Welcome to the fourth newsletter of the Inclusive Innovation Forum. Following the roundtable led by the Government’s Chair of the Commission on Race and Ethnic Disparities, we crossed the House of Commons for our fourth roundtable to discuss the findings of the Labour Party’s recent Start-Up, Scale-Up review, which provides crucial insights on how the Party would aim to achieve one of the guiding ambitions of a potential future government: to make Britain the best place to start, and to grow, a business.
Roundtable Insights
The Start-Up, Scale-Up review includes data that reinforces the notion that investing in founders of colour has a substantial and positive economic impact. One respondent to their call for evidence calculated that if entrepreneurship among ethnic minority founders was increased to the average level, this could add a further £15-20 billion to UK GDP.
The discussion was opened by Tom Adeyoola, Co-founder of Extend Ventures, who sat on the panel of the Labour Startup Review. A central theme of the review and Tom’s talk was how to encourage growth. “There are only three ways to generate growth: more people, more productivity, and mining untapped resources. Untapped resources refer to communities and regions that have not been given fair access to funding opportunities. If it is possible to remove structural biases and systemic issues, then there could be improvements on the capability, capacity, and outcomes of UK PLC.”
But, how can we facilitate greater access to capital for entrepreneurs in the UK and ensure that this access is distributed more equitably? Adeyoola thinks we need to follow the money. One of those routes is pension funds: “Pension fund capital is probably the most diverse asset class of capital in the UK, yet Canadian pension funds invest more in UK start-ups than UK-based funds. This means that people in the UK do not receive stakes in the success. It reinforces the importance of connecting capital to broad and diverse sources of capital through the system, to get more alignment around where the money is going”. But convincing pension funds to invest in the venture asset class is challenging, says Amina Ahmad, head of community and content at Diversity VC. Pension funds are known to be more risk averse in the UK – they need a change of culture that enables them to take more risks into startups as an asset.
According to Adeyoola, we also need to address the issue of equitable access to capital for entrepreneurs. He proposes government develop an Investing in Ethnic Diversity Code – similar to the Investing in Women Code – to bring to light the lack of equity in capital distribution and provide recommendations. It’s also important that the government commits to ongoing engagement with the topic and establishes working groups under each recommendation area to implement them quickly and create real tangible outcomes.
Another way to promote more investment into ethnically diverse founders is to diversify who deploys capital. We should be looking at global tech hubs – like Tallinn, Estonia, for example – that have a founder culture of reinvesting into the ecosystem. As entrepreneurs and senior operators experience a liquidation event, they should be encouraged and incentivised to invest in UK startups. “We need the UK to recycle wealth from the older generation into turbocharging the younger generation — we need to create that virtuous cycle,” says Adeyoola.
Alongside recycling cash, the roundtable discussed needing more visibility of diverse role models. Investing through a mirrortocracy lens – not on merit but in people who “mirror” other successful people – hinders investment into people of colour. Roundtable participants argued that, alongside increased data and awareness that illustrates the benefits and increased returns of investing in ethnic minority founders, investors need to see more success stories to further convince them. Role models also encourage future entrepreneurs to believe they can also build: “The importance of role models is crucial to show young people how and why they might want to consider, even in a recession, or because of a recession, the opportunities of entrepreneurship,” says Richelle Schuster, Head of Innovation Programme at Leeds City Council.
Another suggestion raised was putting pressure on entities providing funding to ensure that they invest more equitably across the board. This could look like quotas, a code of conduct or key goals.
In addition, participants largely agreed that there needs to be improved guidance and support for founders to help them navigate more open and diverse funding sources. This isn’t to enable venture capital investors to ignore ethnic minority founders but to provide founders with greater options to increase chances of success.
Sanghamitra Karra, EMEA Head of the Inclusive Ventures Lab, welcomed the thoughtfulness and the research undertaken to provide a snapshot of the start-up ecosystem in the UK for the purpose of the report and the roundtable discussed ways to make the findings actionable irrespective of the party.
Inclusive Innovation Forum: Access to Funding
Welcome to the third newsletter of the Inclusive Innovation Forum. The first and second roundtables and newsletters considered how founders of colour can access funding, the different paths they can follow, the barriers they face, and what can be done to unlock their potential.
In the third roundtable we focused on understanding the role of public policy and how it can support founders of colour. At The Entrepreneurs Network we will use these insights of this project to inform its policy work and lobbying efforts, including:
- Ongoing discussions with government departments;
- Engagement with policy makers outside government, e.g. the Labour Start Up Review
- Upcoming conversations with the British Business Bank;
- Scoping out a briefing paper to impact policy.
Roundtable Insights
The roundtable opened by summarising the findings from the Report of the Commission on Race and Ethnic Disparities, which analysed different areas, including employment and enterprise. As Tony Sewell, Chair of the Commission on Race and Ethnic Disparities, said in his opening remarks: “There are disparities in terms of who gets money from venture capitalists for their startups, and these disparities are also rooted in peer groups and families."
There was agreement that a barrier for underrepresented communities to start an entrepreneurial journey is the lack of access to capital. Marquis Caines, partner at Diversity-X, explained this problem: “Typically, in the black community, we can not do family and friends rounds. When we try to leave the ideation stage, most of us do not even have the capital to develop the idea of a product, which is a necessary first step before approaching venture capitalists.”
It was suggested that this situation should be addressed by the government:
"Public policy, especially within the pre-seed investment space, should include more vehicles to promote more equitable access to capital." – Dama Sathianathan, Partner at Bethnal Green Ventures.
“I don’t think that mentoring and outreach is good enough, because the question is not how do we discuss ideas, but how do we turn the idea into a business.” – Ahana Banerjee, Founder & CEO of Clear.
Mark Neild of the University of Bristol said: “People from underrepresented communities often can’t access Start Up Loans because credit decisions are based on whether the applicants have money and if they can pay it back.” He believes that credit decisions should shift to be more about the prospects of the business rather than the founder's already existing wealth.
The discussion, additionally, revolved around whether entrepreneurship can be promoted by shifting mindsets and encouraging people to convert their day jobs into a business. Mark Neild thinks this may be particularly important for excluded groups that may not be able to access employment and may be better suited to selling directly to the public rather than selling their skills to an employer.
Another major topic of conversation was around if entrepreneurs should focus on selling to their own communities or look to expanding their market beyond them. Many of the attendees said that an advantage of selling to their own communities is that they understand what their specific needs are that have not been solved by others.
Moving on, the discussion covered the importance of promoting minority-lead accelerators and other organisations that provide startup support. More diverse organisations that support startups could be game-changing.
Eni Timi-Biu, Founder & Director, Create Your Table, said: “The opportunity to design and deliver programmes can be monopolised by quite a few organisations who often mirror some of the biases that exist in the entrepreneurship ecosystem.”
Ahana Banerjee, Founder & CEO of Clear stated some of the key institutional blocks for underrepresented founders:
- There are too few ethnic minority investors in senior positions (with decision-making power) at VC funds;
- Companies tackling problems faced by underrepresented founders are often built by those minorities. These areas may be less familiar or less well understood by most investors, resulting in even more unknowns and an increased perceived risk;
- Many investors will not respond to cold communication, thus, the ability to fundraise is often tied to one’s network. Most people in VC come from a finance, tech, or a startup background; these are also white male-dominated fields.
It was agreed that something has to be done to overcome those institutional barriers and this is something that the private sector can help with. “Corporate-led programmes such as the Morgan Stanley Multicultural Innovation Lab, which focuses on actively investing in improving access and opportunities for diverse founders, are critical. We find that there is a strong business imperative to invest in diverse founders, given the resilience and innovation they bring to the table” said Sanghamitra Karra, EMEA head of multicultural client strategy at Morgan Stanley.
Finally, it was agreed that it would be valuable to have a better evidence base to, as Tony Sewell put it “gain a better understanding of what works and use this as a model to move forward.”
Inclusive Innovation Forum: The Diverse Path to Success
Welcome to the second newsletter of the Inclusive Innovation Forum. The first roundtable of the Inclusive Innovation Forum focused on the discussion of a well-known problem: the funding gap for founders of colour. The conversation gave insights into whether venture capital firms should have quotas to reduce the underinvestment in entrepreneurs of colour.
Check out Morgan Stanley's write-up of the first roundtable here.
The second roundtable looked at operations in companies founded by people of colour. The conversation delved into whether they set companies up differently: what are the pathways to success and what factors determine the route they decide to follow? The Entrepreneurs Network will use the insights of this project to inform its policy work.
Insights from the Roundtable
Kalkidan Legese, founder of resale marketplace Owni, explained that she lacked exposure to companies designed to scale. When she started her first company, it was with the simplest and most cost-effective model — the basic money in, money out apprach. After spending time in the industry, she decided to approach things differently with her current business. Owni is VC backed and aiming for fast and large scale growth.
“I see a lot of people, especially in the Black community, running social enterprises and CICs. Sometimes the lack of knowledge pushes you into directions that you do not know, and later you learn what you need to do. At that time, it is not too late, but it takes a lot of work to untangle all of that.” – Alecia Esson, founder of sports wearable startup Nxsteps.
It raised the question of whether the Black community chooses to build social enterprises and community interest companies because they do not know other routes or do not have access to them, or because that is the choice they wanted to make. For Alecia, it is a result of both factors. She believes that many people do not know enough, but also when a person of colour tries to launch a company, the advice they receive is based on underestimation of their skills, ambition, and potential. Others mentioned that the reason a traditional VC funding route is often not considered is lack of networks and the industry’s need for warm introductions.
Although there is a wealth of knowledge and information out there, access to the right information at the right time isn’t always easy:
“There is a huge disparity when it comes to access to knowledge, where to find it, or where to be signposted when it comes to first time entrepreneurs versus people who have done a business before.” – Dama Sathianathan, Partner at Bethnal Green Ventures.
Some suggested that knowledge should be more practical and critical, particularly for people who do not have an established network. According to Upasna Bhadhal, founder of recruitment firm Career Collective, there should be easy, standard answers to key questions like ‘How do you raise money?’ and ‘What are the different pathways you can take when running a business?’ that everyone can find. When you have no network and are starting your first business, googling these concepts brings up a whole host of resources — many from consultants who want you to pay them to help — and that needs simplifying.
“Networking has an important significance for the ecosystem. Getting insider information is key and having it early in a founder’s journey is important because it is the initial capital raising that makes a huge difference.” – LaToya Wilson, Executive Director at Morgan Stanley.
Another major topic of conversation was around why VC is considered the pinnacle of success. We discussed whether there are other options that could be better for founders of colour:
“VC is one route. It is just one option of many. There are huge stories of success from companies that have followed this route because VCs have the loudest voices, and they push that narrative. The other funding routes have smaller voices.” – Esme Verity, founder of Considered Capital.
Additionally, VC is beneficial because it helps to gain credibility for the founder:
“If you have raised any kind of money, you are taken more seriously; if you raise VC money, you are taken even more seriously. It is a repetitive cycle.” – Upasna Bhadhal, founder of Career Collective.
More founders of colour are considering alternative routes because “they don’t have access to VC or they realise that this route is not right for them due to their business models, growth projections, aspirations and lifestyle choices”, says Esme.
But what are the alternative routes? Alongside grants and loans, there are also options such as revenue-based financing, profit-based financing, shared earning agreements and a mixture of a bunch of them.
Sheeza Shah worries that raising venture funding leads founders into a repetitive cycle of pursuing funding, instead of building their company for profit:
“Any financing firm exists to make a profit from a founder continuously needing financing. While financing organisations continue to lean on encouraging founders to be constantly in a fundraising mode, they will not have the time or resources to make those enterprises sustainable.” – Sheeza Shah, cofounder of social impact crowdfunding platform UpEffect.
Dama explained that, in her experience, raising constant rounds of VC is not always necessary when you have the right investors and advisors onboard — Bethnal Green Ventures’ has portfolio companies that haven’t raised again, or raise many years later, as they focus on becoming a profitable and revenue driven business.
The flipside of this discussion was that founders of colour stay away from being a limited company by shares or from raising venture funding because they don’t believe they can create impact under those models:
“A lot of enterprises are realising that they can be any structure they want if it serves their community. So being a profit limited by shares company does not keep them from doing something good. This is progress because, in the early years, many companies chose CICs or tried to incorporate articles for a third-social mission. This has limited them because it builds barriers to accessing the right kind of financing. Generally, financing options are fairly limited for social enterprises. Over the last five years, a lot of enterprises that are now approaching our organisation are limited by shares because they have realised that this gives them more options.” – Sheeza Shah, cofounder of UpEffect.
Finally, we discussed diversity in teams. It was insightful to hear how differently attendees have approached the topic of hiring: Some have considered diversity a conscious priority — they’ve experienced being overlooked or underestimated and are purposefully ensuring they do not do the same. For others, it hasn’t been a conscious thought. There was a widely accepted belief that coming from underrepresented communities means you are more likely to hire diversely, anyway. However, some of the women founders shared that they have been advised to hire senior white men be more credible to VCs, their market and future hires.
Thank you to everyone who attended. I’m looking forward to having further conversations on the topic and using these insights to drive policy change.
Attendees
– Anisah Osman Britton, Reporter at Sifted, Founder at 23 Code Street
– Sanghamitra Karra, Managing Director at Morgan Stanley
– La Toya Wilson, Executive Director at Morgan Stanley
– Eni Timi-Biu, Founder of Create your Table
– Karan Jain, Chief Executive Officer at NayaOne
– Dama Sathianathan, Partner at Bethnal Green Ventures
– Kalkidan Legesse, Founder of OWNI
– Esme Verity, Founder of Considered Capital
– Saffron-Lucia Gilbert-Kaluba, Co-Founder of the Corporate Law Journal Limited
– Alecia Esson, Founder of Nxsteps
–Kelly Kalaitzaki, Vice President Lead of the Multicultural Innovation Lab in Europe, the Middle East, and Africa at Morgan Stanley
– James Usmar, Head of Tech Strategy at Department for Digital, Culture, Media and Sport
– Upasna Bhadhal, Founder of Career Collective
– Ruphina Ochanda, Department for Digital, Culture, Media and Sport
– Sheeza Shah, Co-Founder of UpEffect
Closing the Funding Gap
Over the last decade, I've tried to shift inclusion in entrepreneurship and investing: through education, storytelling, and access to capital. Policy cuts through all three of these things, which is why I decided to get involved in this project with The Entrepreneurs Network.
We kicked off our programme with a roundtable on the funding gap for founders of colour. Let's be real. Most of us have discussed the funding gap more than enough. We are bored of it; I am bored of it. It's time for some action. Maybe we've been directly impacted by it as founders; maybe we've struggled to gain funding; maybe we've been seen by our peers to be investing in what they think is socially good and nice projects, as opposed to what it really is, which is an absolute need for more funding options for underrepresented founders. This isn't charity. This is a need for innovation that serves everyone.
The Entrepreneurs Network will use the insights of this project to campaign around this issue. They were among the first to call-out the gender equity funding gap and since then, others have taken up the torch, with industry and Government working together on initiatives like the Investing in Women code. While there is a long way to go, we have seen the funding gap narrow over the past few years.
The same attention hasn’t been paid to entrepreneurs of colour. The Government’s recent response to the Commission on Race and Ethnic Disparities does not go anywhere near far enough.
Less than 2 percent of VC funds in the UK invested in teams of founders who were all from an ethnic minority demographic. This is mad. Yet founders of colour have built over a million businesses, created over 3 million jobs, and delivered more than £74 billion to the UK economy and growing.
This project is in partnership with Morgan Stanley, which recently expanded its Multicultural Innovation Lab to Europe, Middle East and Africa, having successfully run it in the US for almost five years now. “It's about connecting capital to ideas,” explained Sanghamitra Karra, Managing Director, EMEA Head of Multicultural Innovation Lab at Morgan Stanley. “We want to make sure that we help businesses grow. We want to make sure that new products get formed, and we want these new businesses to help communities grow.”
Sanghamitra pointed to research they’ve done on why VCs aren’t investing in diverse entrepreneurs and the trillion-dollar case for investing in female and multicultural entrepreneurs.
Insights from the roundtable
“The challenge always is when you're presenting to a VC, you're usually sitting in the room of white, middle-class men. The challenge is getting them to really appreciate the problem.” – Angela Malik-Agarwal, Founder & CEO of Planet Nourish
“We're a FinTech that empowers migrant communities to build generational wealth. So here, we have a triple glass ceiling where I'm a female founder, a woman of colour, and we are also serving communities of colour. So I had problems when I was trying to raise venture capital. I had to contort myself and my business so that venture capitalists and investors would understand what we’re doing. Oftentimes, I was talking to people who didn’t know anything about immigrant communities and that was tough.” – Nina Mohanty, Founder of Bloom Money
One of the major topics of conversation during the roundtable was whether investors should have quotas for the amount of funding they give. There wasn’t agreement on this, with some worried it would be seen as tokenism.
"Sometimes when we got a yes from VCs, I would wonder if I am their token founder that they’ve chosen to invest in – that I’m the brown woman that they get to put on their website. Especially with social impact funds, they'd keep telling me that they are diverse and they invest in diverse founders but then I'd later find out that they have no women or no people of colour on their portfolio team page, which I find very alarming.” - Nina Mohanty, Founder of Bloom Money
There is a worry that official quotas would only increase the feelings of imposter syndrome that some minority founders face.
“It’s not about quotas on the founders and amounts invested. I think we need quotas on the investors and that these will filter down to the founders. This way you won’t end up with people feeling as if they only received money because the company had to invest in them. Instead you have ethnic minority investors who have a larger community to draw upon.” – Josephine Philips, Founder & CEO of Sojo
But Nina and Josephine’s views weren’t shared by all. Ezechi Britton MBE believed that anything that gave him, and people like him, control of the levers of power is a good thing.
“If I get to sit at the top table, and if I get my hands on the levers of power, and I am only there because of a quota, that doesn't bother me. Sign me up. I don’t care, so long as I am in the room where it happens. We have to recognise that people don’t just change without encouragement or incentive. Do I like quotas? No. Are they necessary? Yes.” – Ezechi Britton MBE, Founding Member, Principal & CTO in Residence at Impact X Capital Partners LLP & Co-Founder and CEO of Code Untapped
It was agreed that quotas don’t need to be applied to the whole industry.
“It’s probably unrealistic to force private Angel-owned funds to change their behaviour. The way they invest is going to be at their discretion and they are going to do what they want. But I do think the BBB is the answer. It should be made to invest in diverse fund managers. That’s the simplest and most straightforward solution.” – Andy Davis, Co-Founder of 10x10
"If we’re not going to enforce quotes on everybody, then at least we should enforce them on certain VCs, subject to where their cash has come from. If the money has come from publicly funded sources, like the BBB or from pension funds, then I want to have some say about where that money goes and I expect it to be representative of the population as a whole.” – Ezechi Britton MBE, Founding Member, Principal & CTO in Residence of Impact X Capital Partners LLP & Co-Founder and CEO of Code Untapped
Some suggested that a data driven approach would be better. A quota would be a crude tool and would not uncover the reasons for why ethnic minority entrepreneurs are underinvested in – moves like this could just result in the most privileged people, who are ethnic minorities, receiving funding. This would only make the situation more equitable on the surface but would fail to address the core of the issue.
“I think it's really about having a data-driven approach. We need to understand why VCs tend to overlook these opportunities, whether it's in the way that they ask questions, which I know is the case for unconscious bias in gender, or whether it is about what they're seeking to build and who their target consumers are. Something like standardising investment committee questions, or even just screening questions, could go a really long way. So I don’t know that having quotas is necessarily the right approach.” – Saloni Bhojwani, Co-Founder and Partner of Pink Salt Ventures
We know that a large part of the reason that white founders are more likely to receive funding is that they have relationships with people in Venture Capital before they even found their first businesses. “Warm approaches” to funders, by people who already know them, are much more successful than cold approaches. And this is bad for business.
“Diverse and emerging fund managers outperform the market. But the amount of capital going towards that part of the market is low.” - Saloni Bhojwani, Co-Founder and Partner of Pink Salt Ventures
Sanghamitra Karra, the Managing Director, EMEA Head of Multicultural Innovation Lab at Morgan Stanley worries that new technology is making this problem worse. VCs are now building technology that grabs information from LinkedIn Connections as a way of finding new people to fund. This technology focuses on people who went to elite universities or else helped to build unicorns, meaning that people who have been gate-kept from established tech companies and academic institutions are still more likely to lose out.
Taking it back to quotas, Angela did not think that this was a good enough response.
“When you’re pitching an ESG company, then you’re competing against companies that are doing things like making beer from recycled bread. It’s a very broad space with a lot of categories. So who is going to be more successful? It’s probably the guy who is talking about saving the world through recycling bread. So there’s a fundamental disconnect between the different goals. If you have a quota, then you have to be included in the conversation. And that is basically a way of giving a leg up to individuals who come from different backgrounds and different life experiences. Did I go to the right school? Do I have the right network? Can I pick up the phone and get a warm introduction? No. So I think there has to be a way to give people the chance to go forward.” – Angela Malik-Agarwal, Founder & CEO of Planet Nourish.
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