were still disproportionately male (89.3%), white (71.6%), Silicon Valley-based (35.3%), and Ivy League-educated (13.7%),” Sarah Millar, chief operating officer of Diversity VC, said in the report. “The data had barely changed in two years.”
Still, the group found that it is beginning to see the roots of more systemic change. Familiar names among institutional investors, from Goldman to Citi and Carta, have announced commitments to funds managed by emerging managers and/or general partners of underrepresented investors.
Many branded venture capitalists spread out a portion of their assets under management (AUM) or raise separate funds to invest in underrepresented founders.
“In total, we saw billions of dollars go to invest in non-majority investors and entrepreneurs,” Millar said. “The exact language of these commitments varies, but overall the goal is similar: to put more capital in the hands of underrepresented investors and founders, who will in turn invest in underrepresented communities. There is some research that confirms this hypothesis, but funding figures from underrepresented founders remain disappointingly low.”
Diversity VC wanted to understand how to square the availability of “DEI Capital” with the reality of capital allocation. In other words, if the money is there, where does it go? How do limited partners determine where it should go and to whom it should go? And most importantly, how do diversity, equity, and inclusion play a role in your decision-making?
Diversity VC, in collaboration with sponsors and partners, wrote a survey to collect fund-level information from venture capital firms with a presence in the US. That survey, which includes high-level categories and specific questions, is available at the appendix to the report.
The survey was conducted from June 28 to September 20, 2022. The funds were obtained through a
combination of direct email, Slack communities, and strategic partner communications. Of the thousands of funds that were exposed to the survey, the nonprofit organization received 393 responses. Each response represents a single venture capital fund, and each respondent completed the survey on behalf of their respective institutions for both company-level and individual questions (for example, a single respondent provided all information on GP demographics) .
Not all respondents answered all questions, but the analysis is based on responses from 213 VCs.
DEI funds are smaller
The first and clearest difference between DEI funds and their peers was size. DEI funds were about $57 million in AUM on average, compared to $354 million for non-DEI funds.
Most of the funds surveyed employed a multi-stage strategy, but DEI funds were much more likely to focus on the early stages of investment (pre-seed and seed). In fact, 100% of the DEI funds surveyed invest in the seed stage; 64.6% invest in pre-seed and 58.3% invest in Series A. They are slightly less likely to focus on later stages compared to non-IED funds.
Given that DEI funds tend to be overrepresented in pre-Series A categories, it makes sense that fund sizes are generally smaller. According to Crunchbase data, DEI funds represented in the survey also participated in smaller rounds: $10.8 million on average, versus $21.4 million for non-DEI funds.
Of the 172 general partners for whom the survey collected demographic data, 59 identified as female or 34% of the overall sample. Thirty-two funds out of 141 for which it had complete gender data consisted of only male general partners (GPs), just 22.7% of the total. Ten funds (or 7%) were 100% female physicians. The rest, 99 funds, had at least one GP who identified as female.
On average, 31% of GPs are women per VC, which means the average fund will have about a third of their general partnership made up of women.
Of the 172 GPs for whom we collected demographic data, 25 identified as non-white, or 8.9% of the overall sample. Fifty funds of the 92 for which we have complete career data did not have non-white GPs (54.3%). Only six funds (or 6.5%) were 100% underrepresented minority physicians. The remainder, 46 funds, had at least one GP who identified as URM. On average, 14% of GPs are underrepresented minorities per VC, meaning the average fund will have approximately 14% of its general partnership made up of underrepresented minorities.
An initial finding was that DEI backgrounds were much more likely to have a female or non-white GP. For women, about 23% of non-DEI funds had a female GP; 40.5% of DEI funds did. Meanwhile, only 5.9% of non-DEI funds had a non-white GP in their association, compared to 25.3% of those with a DEI mandate.
Interestingly, the differences change slightly when IED-mandated funds are analyzed. A fund with a DEI
The mandate is more likely to have a female GP, non-white GPs are almost equally represented in funds with and without DEI mandates.
What does it mean
One interpretation of these data is that the presence of a woman in general society increases the
probability that a fund has allocated capital to invest in DEI/URM investments.
This is true whether the fund simply has an exception for IED investments, or has an explicit mandate to make IED investments (100% of its capital).
Meanwhile, a non-white GP increases the likelihood that a fund will have capital allocated to DEI investments,
but it does not increase the probability that the fund has a mandate to invest 100% of its capital in DEI
investments. In other words, a non-white partner indicates that some, but not all, of the AUM will be dedicated
to DEI investments.
In general, a fund with a non-white female or GP was much more likely to have allocated capital to invest
in URM founders/DEI investments. This could also mean that non-white women and GPs are more attracted to funds that have DEI equity funds.
All funds were fairly similarly distributed geographically, although DEI funds were more prevalent in the South (highly concentrated in Texas) than non-DEI funds. The Northwest and Southwest had no
any DEI fund represented in the sample.
Most funds said their LPs did not have an IED investment mandate (63%); 12% said they were not sure. Just under a quarter said their investors had a mandate.
Overall, DEI-focused funds and URM talent-managed funds are still disproportionately underfunded.
compared to their peers. Although large commitments from major institutions may bode well for long-term impact, we are still a long way from fair and equitable access to capital in the risk ecosystem, according to the report.
None of this information is necessarily new, but the report says it’s important to look at it and set a benchmark from which to improve. Capital allocation to fund managers DEI and URM continues to face
structural barriers, from the diligence requirements of limited partners to the commitment expectations of general practitioners. And until these barriers are removed, it will be difficult to make progress in creating a fair system in venture capital investments.
The report called on all stakeholders in the venture capital ecosystem, and especially limited partners and general partners, to consider their use of DEI as a lens for capital allocation.
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