DEI in venture capital is slowly on the rise. Who is benefiting?

Every two years since 2016, Deloitte and the nonprofits Venture Forward and the National Venture Capital Association have conducted the VC Human Capital Survey, collecting information on diversity, inclusion and equity from over 300 VC firms.

This kind of data collection matters because of the critical role the VC industry plays in startup funding — and because historically, the opportunities it provides have been inequitable. In 2021, for instance, just 1.3% of startup investments went to Black founders. Similarly low percentages were dedicated to Hispanic and women founders.

For Black founders, 1.3% was a high that followed a “racial reckoning” in 2020. That number dropped back down to 1% in 2022.

Why does diversity in VC matter?

VC firms that are diverse are more likely to invest in startups founded by historically marginalized groups. The Human Capital Survey looks at progress in terms of DEI at VC firms, including how many have DEI policies, and the racial, ethnic and gender breakdown of investment professionals.

2022’s numbers show some progress, primarily for women: More than a quarter of VC investment professionals are women, at 26%, up from 23% in 2020. Asian/Pacific Islanders (API) saw the same rate of growth and are approaching a quarter of investment professionals, at 22%. The number of Hispanic investment professionals rose to 6% in 2022 from 4% in 2020, while Black investment professionals has the slowest growth, up to 5% in 2022 from 4% in 2020.

“We are seeing forward progress,” Heather Gates, national private growth leader at Deloitte and co-author of the report, told Technical.ly. “But to be fair, the progress, at least from my perspective, was much less than I hoped that we would see.”

A shift in DEI focus

Part of the reason why more change hasn’t come — yet — is built into how the industry functions: “The venture industry is set up with these venture funds that have a 10-year contractual life, and the general partners that are in a particular fund usually stay in that fund for the 10 years,” Gates said. “So the industry doesn’t move real fast.”

The study’s other author, Maryam Haque, executive director of Venture Forward, also noted that the two years between the 2020 survey and the 2022 survey isn’t enough time to see significant change from some of the initiatives put into place post-2020 — a year that at least marginally shifted the focus of DEI in VC.

“In the early days, of a lot of the DEI focus in the industry was mostly on the gender side of diversity,” Haque said. “Then there was a real reckoning across the country, as well as in our industry, on the importance of intersectional approaches and racial and ethnic diversity. … Two years in might feel like we should be seeing a lot of progress, but because this is an industrial long-term cycle, it takes time to get a silver track record and really get into those investment partner positions.”

The survey does more than count the number of investment professionals by demographics. It also covers how firms approach talent management and what their DEI practices are, which may be an indicator that more diverse talent will start to surface.

There is, in fact, growth in the area of DEI practices. In 2022, 60% of firms have a staff person or a team responsible for DEI initiatives, up from 55% in 2020, 34% in 2018, and 16% in 2016.

There is also growth in junior-level investment professionals that suggests more diversity in senior level positions in the future. For example, in the 2022 survey, 7% of junior investment professionals were Black, up from 5% in 2020.

Big vs. small firms

Both Black and Hispanic groups were more highly represented at small firms, as were women. API groups were more highly represented at large VC firms, though the majority for all firm sizes remain white and male.

Women’s progress, while relatively fast moving, is not equal or proportionate among racial and ethnic groups: Black women comprised 1% of investment partners in 2022 compared to 0.25% in 2020; Hispanic women were 2% of investment partners in 2022, increasing from 1% in 2020; API women comprised 5% in 2022 compared to 3% in 2020. White non-Hispanic women comprised 13% of investment partners in 2022, up from 12% in 2020.

The big picture can obscure some of the progress. One reason Black and Hispanic groups are more represented in small VC firms is because small firms are generally making a more intentional effort to evolve.

“Firms that have an intentional talent strategy do produce higher results in DEI,” Gates said. “We know there’s causality between having focus, resources, policies and procedures in place and the actual results. That’s why the upticks encourage us for the future.”

The importance of intentionality

In 2022, 46% of firms reported having a diversity strategy, up from 44% in 2020, and 44% said they had an inclusion strategy, up from 41% in 2020. While smaller firms tend to employ more racial and ethnic minorities as investment professionals, a solid majority of large firms (67%) have these strategies, while a minority of mid-size (46%) and small (37%) firms have them.

Large companies across different industries committing to DEI after the events of 2020 was very much the status quo, so it’s not a big surprise that large firms had more DEI on paper than more diverse smaller firms. It’s too soon to know if large VC firms will step away from DEI, but if they do, it will be part of a trend dubbed “the great exodus,” where DEI executives at large companies like Nike and Gucci ultimately left due to the lack of resources given them to develop DEI programs.

That “exodus” in other industries doesn’t negate the fact that diversity is profitable, and VC is an especially vital part of supporting and growing innovative ideas and technologies from historically underserved groups. Business ecosystems around the world need VC to embrace DEI, and to follow through with it.

“I think there is a growing recognition amongst the asset allocators that not only is diversity the right thing to do, but it also is the smart thing to do when it comes to business outcomes,” Haque said. “I think there’s real concern that the momentum that we have seen, and the initiatives that have been put in place may not get the priority that it needs. Our role here is to conduct a survey every two years and hold the industry accountable.”