Will diversity slip further as the tech slowdown continues?

Tech knows he has a diversity problem. But with the current slowdown in funding and economic growth, many investors and founders worry that things could get worse.

According to Atomico’s European state of technology report, All-female founding teams accounted for 6% of all funding rounds in 2022, but only 1% of the funding raised. It’s a statistic that’s getting worse; it was also 1% in 2021, down 3% in 2020.

“My biggest fear is that people are using the recession as a smokescreen to backtrack on diversity. When the chips are down, people are back to writing, and that hits people from backgrounds that are normally overlooked or underappreciated the most,” says Eleanor Kaye, executive director of the newton Enterprise Program, a training course for venture capitalists.

“And yet there is so much data showing diverse teams outperforming homogeneous ones. Funds that want to thrive in a difficult market need diverse investors backing diverse founders. Now is not the time to go back, but to keep pushing forward.”

The data suggests that despite growing efforts by venture capitalists and tech companies to encourage diversity, nothing much has changed. Many venture capitalists have hired more women investors, but there is still a lack of women in senior decision-making positions. Much mentoring programs for underrepresented founders have launched, but those founders still lack funding opportunities.

And while there isn’t much data on the impact of the slowdown on people from other types of underrepresented backgrounds, everyone agrees that the picture is probably bleaker.

Venture capitalists retreat to “network investing”

Atomico’s data also shows that things are more difficult for women in the early stages of their entrepreneurial journey. While mixed-gender teams increase average rounds at roughly the same rate as men’s seed teams, women increase significantly less.

Eva-Valérie Gfrerer, CEO and general partner of Morphais VC, says it could become even more difficult for female founders because VCs will now make more cautious bets. For them, the least risky investments mean backing serial founders or “network investing”: investing with other VCs with good track records, usually backing founders already in their network.

“We expect to see more of a focus on fairly homogeneous network deals,” he says. Although, she adds, if venture capitalists really wanted to tread carefully, they should do the exact opposite. “ [They] you would actually manage risk better by having a diversified portfolio.”

56% of ethnic minority founders (vs. 41% of white founders) and 36% of female founders (vs. 24% of male founders) find that accessing capital has been the biggest challenge in recent years 12 months, according to Atomico’s survey.

The importance of funds focused on diversity, angels and solo GPs

Many investors feel that a new generation of investors who are more representative of the diversity of society will be needed to change the status quo and direct more capital to diverse founders.

“It is now clear that to get the best returns, venture capitalists must look outside their comfort zones and fund the best teams for the problems they are working on, which, since the world is not simply made up of men white, they are often diverse. says angel investor Sarah Drinkwater.

“This is where angels and small individual funds, who often have distinctly different networks, can win, funding diverse teams at fair valuations, while larger companies seek deeper proof points.”

There are numerous examples of these funds, including:

• Unconventional Ventures of Sweden, which launched a €30 million fund this year for underrepresented founders.
• The F-Fund in Austria, which is raising a fund of 20 million euros for startups with female founders.
• Sista from France, which aims a fund of 100 million euros to back startups with female founders.
• Auxxo from Germany, who raised a fund of $15 million at the end of 2021 to invest in companies with female founders.
• Other funds, like the UK’s Ada Ventures, are testing new ways to find and invest in underrepresented founders. Ada launched a scouting program in 2018 specifically to try to access diverse talent, and says she’s seen her approach pay dividends. A quarter of the 28 companies it backed with its first fund they were scout references — 55% of them had female founders and 30% had founders from minority ethnic groups.

This rise in funds focused on underrepresented founders gives some people hope that the tide will turn soon.

“2022 saw the rise of a new wave of contrarian emerging managers in the Nordic countries, France, Austria and the UK, emboldened by the thesis that greater diversity produces higher returns. The virtuous cycle of attracting and funding more diverse teams has begun and we will start to see incremental changes. [at the earlier stages]says Vera Baker, a venture partner at Unconventional Ventures.

profitability is king

There is also hope for underrepresented founders in VCs’ increased focus on profitability, some say.

“This should translate to more funding for female founders,” says Amber Ghaddar, founder of decentralized finance startup AllianceBlock and female founder accelerator The 200BnClub. “It is well documented that, despite the fact that women receive less than half the funds that male founders receive, they generate twice the revenue per dollar invested. Women founders are good business, and the current recession and resulting changes in venture capital requirements mean that funding should flow organically to them.”

Mimi Billing is the Nordic correspondent for Sifted. She tweets from @MimiBilling.
Sifted Associate Editor Eleanor Warnock and Editorial Assistant Sadia Nowshin contributed to this article.