From Pipeline Problem to Investment Opportunity: Rethinking How VCs Tackle DEI

Nea Höynälä
DEI Consultant, Inklusiiv
9 min read – Oct 31, 2023

When we do not see enough diversity, it is easy to blame the environment. “It’s a pipeline issue”, as the venture capitalists (VCs) have coined it. 

But as catchy as the good old pipeline defence sounds, it has been notoriously debunked. But even with empirical evidence, the phenomenon continues to persist as a lazy excuse for the lack of diversity, equity, and inclusion (DEI) progress in the VC space.

What we need more than ever is for VCs to shift their approach from passively defaulting to diversity being a pipeline problem to actively seeking investment opportunities from more diverse networks – and a lot of it begins internally.

The “pipeline problem,” in essence, is an excuse often given by investors who claim that they haven’t funded founders from underrepresented groups because there aren’t any promising startups led by these individuals. This is inaccurate. There are founders from diverse backgrounds in the pipeline – but it’s the corporate culture that’s pushing them out.

While there are statistically fewer founders from underrepresented groups, and this problem can certainly be traced back to societal norms, education systems, presented career paths, study decisions, and other structural barriers, that isn’t a reason for VCs to shrug off taking some accountability for the problem. 

Because there is also a parallel issue to be observed in the tech industry’s gender disparity. Many companies suggest that supporting the education of women is the key to increasing their representation in tech. However, a study by Girls Who Code and Accenture in the United States revealed that even when women do enter the tech industry, approximately 50% of them leave by the age of 35, primarily due to a lack of inclusive work culture. 

Recognizing these issues, any self-respecting investor should be keen on investing in opportunities with the greatest return on investment. Achieving this goal requires putting more effort into sourcing beyond their existing, exclusive network and actively contributing to building a culture where people from various backgrounds can succeed. By addressing these interconnected challenges throughout the pipeline and industry, VCs can play a significant role in advancing diversity and inclusion in entrepreneurship and technology.

Given how much you hear about DEI, one might assume that the DEI progress in the past years has had at least some sort of upward growth trend. Wrong. 

According to State of European Tech 2022, 87% of all VC funding in Europe is still raised by men-only founding teams, while funding raised by women-only teams dropped from 3% to 1% from 2018, and only 1.4% of European unicorns are made up of entirely minority ethnic entrepreneurs. 

The investment split is tragic, just like the awareness a significant portion of VCs have about DEI. Inklusiiv and VALIDEI’S research (2022), dived into the state of the Nordic VC scene and uncovered that most investors focused exclusively on narrow definitions of diversity, overlooking equity and inclusion. Over a third of participants had no DEI-informed practices to address biases at all. Many participants underestimated their own agency in affecting change; some even believed that the status quo in the industry cannot be altered. 

It is clear that if we want to change these figures and attitudes, we need ecosystem players to put their full weight behind DEI initiatives in the startup and venture capital industry.

Efforts dedicated to achieving diversity, equity, and inclusion yield no results without deliberate action and commitment.

1. Building a diverse internal team

Diversity within your internal VC team is the foundation upon which all DEI efforts rest. A diverse team brings a rich tapestry of experiences and perspectives into every stage of the VC process. It ensures that a VC is not confined to a singular worldview, but rather, is equipped to navigate the complexities of a diverse startup landscape. 

Beyond just the numbers, internal diversity also sends a powerful message to potential portfolio companies and founders – that you’re better equipped to identify and connect with startups led by founders from underrepresented backgrounds. 

Due to the unique nature of how venture funds operate, building a diverse internal team within a venture capital firm requires time and patience. But it also needs work on all levels from the investment team to the Partner level. 

Broaden Recruitment Channels: Actively seek out underrepresented talent by expanding your recruitment efforts to various channels. Collaborate with organizations, networks, and educational institutions that have connections to diverse candidate pools. Building partnerships can help you tap into a broader range of potential candidates.

Inclusive Job Ads: Begin by carefully reviewing job advertisements to ensure they use inclusive language and do not inadvertently deter candidates from diverse backgrounds. Avoid gendered or exclusive language and communicate about the commitment to diversity and inclusion in your firm, if you have one.

Anonymous CV Screening: Implement anonymous CV screening practices to conceal key demographic information such as names, addresses, and photos. This approach helps eliminate unconscious biases that may arise from these details, allowing candidates to be evaluated solely on their qualifications and experience. 

Structured Interview Process: Where applicable, establish a well-defined and structured interview process that includes pre-defined evaluation criteria and interview questions. Using scorecards can help ensure consistency and fairness in the assessment process. Craft questions that primarily focus on candidates’ skills, competencies, and qualifications relevant to the job.

Diversity Metrics and Monitoring: Regularly measure and monitor the diversity of your team. Track metrics related to gender, race, and other demographic factors to assess progress. It’s important to note that the types of data you can collect may vary depending on your organization’s size and location, as well as local regulations. Set clear goals for diversity representation and regularly evaluate your firm’s performance in achieving these objectives, taking into account any limitations imposed by data privacy and regulatory considerations.

2. Building and maintaining an inclusive culture 

Fostering an inclusive culture within VC firms is paramount to addressing the ongoing diversity challenge. Since the beginning of the year, numerous women, particularly at junior investing levels, have left the VC sector, exacerbating an already existing diversity challenge. According to Sifted, dissatisfaction with the male-dominated industry, perceived glass ceilings, lack of funding going to diverse entrepreneurs, and differing compensation structures for women compared to their male counterparts are among the reasons cited by departing female investors. 

The departure of female talent highlights the urgency for VC firms to not only add diversity but also build inclusive cultures that promote equity. Addressing issues related to compensation, career progression, and bias in decision-making is imperative to ensuring the retention of talented individuals in the VC industry. 

To build an inclusive culture, VC firms should take proactive measures to:

Outline Clear Career Development Paths: Clearly define career development paths for employees from underrepresented backgrounds, this includes promotions, raises, and access to leadership positions. Communicate the specific requirements and criteria for advancement, ensuring that the process is merit-based, equitable, and accessible to all.

Address Promotion Disparities: Continuously track promotions and compensation to identify and address any disparities among employees. Take proactive measures to rectify issues related to equal pay and promotion opportunities.

Conduct employee Wellbeing and DEI Surveys: Conduct anonymous surveys to gauge employee wellbeing and satisfaction with the organization’s DEI initiatives. Use the feedback to refine and enhance inclusion efforts.

An inclusive culture doesn’t happen overnight. It requires ongoing commitment and continuous improvement. 

3. Tackling Bias in Deal Flow

Addressing bias is an essential but challenging endeavor within the venture capital landscape. Biases, whether conscious or unconscious, are pesky but detrimental elements that can hinder the industry’s progress. To pave the way for a more inclusive VC ecosystem, it’s crucial to scrutinize every aspect of your deal flow process.

Continuous Training and Awareness: Implement training programs and workshops focused on bias awareness and mitigation. Encourage team members to recognize their own biases and equip them with tools to overcome them.

Diverse Due Diligence Teams: Assemble diverse due diligence teams to evaluate potential investments. Research shows that getting a second opinion can drastically reduce biases. It is also effective to incorporate DEI-related questions into your due diligence process e.g. by asking founders about their commitment to DEI and their strategies for promoting it within their companies. 

Objective Scoring Systems and Bias Training: In later-stage investments, the utilization of objective scorecards and predefined evaluation criteria becomes more practical due to the wealth of data available, encompassing metrics like revenue and break-even points. These data-driven assessments help mitigate biases by providing investors with concrete benchmarks for decision-making. 

However, in the early stages, where investors often rely heavily on their evaluations of the founding team, implementing objective scorecards can be challenging due to limited data points. Consequently, at this juncture, cultivating awareness of unconscious biases becomes paramount. A prevalent bias to address is pattern matching, which tends to favor founders resembling the likes of Mark Zuckerberg while potentially sidelining women, people of color, and other underrepresented groups. Understanding and actively mitigating these biases are crucial steps in ensuring that the venture capital assessment process remains equitable and inclusive at all stages.

Data: Monitor the diversity of founders you meet with. If you consistently meet with a homogenous group, you’re likely missing out on diverse investment opportunities. Recognize the potential impact of unconscious bias when selecting which founders to engage with and the conclusions you draw from those interactions. 

4. Cultivating diverse networks

Networks are the lifeblood of the VC industry, both its key problem and its most promising opportunity. It’s here that the critical “pipeline argument” takes root, often stemming from complacency within VC networks. But with proactivity, VCs can broaden their horizons.

Actively Seek Diverse Founders: Instead of waiting for diverse founders to show up at your front door, take proactive steps to seek them out. Go beyond your specific investment strategy and actively attend events, conferences, and pitch competitions that shine a spotlight on diverse entrepreneurs. 

Forge Strategic Partnerships: Building diverse networks often starts with strategic partnerships. Seek alliances with organizations, incubators, and accelerators that prioritize diversity in entrepreneurship. These collaborations introduce you to a broader and more inclusive pool of startups and founders.

Assist Companies: Assist in finding suitable partners among PE and VC investors for diverse and inclusive companies that may not align with your portfolio but can thrive under different investment strategies. Similarly, assist your own portfolio companies in finding and connecting with relevant peer networks. These networks can provide valuable support and resources, fostering a sense of community and empowerment among diverse founders.

5. Sharing & tracking DEI progress

Transparency is key to advancing DEI efforts in venture capital. Without VCs mentoring their portfolio companies and concrete data to shed light on the current state of affairs, it becomes challenging to identify, acknowledge, and subsequently transform the existing realities.

Establishing a robust system for measuring and reporting progress is essential. Develop clear, quantifiable metrics that track the diversity within your portfolio, investment teams, and advisory boards, while ensuring strict adherence to data privacy regulations. Use this information to identify gaps and areas where you can improve your DEI efforts.

But that data is no use hidden. Regularly report on your progress in achieving a more diverse and inclusive deal flow to hold your firm accountable and encourage others to follow suit. Transparency is key to building trust and credibility in your DEI initiatives. Share your progress openly with stakeholders, including your LPs, founders, and the broader VC community. Highlight your successes, but also be candid about the challenges and setbacks you encounter.

And if investors have indeed been prioritizing building their own internal culture, then VCs are perfectly fit to pass down that DEI knowledge to their portfolio companies. VC firms can play a pivotal role in mentoring founders on how to integrate DEI into the company culture from the outset. They can help founders establish inclusive hiring practices, develop diverse talent pipelines, and create processes that foster diversity, equity, and inclusion. Making this commitment early, makes it easier to sustain as the company grows.

The pipeline argument is dead. Complacency is no longer an option. The call for diversity, equity, and inclusion is resounding, and internal practices, tackling biases, diverse networks, and transparent reporting are the nucleus of this change. It’s an endeavor that requires dedication, intentionality, and the unwavering belief that a more diverse VC ecosystem benefits all.

Keep learning by diving into FVCA’s DEI Guidelines: HERE.

Inklusiiv is a global DEI consultancy helping organizations advance diversity, equity, and inclusion. Find out more about Inklusiiv’s services here.  If you need help in training your team, building a DEI strategy, or measuring the state of DEI in your organization, get in touch at [email protected].