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When will venture capital catch up?
Risks from environmental and social sources are increasingly taken into account by investors. And the benefit of having a diverse leadership team are now documented in empirical studies. Yet, there is one area of finance where nonfinancial risks and topics such as a diversity of opinions are basically non-existent: Venture capital.
The VC world essentially is a world of white men (58% of VC partners in the US are white men) coming mostly from elite universities (more than 50% of VC partners graduated from Harvard or Stanford). Dig a bit deeper and you can become truly horrified. Only 3% of VC partners in the US are black, only 1% are Hispanic, and only 18% are women. A global survey of VC employees showed that 76% of all employees in VC are white and 80% of partners. But while 45% of all employees are female, only 16% of partners are.
One may say that this doesn’t matter too much as long as people are able to identify the best investment opportunities, but we know that like hires like and thus, it seems possible that a lack of diversity leads to a bias in investments. And the headline statistics seem to indicate that there may be some bias (though there is no definite proof, yet). In the United States, 89% of venture capital went to all male founder teams, and only 2.7% to all female founder teams, with the remaining 8.3% going to mixed gender teams.
And when it comes to ESG integration in their investment process, the situation seems bleak as well. Only 5 out of the top 50 global venture cap companies have any statement on sustainability and how it influences their investment decisions.
This lack of awareness and integration exposes startups and venture capital firms to the reputational risks from poor environmental or social practices. The IPO of Deliveroo earlier this year which became a disaster because investors were concerned about the employment practices of the company should be a warning sign for VCs that exits might become more difficult going forward if their businesses neglect environmental and social risks or have poor governance structures. And as I have written before on the example of infrastructure, every good investment requires two decisions. The decisions to buy at a low price and the decision (and may I add ability) to sell at a high price. By neglecting ESG risks, VCs put their investments in jeopardy.
On the other hand, this neglect of ESG risks by mainstream VCs provides opportunities for up and coming VCs. Obvious Ventures in the United States and Pale Blue Dot in Sweden focus on investment in climate technologies and sustainable investments in general. Recently listed Forward Partners in the UK as well as Balderton and Kindred Capital are venture capital firm that take ESG seriously in their investment processes. And MaC Venture Capital in the United States and ImpactX in the UK are majority owned by partners from ethnic minorities. As usual, the big names in the business are lethargic and slow to change. It could be that in an industry that specialises in identifying disruptors, these large VCs will be disrupted themselves soon.