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Venture capital has a network problem

Author: 
Jessica Zoutsos, CEO of Capitalex

Much has been said about underinvestment of venture capital into women, minority ethnicities, companies based outside city centres, alongside numerous other classifications that define the population of UK business.

But why should we be worried about this?

Imperfect allocation of capital into our smaller companies effects the shape of our economic pipeline – our future cohort of businesses and business leaders. Underinvestment in any one category is not necessarily an issue in itself – it is not conclusive that women are better business leaders than men, for example, nor the opposite.

It is instead indicative of a much larger, underlying issue. If venture capital portfolios do not mirror the population of opportunity, then opportunity is being missed.

Why, then, are certain categories overlooked?

The problem lies in distribution. The channels through which companies reach venture capital firms and vice versa, are flawed. Research published by the British Business Bank found that companies that are recommended to a venture capital firm by someone in the VC’s network are 13 times more likely to reach investment committee and be funded than those that approach directly.

It is not a huge leap of logic that such a distribution channel is unfairly influential. If the composition of venture capital networks in any way mirrors the composition of the VC funds themselves, then it is clear that access to these networks is not uniform – only 13% of senior VC positions are held by women, for example.

The potential impact of rectifying this is huge – for every venture backed company, there are twelve companies that may have been overlooked, simply because they did not secure the coveted “warm introduction”.

In the wake of covid-19, the UK needs net job creation, and these jobs need to be productive. A well-functioning venture capital ecosystem has the capability to create jobs today and sustain them in the future, delivering far-reaching benefits to our economy and society. And if that were not enough, we are direct investors too – the Government-funded British Business Bank is the largest UK based investor in UK venture capital, having invested £1.5 billion between 2006 and 2019, part of a broader package of £8 billion in finance extended to UK SMEs. Investments via the Future Fund have added just under £800m to this balance.

Thankfully, a number of initiatives have been launched to improve access to investment for those business leaders and companies that have historically found themselves consigned to one of the twelve. A robust solution must include proactive, targeted initiatives; however, it is also essential that we address the root cause.

My company, Capitalex, was founded four years ago to tackle another, no less significant, factor in access to investment, being access to expertise. But the problem of network access has become resolutely clear, and hence we have set about creating a mechanism to enable fair, equal and direct access.

Capitalex Connect identifies and surfaces investment opportunities in UK SMEs through a digital directory accessible to those working within professional investment organisations and funds. Established as a trusted first port of call for companies considering equity funding, we are in the privileged position of meeting these companies early. Our tech-enabled approach reaches companies of all origins and from all corners of the UK, disintermediating pre-existing networks. We use our experience as investors to extract and translate the information that investors need to assess mandate fit and identify opportunity, and provide the mechanism for them to reach out and form relationships.

In an industry so defined by innovation and forward thinking, it is perhaps time for us to break away from the mentality of the old boys’ network and look for better ways to align our capital with the diverse opportunity that UK SMEs represent.

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