In a study analyzing capital allocation with Penn State, Diversity VC focused on how much money was going to underrepresented minorities and women.
The report found discrepancies between the diversity, equity and inclusion (DEI) investments that have been promised and the assets actually committed at the general partner and limited partner levels. The sample from 213 firms represented more than $31.6 billion in combined assets under management, and $582 million, or 1.87%, was dedicated to DEI investments.
The conclusion is that DEI-related funds, underrepresented minorities, and women are still grossly underfunded, even though more institutional investors and VCs are claiming otherwise.
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The report captures the first set of previously uncollected data that directly correlates continued inequities in DEI-related funds, across the entire VC ecosystem.
Diversity VC partnered with Penn State researchers and economists to evaluate the survey, which focused on fund size, DEI mandates, gender and race, and more. Silicon Valley Bank and AWS supported Diversity VC in developing the report and bringing it to market, which includes an upcoming series of exclusive events with industry stakeholders.
Diversity VC has been around for five years with the aim of building a more diverse and inclusive VC ecosystem across the world. It looked at teams receiving venture capital financing in 2018 and 2020 from the most active funds across the U.S.
“What we found was that VC-backed startups were still disproportionately men (89.3%), white (71.6%), based in Silicon Valley (35.3%) and Ivy League-educated (13.7%),” said Sarah Millar, COO of Diversity VC, in the report. “The data had hardly changed in two years.”
Still, the group found that it is beginning to see the roots of more systemic change taking hold. Household names among institutional investors — from Goldman to Citi to Carta — announced commitments to funds run by emerging managers and/or to general partners from underrepresented
Many brand-name VCs carve out a slice of their assets under management (AUM) or raise separate funds to invest in underrepresented founders.
“Altogether, we saw billions of dollars get earmarked for investment in non-majority investors and entrepreneurs,” said Millar. “The exact language of these commitments varies, but overall the goal is similar: put more capital into the hands of underrepresented investors and founders, who will in turn invest in underrepresented communities. There is some research that confirms this hypothesis, yet the numbers for funding underrepresented founders remain disappointingly low.”
Diversity VC wanted to understand how to square the availability of “DEI Capital” with the reality of capital allocation. In other words, if the money is out there, where is it going? How are limited partners determining where it should go and who it should go to? And most importantly, how do diversity, equity, and inclusion play a role in their decision-making?
Diversity VC, in collaboration with sponsors and partners, drafted a survey to collect information at the fund level from venture capital firms with a U.S. presence. That survey — including high-level categories and specific questions — is available in the report’s appendix.
The survey was conducted from June 28 through September 20, 2022. Funds were reached through a combination of direct email, Slack communities, and strategic partner communications. Of the thousands of funds that were exposed to the survey, the nonprofit received 393 responses. Each response represents a single VC fund, and each respondent filled in the survey on behalf of their respective institutions for both firm-level and individual questions (e.g., a single respondent provided all information on GP demographics).
Not every respondent answered all the questions, but the analysis is based on responses from 213 VCs.
DEI funds are smaller
The first and most clear difference between DEI funds and their peers was size. DEI funds were about $57 million in AUM on average, compared to $354 million for non-DEI funds.
The majority of funds surveyed employed a multistage strategy, but DEI funds were much more likely to focus on the earliest stages of investment (preseed and seed). In fact, 100% of DEI funds surveyed invest at the seed stage; 64.6% invest in preseed, and 58.3% invest at series A. They are slightly less likely to focus on the later stages compared to non-DEI funds.
Given DEI funds tend to be overrepresented in the preseed-series A categories, it makes sense that fund sizes would generally be smaller. According to Crunchbase data, the DEI funds represented in the survey also participated in smaller rounds: $10.8 million on average, versus $21.4 million for non-DEI funds.
Of the 172 general partners for whom the survey collected demographic data, 59 identified as women or 34% of the overall sample. Thirty-two funds out of 141 for which it had full gender data consisted of only men general partners (GPs) — only 22.7% of the total. Ten funds (or 7%) were 100% women GPs. The remainder — 99 funds — had at least one GP who identified as a woman.
On average, 31% of GPs are women per VC — meaning the average fund will have approximately a third of its general partnership made up of women.
Of the 172 GPs for whom we collected demographic data, 25 identified as nonwhite, or 8.9% of the overall sample. Fifty funds out of 92 for which we have full race data had zero non-white GPs (54.3%). Only six funds (or 6.5%) were 100% underrepresented minority GPs. The remainder — 46 funds — had at least one GP who identified as an URM. On average, 14% of GPs are underrepresented minorities per VC — meaning, the average fund will have approximately 14% of its general partnership made up of underrepresented minorities.
One initial finding was that DEI funds were much more likely to have a female or nonwhite GP. For women, about 23% of non-DEI funds had a woman GP; 40.5% of DEI funds did. Only 5.9% of non-DEI funds counted a nonwhite GP in their partnership, meanwhile, compared to 25.3% of those with a DEI mandate.
Interestingly, the differences change slightly when looking at funds with a DEI mandate. A fund with a DEI mandate is more likely to have a female GP, nonwhite GPs are nearly equally represented at funds with and without DEI mandates.
What it means
One interpretation of this data is that the presence of a woman in the general partnership increases the likelihood that a fund has capital allocated to invest in DEI/URM investments.
This is true whether the fund simply has a carve-out for DEI investments, or whether it has an explicit mandate to make DEI investments (100% of its capital).
A nonwhite GP, meanwhile, increases the likelihood that a fund has capital allocated to DEI investments, but does not increase the likelihood that the fund has a mandate to invest 100% of its capital in DEI investments. In other words, a nonwhite partner indicates some, but not all, of the AUM will be dedicated to DEI investments.
Overall, a fund with a woman or nonwhite GP was much more likely to have capital allocated to invest in URM founders /DEI investments. This could also mean that women and nonwhite GPs are more drawn to funds that have DEI pools of capital.
All funds were fairly similarly distributed geographically, though DEI funds were more prevalent in the South (heavily concentrated in Texas) than non-DEI funds. The Northwest and Southwest did not have any DEI funds represented in the sample.
The majority of funds said their LPs did not have a DEI mandate for investment (63%); 12% said they were unsure. Just under a quarter said their investors did have a mandate.
Overall, funds focused on DEI and funds managed by URM talent are still disproportionately underfunded compared to their peers. Though large commitments from major institutions may bode well for long-term impact, we are still some ways away from equal and equitable access to capital in the venture ecosystem, the report said.
None of this information is necessarily new — but the report said it is important to analyze and set a benchmark from which to improve. Capital allocation to DEI and URM fund managers continues to face structural barriers, from limited partner diligence requirements to GP commit expectations. And until these barriers are lifted, it will be difficult to make progress on creating an equitable system in venture capital investments.
The report called on all stakeholders in the VC ecosystem — and especially on limited partners and general partners — to consider their use of DEI as a lens for capital allocation.
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