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There’s Still Little Diversity Of Capital Flowing To And Through VC Funds

More than two years after the murder of George Floyd and declarations from venture capitalists, among others, of their support for DEI, there still isn’t a lot of diversity of capital in the VC biz or among those funding venture capital. And limited partners continue to explain their lack of diversity-oriented funding by pointing to barriers that, in fact, can likely be addressed with a sufficient commitment to change.

Those are some of the findings of The Equity Record, a recently released report that surveyed over 200 VCs and examined the diversity of capital in venture capital, both in limited partners’ funding of venture funds and VCs’ investments in startups. Specifically, less than 2% of overall assets under management of $31.8 billion is allocated to DEI-related investments.

“There’s seems to be a strong correlation between how much is available for such investments and how much actually gets invested in diverse companies,” says Sarah Millar, COO at Diversity VC, which teamed up with economists and researchers from Penn State University to trace the flow of capital to and through VC funds.

Earlier studies conducted by Diversity VC in 2019 and 2021 showed that companies run by women, people of color and lower educational attainment were underfunded. With that in mind, they decided to look “one layer up,” says Millar, and focus on the larger funding ecosystem. Specifically, with more funds being founded with the mission of investing in DEI, they turned their focus to the sources of money for these funds and what their portfolios looked like, as well as whether more capital had been allocated to such funds and founders in the aftermath of George Floyd’s murder.


On the whole, according to Millar, they tended to hear similar explanations from VCs for the problem. “What we were hearing on a regular basis was, our LPs aren’t asking us for this, or, we think that investing in diverse ventures is not our financial responsibility,” she says.

As for those funding VC funds, the research also highlighted the conundrum of DEI investment. A lot of the funds raised by diverse funds are on the smaller side—an average of $57 million versus $345 million for more traditional entities. But many institutional investors that invest in VC funds, like pension funds, don’t consider funds of less than $500 million. As a result, DEI-focused funds run by diverse GPs have trouble tapping the capital they need, even from potential funders that profess an interest in supporting such investments. “If you’re raising a $50 million fund, there is an access barrier,” says Millar.

Other Findings

Other findings included:

—Under-represented fund managers or managers with a DEI focus were more likely to say their capital came from high-net worth individuals and fund of funds than from such sources as endowments, foundations and pension funds.

—100% of funds with a DEI mandate invested in seed stage companies. That’s partly because, with little friends and family and seed funding typically available for founders who don’t come from privileged backgrounds, these funds see that’s where they can have the most impact, according to Millar.

—Funds with part or all of their capital allocated to DEI investments were more likely to have a woman or person of color in the general partnership.

The plan is to run the survey annually, with this first one serving as a benchmark. Eventually, Diversity VC will be able to create an index that, says Aisling Carlson, Diversity VC’s marketing and partnerships lead, “Will demonstrate whether funds are putting their money where their mouth is.”

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