The venture capital industry has come under fire from MPs for its “unacceptable failure” to invest in businesses located outside London or south-east England, or those run by women and ethnic minorities.
Businesses founded exclusively by women were revealed to have received just 2% of all venture capital funding in 2022, while even less investment went to companies led by black or other minority ethnic executives.
Parliament’s Treasury committee is now urging the sector to implement rapid change, and is calling on the government to play its part.
Venture capital is a kind of financing provided by investors to start-ups or emerging companies, which are seen as having potential for high growth. The investment is usually offered in exchange for a share of the business but can be risky for investors.
The venture capital sector receives support from government through tax reliefs, which are aimed at encouraging investment in the UK.
The cross-party Treasury committee of MPs has criticised the unfair allocation of funding revealed by the diversity statistics and is calling on the industry and government to urgently improve the figures as well as transparency.
Data also showed that the overwhelming majority (80%) of venture capital investment flows to the “Golden Triangle” of London, Oxford and Cambridge, a situation the committee called “unacceptably concentrated”.
Nearly half of all venture capital funding goes to small businesses based in the capital, despite it only being home to under a fifth (19%) of such firms.
The committee said it can take companies based elsewhere in the UK longer to become established, and called on the government to extend tax reliefs which are currently limited to companies that are less under seven or 10 years old, saying this holds back economic growth and innovation.
The committee complained that it had still not received information from the Treasury on when venture capital tax reliefs with expiry dates would be extended.
Harriett Baldwin, chair of the committee, said the statistics showing that most venture capital finance failed to reach female and ethnic minority-led businesses demonstrated a “shocking dereliction of duty given the level of government support for the industry through tax reliefs”.
She added: “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.”
The committee, which in recent days said it would renew an inquiry into sexism and misogyny in the City after a spate of sexual harassment allegations in the world of business, said it would be keeping a close eye on developments.
The MPs also have urged the Treasury to make collecting and publishing the diversity statistics of venture capital firms and their investments a requirement for eligibility.
