The venture capital industry in the UK has faced criticism from MPs over its lack of investment in businesses outside London and the south-east, as well as its failure to support companies run by women and ethnic minorities.
A report by the Treasury Committee has shed light on the stark underrepresentation of women and minority-led businesses in venture capital funding.
Just 2% of all venture capital funding in 2022 went to businesses founded exclusively by women and even less to companies led by minority ethnic executives.
Citing the British Business Bank, the report stated: “For every £1 of equity investment in the UK in 2021, all-female founder teams received 2p, all-male founder teams received 84p, and mixed-gender teams 14p. This is lower than the 4% received by all-female teams in 2020, reflecting yearly volatility.”
Venture capital investment is also highly concentrated in the ‘Golden Triangle’ of London, Oxford, and Cambridge, with 80% of venture capital funding flowing to this area, leaving companies based elsewhere in the UK at a disadvantage.
The committee highlighted the negative impact of such concentration and called on the government to extend tax reliefs to companies based outside this region.
The committee is now urging both the venture capital sector and the government to take action.
One of the key recommendations from the Treasury Committee is the implementation of greater transparency in the venture capital sector.
Currently, venture capital firms are not required by law to report diversity statistics, making it challenging to understand the true scale of the problem.
The committee emphasised the need for consistent diversity reporting and called for venture capital firms to disclose the gender and ethnic breakdown of both their recipients and their own staff.
To further incentivise diversity and inclusion, the committee proposed linking tax reliefs to improved diversity reporting by making provision of diversity statistics a requirement for eligibility to receive Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCT) tax reliefs.
The report also acknowledged the importance of initiatives like the Women in Finance Charter and the Investing in Women Code.
But even though these initiatives have seen some progress, their voluntary nature limits their overall impact, according to the report.
Treasury Committee chair Harriet Baldwin said the statistics showed a “shocking dereliction of duty given the level of government support for the industry through tax reliefs”.
She added: “Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change.”