Black and minority founders being excluded from funding opportunities by UK VCs; Cornerstone reports

London-based Cornerstone Partners is an angel investor network focused on investing in businesses owned and run by black and diverse founders across the UK. “We focus our attention on this group because we believe their entrepreneurial talent is often overlooked, underestimated, and under-represented in the traditional funding community,” said the company in a statement.

Minority founders excluded from funding opportunities

In a recent development, Cornerstone Partners have released a report in collaboration with Engage Inclusivity, Diversity VC, and Beauhurst about the barriers to inclusive investment for minority founders in the UK.

Check Warner, CEO of Diversity VC said, “This report serves to remind us how accessibility to venture capital continues to evade minoritised founders – a missed opportunity for investors. 

Whilst there are encouraging signs that founding teams with mixed ethnicities are starting to feel more supported, the barriers to entry remain high and there is far too little progress being made with non-binary and female founders.“

This report identifies how many black and minority ethnic founders have achieved VC fundings, and insights into their experiences of raising capital. The Cornerstone Report takes a closer look at two specific and critical stages of their funding journey: the seed/pre-VC stage, and scale up/VC funded stage.

About Cornerstone Partners

The firm provides investment of between £25K and £100K into post revenue businesses across the UK. In addition to capital, Cornerstone also runs an internship programme to widen access to angel investing, an annual scale up programme for post revenue businesses, and commissions research to raise awareness of the benefits of diversity led investing.

Since its inception, Cornerstone Partners have supported 14 UK businesses and invested just under £1M in aggregate. Some of its recent investments include Coordinate Sport, Hutch Logistics, Nudea, and Cubic Lease.

Eliminate exclusionary in the VC industry

According to the report, of those who successfully raised VC funding in the period, 7.3 per cent of founders identified as Asian and 2.9 per cent of founders identified as Black. Cornerstone Partners believe that this issue is a call to arms; VCs need to work together to eradicate exclusionary practices in the industry.

The data suggests that ethnic minority founders who are successful at raising seed capital are still often excluded at the pre-VC and VC stage of funding. Thereafter, they are subsequently underserved by institutional providers of venture capital. 

Wilfred Fianko, co-founder of Cornerstone Partners says, “At Cornerstone, we review pitch decks from more than 400 businesses a year that are led by exceptional diverse founders across the UK. Our data suggests that there is a strong pipeline of “VC ready” businesses, who successfully secure seed investment, but then struggle to win the support of an institutional investor.” 

He further added, “Although an emerging cohort of funding vehicles which include Cornerstone, Ada Ventures, 10×10 and Impact X to name a few exist, we believe that more work needs to be done, particularly for those businesses at the scale stage. The ongoing support of the Government, trade bodies and other agency groups will be key to amplifying current efforts.”

Some of the key findings from the report are highlighted below:

• Underrepresented founders get excluded from investments at a very early stage of business development. Black founders are hugely under-represented in both cohorts, pre-VC (1 per cent) and VC (3 per cent). This is significant considering 53 per cent of both cohorts are based in London, where the Greater London Authority estimates the population as 16 per cent Black (GLA, 2016)
• Black and racially minoritised women and nonbinary founders are the worst represented, and the work on inclusion of women must continue (The Guardian, 2020)
• Three-quarters of founders come from advantaged socioeconomic backgrounds, and hardly any founders come from families living on welfare entitlements 
• The majority of all founders are graduates from prestigious universities and VC funding is more likely to go to such founders. With 35 per cent of teams without any graduates from top tier/ exclusive universities finding out about VC through personal research, and a further 5 per cent through events/webinars
• This research indicates that whilst the VC industry has in some cases suggested a ‘pipeline problem’, citing a lack of suitable businesses run by women, Black and racially minoritised founders – the problem lies with VC’s limited perspective (Forbes, 2018)

What should the VCs do to fix this?

According to Cornerstone Partners, they offer some recommendations that may positively address the challenge faced by underrepresented founders when raising VC capital. These include:

• Investors must recognise the implicit use of networks for risk mitigation, and develop new processes to replace these exclusionary practices
• To create schemes that support angel groups, accelerators, and diverse managers to invest in businesses led by minoritised founders
• Encouragement of “open VC” model which sees investors work with the BVCA (British Private Equity and Venture Capital Association) to eradicate exclusionary practices, enable groups with less social capital, and gain access to investment networks
• Introduction of early career development programmes that increase the exposure of venture capital to diverse audiences
• Research to examine businesses prior to ‘Pre-VC’ stage to understand issues faced by founders from underrepresented groups
• Research to find solution needed into the disparities within broad ethnic groups
• Further research is needed on the experiences of non-binary and gender-nonconforming founders

Rodney Appiah, Chairman of Cornerstone Partners, commends the work of the emerging ecosystem and calls for further research, particularly in relation to the emerging pipeline from black and diverse founders.

Appiah says in a statement, “We are delighted to have commissioned this important piece of research which seeks to move the conversation forward and further analyses the specific challenges faced by black and diverse founders at different points of the funding lifecycle. We look forward to continuing to build on these findings with our partners and provide the insight and tools that funders need to support exceptional founders regardless of their background.”

Henna Zamurd-Butt, Director of Engage Inclusivity and report author, further added, “Currently, investor processes for evaluating businesses tacitly seem to rely on network integration of founders to mitigate risk. This reliance on social capital – be that through schooling, university or familial connections is a self-fulfilling prophecy, any founder who is a part of these fairly closed networks is much more likely to be able to get investment. To step out of this cycle we need investors and policymakers to first, acknowledge these processes exist and are exclusionary, and second, engage in an honest and open discussion to determine how to better mitigate risk.”

About Diversity VC

Diversity VC is a non-profit partnership promoting diversity in Venture Capital. It has four key initiatives. 

1. Network: to build a diverse network of VC professionals
2. Pathway: help VC firms hire from diverse backgrounds; Future VC is the flagship initiative
3. Ecosystem: connecting the VC community to a broader network 
4. Data: uncovering new and important data

Seb Butt, Head of Partnerships at Diversity VC and founder of Future VC says, “Recognising the important role of research in identifying these issues and providing evidence-based approaches to solving them, we set out to build on the excellent work carried out by organisations such as the British Business Bank, Extend Ventures, 10×10, Google for Startups, OneTech, YSYS and Atomico.”