Businesses with all-female founders received just two per cent of all venture capital funding in 2021, while less than two per cent went to black and ethnic minority-led businesses.

Venture capital is a form of investment in early-stage companies, typically in return for a share of the business and is very common in the tech sector.

In a new report, the cross-party Treasury Committee of MPs criticised ‘unacceptable’ diversity statistics and called for rapid change from Government and the industry.

The committee highlighted the importance of globally competitive tax reliefs designed to promote investment in UK firms.

Venture capital is a risky but crucial form of investment for innovative companies with high growth potential. The sector receives Government support through tax reliefs designed to encourage investment in the UK.

Despite previous calls from the committee, the Treasury has not provided clarity on when venture capital tax reliefs with expiry dates will be extended.

The Government has been urged to extend the schemes at the earliest opportunity to provide more certainty to founders and investors.

The  committee has also recommended that the Treasury make collecting and publishing the diversity statistics of venture capital firms and their investments a requirement for eligibility.

Leeds hailed as UK’s most ‘collaborative tech community’

The committee also found that venture capital investment is ‘unacceptably concentrated’ in London and the South East with 80 per cent of VC investment going to the ‘Golden Triangle’ of London, Oxford and Cambridge.

London alone receives almost half of all equity deals despite accounting for 19 per cent of all small businesses.

Given firms elsewhere in the UK can take longer to become established, the maximum company age limits of seven and 10 years written into the tax reliefs currently hold back economic growth and innovation and should be extended, the committee found.

The MPs encouraged all venture capital firms to sign up to the Women in Finance Charter and Investing in Women Code, both of which require the publication of gender and diversity statistics. Organisations should comply or explain why they are not as a condition of receiving tax relief support.

The committee also recommended the Government and British Business Bank consult on creating a fund with the specific purpose of promoting gender diversity in venture capital allocation.

Commenting on the report, Harriett Baldwin MP, chair of the Treasury Committee, said: “The venture capital industry plays a vital role in supporting the growth of the nation’s small businesses, but statistics which show just two pence in every pound of investment goes to all-women led businesses demonstrate a shocking dereliction of duty given the level of Government support for the industry through tax reliefs.

“In the 21st century, it shouldn’t come as a surprise to investors that women and those from ethnic minority backgrounds can start successful businesses.

“Given public funds play a key role in the success of the UK’s venture capital sector, more must be done. Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change. Government incentives could also be tweaked to encourage more regional venture capital investment.

“As a committee, we will continue to keep a close eye on these important topics and will be investigating small business finance and sexism in the City in two new inquiries launched recently.”

Investing in diversity

Responding to the news, Suid Adeyanju, CEO of cyber security intelligence partner RiverSafe, said: “One of the main issues perpetuating a lack of diversity in key industries such as tech is a lack of representation at the ownership and C-Suite levels.

“In the absence of role models from diverse backgrounds, staff from under-represented groups can often lose confidence and wonder if they will  be able to climb the ladder to get into those positions, presenting a significant hurdle at an early stage of their journey.

Investor wants more backing for female founders

“If we are going to make the technology industry sustainable, we must first make it equitable, and that starts with boosting the percentage of funding for minority-founded businesses, and encouraging more entrepreneurs > from diverse backgrounds to start their own ventures, supported by Government, VCs and industry.”

Sheila Flavell CBE, COO of FDM Group and president of techUK, added: “The lack of diversity across industries including technology continues to be an issue and the lack of funding being provided for founders from diverse backgrounds is the latest problem that needs to be tackled.

“While some progress is being made to encourage women into tech through returners schemes and more equitable pay, although there is still much to be done, barriers such as unconscious bias still exist and transparency on reporting such data is key to addressing issues in funding.

“Investing in diversity opens the UK to more diverse talent pools that can help drive economic success and help diverse businesses to thrive.”