Newly-founded companies get less than 1% of capital invested
It's easy to be drawn into the narrative that it's easy to start a company and raise millions of dollars (seemingly overnight) on just an idea and little more. Although this can happen, it is very much the exception rather than the rule. The reality is that raising capital requires patience, resilience, determination and, arguably, a lot of luck. 2021 has been a record year for venture capital investment in Europe, yet securing funding remains one of the greatest challenges for founders. That's particularly true for those at the earliest stages of their journey, or those further along, but still searching for product-market fit or for an investor that believes in them. To put things in some context, companies founded in 2021 only captured 0.9% of total capital invested in the first nine months of the year. More than three-quarters of all capital invested was raised by companies that are at least 6 years old. The reporting lag may push that 0.9% higher, but it has typically ranged between 1-3% in recent years.
Founders from underrepresented groups see greater barriers to raising capital
Not only is it not easy to raise capital; the challenge is not equal for all. For example, women founders, and founders from ethnic minority backgrounds face higher barriers to securing access to capital. When asked whether their background has had an impact on their ability to raise capital, they are much more likely to feel prejudiced against.
With regards to your personal circumstances, to what extent does the following factor - "Underrepresented background" - positively or negatively influence your ability to raise capital for your business?
- Positively
- Neither positively nor negatively
- Negatively
- Notes
- Founder respondents only. Numbers do not add to 100 as respondents could choose multiple options.
Unlocking access
Across respondents from diverse groups, the main strengths are somewhat fairly distributed across the board but there are some notable differences. Lesser access to a network of investors places women and ethnic minority founders at a slight disadvantage compared to men and white founders. The former also feel more penalised by their background.
With regards to your personal circumstances, to what extent do each of the following factors positively or negatively influence your ability to raise capital for your business? - By gender and ethnicity
- Positively
- Neither positively nor negatively
- Negatively
- Notes
- Founder respondents that have raised capital in the last 12 months or are currently raising only. Numbers may not add up to 100 due to rounding.
Network, access and ‘relatability’ still govern in fundraising
We asked founders who raised (or are still raising) external capital over the past 12 months about the personal factors that they perceive may have had a positive or negative influence on their ability to raise capital. The factors respondents feel most positively impact their chances of success are personality and/or strong people skills, understanding of their product and audience, and access to a network and knowledge on the fundraising process. The factors that are most likely to be perceived as having negative influence are coming from an underrepresented background and, for women and ethnic minority respondents, lack of access to a network of investors. 💡 When broken down by gender, women are more than 3x as likely as men to cite the inability to build a personal connection from shared experiences with investors as a negative influence on their fundraising experience. Women are also around twice as likely to have faced issues in accessing the right knowledge about funding opportunities, and navigating the fundraising process as a whole.
With regards to your personal circumstances, to what extent do each of the following factors positively or negatively influence your ability to raise capital for your business?
- Positively
- Neither positively nor negatively
- Negatively
- Notes
- Founder respondents that have raised capital in the last 12 months or are currently raising only. Numbers may not add up to 100 due to rounding.
When assessing commitment, I never listen to the rhetoric, rather I measure based on the actions and in VC, action translates to pounds and pence invested.
Over the last year, three more Black female founders have raised at least £1M of VC funding (R Grid, Beautonomy, Afrocenchix). They join that exclusive club with The Stack founder Sharmadean Reid. We see Passion Capital, Ada Ventures, Local Globe and very few others committed to this table. There has been a proliferation of training schemes established to incubate companies with Black and brown founders, but very little capital has flowed to the investors and funds best positioned to find and support these special entrepreneurs.
We need more Black and other underrepresented GPs with the power and purses to make investment decisions. People of colour and other underrepresented folks unable to allocate funds within generalist funds is not the answer. Generalist funds with no particular connections in underrepresented networks or experience of successfully supporting underrepresented entrepreneurs is not the answer.
Discrimination is still too commonplace in the European tech ecosystem
38% of women working in European tech report having experienced some form of discrimination in the past 12 months, compared to just 13% of men. The sample size for respondents that self-identify as non-binary or genderqueer is small, but it is important to share the perspective of those who spent the time taking the survey and provide feedback on the state of diversity in tech. 63% and 67% of those survey respondents respectively reported that they have experienced a form of discrimination in the past 12 months.
Capital flows to all-women founding teams are not improving on a relative basis
As cohorts of established companies - which are dominated by all-white and all-male founding teams - continue to raise more capital, the gender imbalance in the flow of capital is compounding. As a consequence, there is no measurable progress in the overall share of capital invested and deal count accounted for by women or mixed-gender founding teams. In 2021, 1.1% of capital raised overall went to all-women founding teams, and 8.8% to mixed-gender founding teams. Looking at the total number of deals, the share captured by all-men founding teams also remains largely unchanged over the past five years.
More men called John have raised investment than Black women in the UK. That isn't good enough.
I see a lot of talk, but not a lot of action. Funds like Impact X & Backed VC have invested in us and a few others on the list, and of course the Google Black Founders Fund has sent huge waves through the space by showing what happens when you #FundBlackFounders... but there's still a way to go.
Think about the talent we're missing and the breakthroughs that never happened as talented founders were blocked from raising investment because of the content of melanin their skin cells produce. The next generation will look back at the inequalities in funding in the way we look back at segregation and other such folly. Change is happening, but it needs to speed up. There are big problems to solve and we need the best talent from a full range of varied backgrounds.
Women founders are most likely to have faced discrimination
The issue of discrimination is most prevalent for the founder community. 53% of women founders that responded to our survey indicated that they had faced some form of discrimination in the past 12 months while working in the European tech industry. The experience of discrimination is not as commonly cited by women that are C-level executives at European tech startups and scale-ups, but in any case, a significant proportion (33%) have encountered it, significantly more than the 8% of men in similar positions.
But there are seeds of hope in some of the survey data on discrimination
Gender, age, and ethnicity are the most cited types of discrimination among respondents who share having experienced discrimination in the past 12 months. Over the past four years, the share of men experiencing gender discrimination has fallen from 32% to 22%, while the share of women citing gender discrimination has fallen much less, from 89% to 84%. The share of ethnic minority individuals citing ethnic discrimination has fallen from 64% to 56%.
Are we making progress?
While the share of both total funding and rounds raised by all-women founding teams declined in 2021, absolute numbers increased. The dollar amount of funding going to all-women founding teams increased by nearly 80%, while the funding going to mixed-gender founding teams grew by more than 250%. 2021 might be the first year we see $1B of capital raised by all-women founding teams based on data up to September. It is a small but meaningful milestone to celebrate.
We have to continue our efforts to fully exploit Europe’s diversity in terms of gender and cultural and geographical backgrounds.
No innovative European startup is the same as another. Each has their own specific needs and opportunities. This means that we should always focus on being as fast as possible and flexible to tailor our support to the specific circumstances of these companies. We have made great steps in putting this in place. For example, startups can apply to the EIC Accelerator at any time with a short questionnaire, slide deck and video pitch, and get a response in less than 4 weeks.
We’ve also put in place a unique funding offer combining non-dilutive grants with substantial equity investments, as well as a growing set of Business Acceleration services. But there is still untapped potential across Europe. We have to continue our efforts to fully exploit Europe’s diversity in terms of gender and cultural and geographical backgrounds.
Are women founders being set for success?
All-male and mixed-gender founding teams raise larger rounds at both Seed and Series A than companies founded by women only. This trend raises questions about how women in tech are currently perceived by investors, and their future success. By raising less in the early stages, do all-women teams start their journey at a disadvantage? And if so, what effect might that have on future generations of women, and their aspirations and ability to succeed in tech?
The share of all-women teams has increased in smaller funding rounds
While the overall picture of gender diversity is disappointing, it's a small encouragement to see incremental progress made in early rounds. Looking at funding rounds of less than $10M, the share of deals captured by all-women founding teams has increased by one percentage point since 2020. In contrast to the previous year, 2021 also saw at least one all-women team represented in each deal size bracket of funding rounds. Not a leap of progress by any means, but a small step in the right direction.
Women founders are most represented in smaller rounds
We looked at eight European countries and the share of funding raised in each country captured by all-women or mixed-gender teams. Gender diversity is highest in the smallest funding rounds, and quickly tails off as rounds get larger. Given shifting attitudes on gender across generations, it is not surprising to see younger cohorts making more progress on diversity. That said, at the current pace, it would still take far too long for these incremental improvements to lead to a truly gender diverse tech ecosystem. Concerted efforts are needed at all levels of funding.
Share of capital raised by mixed gender and all women founder teams by country in 2021
- <$5M rounds
- <$10M rounds
- Total capital
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
Gender diversity in fundraising varies across the continent
While gender diversity in founding teams remains poor across Europe, there are some variations across countries. Portugal has the lowest rate of all-men teams receiving funding at 75% while Ireland has the highest rate of all-women founding teams at 10%.
Some signs of improvement in Denmark, Finland and Portugal
The share of diverse teams has notably improved in a handful of countries, such as Denmark, Finland and Portugal. In others, the gender mix of founding teams receiving venture funding has remained roughly unchanged in time, including in Europe's largest countries, such as the UK, France and Germany.
Sweden, Ireland and Finland lead in funding women founders
Leading countries by overall capital invested in the country, such as Germany and France, rank well below some of their counterparts when it comes to the density of mixed-gender and all-women founded startups receiving funding relative to the general working population of women. While results vary across Europe, Sweden, Finland and Ireland have the highest relative density in the region.
Number of rounds per 1 million working women, 2017 to 2021
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021. Population data from UN, with data shown for countries with >300,000 inhabitants.
Methodology
We believe data is a crucial building block of progress in any area, as it allows us to better understand the current trajectory, and course-correct based on that. Yet, in the past years of writing this report, we’ve struggled to find reliable data on ethnic diversity in tech at a cross-continental European level. Last year, Extend Ventures, a not-for-profit organisation led by Erika Brodnock and Tom Adeyoola compiled the first ever report on Diversity Beyond Gender for the UK market. This year, in an effort to improve on this reporting gap, we partnered with Extend Ventures and Dealroom with the goal to expand this analysis at a regional level to help diverse entrepreneurs turn their ideas and visions into successful companies. As part of this wider analysis, we used a sample of 4,684 European tech companies that raised $2M or more since the start of 2020, to give a snapshot view of the types of companies and talent - whether young or established - that are currently being funded in European tech. As such, funding is grouped by company stage (Seed, early and late stage) as defined by Dealroom. For about 3,000 of these companies, Extend Ventures were able to map out the ethnic backgrounds of their founding teams and leadership "using a machine learning algorithm [they] are training to detect the perceived ethnicity of founders". While there are many limitations to this methodology, and we do not expect it to be anywhere near 100% accurate, we and the team at Extend Ventures are confident that it gives a directionally accurate picture.
Diversity makeup
The makeup of founders and leadership in the dataset is fairly homogenous across all stages with 92% of white founders and 8% belonging to ethnic minorities. Across ethnic minorities, Middle Eastern and South Asian men were most represented across companies of different stages with 2% of all founders. The gender divide is equally visible across all minority groups too.
34￠ for every $1
The companies and founding teams in the final sample we analysed, as outlined above, have raised a total of $139B over the course of their journey to date, and the overwhelming majority of that went to white founders. Of that total funding, $104B was captured by all-white founding teams, $34B was raised by teams with founders of multiple ethnicities, and only $1.8B was raised by teams made up of solely ethnic minority founders. As we saw when looking at gender diversity, it also looks like the lack of ethnic diversity compounds over time, as companies established longer ago are more likely to have all-white founding teams, and capture a bigger share of total funding through larger rounds. Companies still in their early stages of funding may therefore give a better indication of the direction of travel, as this is where progress registers first. In fact, 55% of all funding raised for ethnic minority founding teams was captured by companies at the beginning of their journey. In total teams of all ethnic minority founders have raised a total $1B for companies still in their early stages. On the other hand, the share of early stage funding for mixed teams is only 18%.
Black founders are fundamentally over mentored and under funded. Venture capital just hasn’t made its way to them yet.
88% of Black founders in the UK self-fund at least part of their venture. There’s always been entrepreneurialism in the Black community - there is no pipeline issue, actually an allocation issue. The lens is configured to white predominantly male founders, as a result the capable underrepresented founders are not being identified or catered for.
The dial has not moved in a significant way. A big issue is many of the institutions are attempting to solve the disparity without the appropriate approach. It is still very top heavy. A big part of the ecosystem still remains unstimulated due to such organisations remits being post seed. Utilising the existing tentacles and supporting existing communities like Black Valley, Black Girl Fest, Black Tech Fest, Code in Black Females and YSYS to support and build a robust ecosystem.
There is more diversity in late stage teams
The share of all ethnic minority teams decreases at each stage, with more mature companies capturing only 1% of all funding raised to date by the sample. It is notable that more funding rounds are typically raised by founding teams that are all-white, and so the more these large rounds are raised, the greater the dilutive impact on the overall share of capital raised by more diverse teams. For mixed teams however, there seems to be a greater level of diversity at the later stage. It is unclear whether this reflects a conscious effort of hiring more diverse CEOs and/or leaders once the company grows or whether there has been a slowdown of progress in more recent cohorts of companies.
Diversity varies meaningfully across regions
This is the first attempt at providing data on ethnic diversity at a European-wide level, and given sample size, we have provided a regional view. It shows significant differences between regions. The UK & Ireland, along with DACH, see the largest share of total funding going to mixed and ethnic minority only founders, with 37% and 36% respectively. These are higher relative to the share of mixed teams in the region as well with 27% and 13% of founding teams either mixed or all ethnic minority.
Europe in context
How does Europe compare to other regions? Although the following analysis is not like-for-like, Craft shared an analysis they performed on Series A and Series B companies across both North America and Europe. North America displays a higher share of diverse founding teams, with 19% of them having at least one black or ethnic minority founder. Similarly to Europe, the team composition for unicorn companies is on average less diverse, with only 10% of teams having at least one black or ethnic minority founder – though this is still twice as high as in Europe.
It is sobering that when Marshmallow closed its $85M round, that amount doubled the total VC investment that went to Black-led UK companies over the previous 15 years.
2021 has been extremely good for the digital and tech companies in the Impact X portfolio. We saw our first portfolio unicorn which is the UK's second Black unicorn - Marshmallow. World Remit aka Zepz was the first. Both companies announced their status in the 2nd half of 2021. That milestone amplified the June announcement that finally a third country has joined the US and China in minting over 100 tech unicorns, the UK. This is another marker of progress in the European tech ecosystem. Sobering, however, is that when Marshmallow closed its $85m round at a $1.25B valuation, that amount doubled the total venture capital investment that had occurred in Black led UK companies over the previous 15 years as reported by Extend Ventures in Diversity Beyond Gender.