HomeOther StuffThe down market shouldn't be a smokescreen for poor performance on diversity

The down market shouldn’t be a smokescreen for poor performance on diversity

Editor’s note: This article has been contributed by guest poster Eleanor Kaye. 

Real priorities are revealed in a crisis. And we’re seeing this right now across the world of tech and startups. As founders battle to secure term sheets and VCs remain cautious with their investments, we’re seeing a new, worrying trend emerging across the market.

The onset of the current downturn also marked the beginning of a downhill slide on diversity; after years of hard-fought, slow progress, we’ve started going backwards. 

Atomico’s latest State of European Tech report, released in December 2022, painted a disheartening picture of this regression: the proportion of funding raised by women-only teams has dropped from 3% to 1% since 2018, and 87% of VC funding in Europe is still raised by men-only founding teams. The report’s stats on ethnicity also make for tough reading. 59% of Black founders surveyed by Atomico say ‘securing access to capital’ has been their biggest challenge of the past 12 months, compared to only 41% of White founders. Teams of all minority ethnic founders make up just 1.4% of unicorns and are afforded an even smaller share of total unicorn funding at 0.7%.

Tech has always had a huge diversity problem, but a down market can often see things get even worse. By the end of last year, data from Crunchbase showed that overall VC funding dropped by 36% in 2022 but plummeted by 45% for Black businesses: the largest year-over-year decrease Black entrepreneurs have experienced over the past ten years. 

The story behind this recession regression isn’t hard to decipher. In tough times, ‘non-traditional’ investment choices are perceived as riskier and decision-makers – whether consciously or unconsciously – retreat to the ‘safety’ of the status quo. Funds avoid backing the founder profiles which are ‘less proven’ and stick to backing white, male founders. At the same time. LPs pull back from emerging managers, who tend to be more diverse. And the cost-cutting pencil, hovering over expenditure tables, slashes out schemes like diversity initiatives or inclusive graduate programmes.

These are all actions of a false economy.

Aside from risking moral bankruptcy in tech, backtracking on diversity is a financial mistake. For instance, 2020 research has found a 30% higher multiple on invested capital (MOIC) upon exit for ethnically and gender-diverse teams vs homogeneous teams. Then there’s the idea that minority founders may be better prepared for market turbulence – given their often rocky road towards accessing funding and getting their businesses off the ground in the first place. Maintaining homogeneity in teams and portfolios means missing out on new perspectives, and new audiences and putting a limit on opportunities and creativity.

Downgrading diversity means deliberately restricting growth and businesses can’t afford to do this at any time, least of all in a downturn.

The current down market has shown tech’s commitment to diversity is far too loosely held. This should be a wake-up call. It’s not excusable to hide behind the current climate as the reason for poor performance on diversity and inclusion. Inaction on diversity is still making a choice: electing inequality. Instead of using downturns as an excuse to de-prioritise diversity, they should be a moment to shine a brighter spotlight on it. Moments of crisis can also be key moments of change and now is precisely the time for tech to make good on its promises of progress.

What can those in the tech sector do? The first step is interrogating your own track record and company culture and being honest about your diversity and inclusion performance. Who do you work with, who do you employ and where does your money go? What’s the makeup of your upper management? Are you affiliated with any access schemes or initiatives to improve organisational diversity? Are you putting up barriers to opportunities, such as in relying on unpaid internships? Improving diversity and inclusion is an ongoing, lifelong practice but the time to take stock of your performance is now.

The market may be volatile but improving diversity is very much within our control. Those that tell you otherwise are wrong. And those with means who use this moment to back away from making the VC and tech ecosystem a fairer place should be held to account.

Eleanor Kaye
Eleanor Kaye
Guest Contributor Eleanor Kaye is the Executive Director at Newton Venture Program - a joint venture of LocalGlobe and London Business School. Newton trains aspiring and practising venture capital professionals with an explicit mission to diversify the VC Ecosystem. Previously, Eleanor worked at Palantir Technologies across multiple operational roles during Palantir’s period of hyper-growth before Direct Listing.

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