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Why Venture Capitalists Should Invest in Start-Ups Led by Diverse Teams

Entrepreneurship and Startups
Published on:

How do diverse European teams fare in gathering investment for their ideas and taking their product or service to market? Amazingly, this question had remained unanswered until now. A study from two HEC researchers and a UK-based venture capitalist marks the first time that gender and ethnic diversity data was gathered on European start-ups attracting venture capital… with some surprising results.

diverse team working in a meeting room - cover

Photo Credits: Jacob Lund on Adobe Stock

Unfortunately, it should come as no surprise that women and people from ethnic and racial minorities are under-represented among entrepreneurs. In particular, the proportion of people from these groups who successfully win venture capital is extremely low. Data  suggests that globally, the proportion of venture capital invested in companies led by women is just 2%. And out of the $147 billion in venture capital invested in US start-ups in the first half of 2021, black entrepreneurs received only 1.2%. 

What is even more shocking is that we know almost nothing about access to venture funding by gender and ethnic origin in Europe. So we set out to understand the scale of the problem. 

Deciphering the gender and ethnic background of thousands of individuals 

The story of this study began when I received an unexpected call. It was from a UK-based venture capitalist named Ramzi Rafih, who had been spending his evenings creating a database of the characteristics of start-up founders. Ramzi had observed from his own experience that female start-up founders, or those from ethnic minorities, were not winning as much investment as groups led by white men. Having found that this data was not being captured in Europe, he had spent a huge amount of time identifying and recording the gender and ethnicity of start-up founders. He had a lot of data and needed help making sense of it.

We tracked over 5,000 start-ups and over 9,000 founders in the UK, France, and Germany between 2010 and 2020. Across these data points, we identified the gender and ethnicity of each founder. Then we assessed the ability of these start-ups to raise capital and market their products and services as an indicator of their success. 

An important thing to note is that we only looked at deals made when the start-up had acquired at least $1 million. This threshold corresponds to the moment when a company begins to achieve business results, and when venture capitalists have objective indicators to assess their performance.

Shockingly low diversity amongst start-up founders

In terms of ethnicity, only 12% of the start-ups we looked at had a co-founder from an ethnic minority. Contrast this figure with societal demographics: ethnic minorities and women comprise around 70% of the population in major cities such as Paris, London, and Berlin.

Our results suggest that ethnic diversity in founding teams can play a role in raising the amount of venture capital. However, this depends on the area in which the financing is sought. In white male-dominated markets and sectors, such as Advanced Manufacturing in Germany, ethnically diverse start-ups raise more investment than others. In this circumstance, we estimate that start-ups with at least one non-white co-founder raise 30% more than teams with only white founders.


In white male-dominated markets and sectors, ethnically diverse start-ups raise 30% more investment than others.


This is set against the fact that ethnically diverse start-ups have a lower chance of success in getting a product to market in white male-dominated industries. We can conclude that this is because ethnically diverse founders may still face challenges in accessing other resources, such as access to mentors and potential partners, that are important to make their business commercially successful.

Hidden sexism?

Our findings concerning gender were even more surprising, but for a quite different reason. Although only 13% of start-ups had at least one female co-founder over the period studied, we found that these companies raised just as much capital as others. We think this may be a result of restricting our sample to those start-ups receiving more than $1 million in venture funding by February 2021. And so, the question remains, how much sexism against female founders exists below that million-dollar threshold here in Europe?

A positive take-home message from our research is that there was an overall trend for more diverse founding teams over the ten-year study period. The proportion of “diverse” start-up teams (those with at least one female co-founder or at least one founder who is a member of an ethnic minority) grew from around 18% to over 40%.

Moving on from prejudice towards smarter, informed investment
Prejudice and prejudice alone drive investment in start-ups. Our findings reveal that companies led by white males are no more successful at obtaining venture capital or in commercializing their products or services than more diverse groups.


Create and invest in diverse teams – especially in white male-dominated sectors – because you have been missing opportunities.


There is a clear message for venture capitalists and start-up creators: create and invest in diverse teams – especially in white male-dominated sectors – because you have been missing opportunities. A well-planned and less common investment strategy to give capital to diverse start-ups can generate benefits for investors by earning higher rates of return. And while they are at it, they should collect and record that diversity so that society can better recognize and address prejudice and underrepresentation.

Our research uncovers a market failure to invest in diverse start-ups, but we hope this is ultimately a good news story. We see that Europe’s universities and major employers are making diversity a strategic priority. And as the upward trend in our data suggests, the market failure observed to date is going to become less and less significant, and we are going to see more equality in the funding, performance, and success of diverse teams.


Our research highlights the benefits for European start-ups with ethnically diverse co-founders. Investors are not yet investing enough in diversified teams, but the data offer for a rationale for doing so, particularly in white male-dominated areas with historic underfunding of ethnic minorities. Such an investment strategy can be more effective in generating benefits for venture capitalists and their investors – an opportunity not to be missed.


We followed 5,090 start-ups and 9,013 founders in the UK, France, and Germany between 2010 and 2020. To obtain quality investment data, we limited the analysis to fundraising over $1 million, representing start-ups where information on financing is more reliable and measurable. We then enriched this data with the gender and ethnicity of each founder, which we obtained using a triangulation approach based primarily on first name for determining gender, last name for determining ethnicity, and secondarily a photo and additional public information. Then we looked at the ability of start-ups to raise capital and market their products and services as an indicator of their success.
Based on an interview with Professor Thomas Åstebro of HEC Paris on his paper, “Venture Capital Financing in Europe: Gender and Ethnic Diversity in Founder Teams,” co-written with Professor Carlos J. Serrano of HEC Paris, and Ramzi Rafih, the General Partner of No Label Ventures in London, UK. The paper was published in 2022 in The Journal of Portfolio Management.

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