The US could learn a lot from how the UK is crafting DEI policy for venture capital

The U.K.’s Treasury Select Committee last month released a report on the diversity — or lack thereof — of the nation’s venture ecosystem. Black founders there receive less than 0.4% of all venture capital, and women founders receive around 2%, the report found.

The report called such dismal stats “unacceptable”:

Venture capital firms are dominated overwhelmingly by white men and the receipts of venture capital funding are even more unrepresentative of the wider U.K. population in terms of gender and ethnicity. While there have been some improvements, it is happening far too slowly and affecting rapid change should be viewed as a priority by government and industry.

And it’s not just in the U.K. In the U.S., funding to Black founders in H1 fell 40% from a year earlier — of the $75 billion invested in the first six months of 2023, just $565 million was raised by Black founders. And women in the U.S. consistently raise just 2% of funds allocated in any given year. As TechCrunch+ has frequently reported, firms and investors have taken only a few steps to create a more equitable landscape, but financial incentivization and a push from the government could help them go all the way.

Brandon Brooks, a founding partner at Overlooked Ventures, said venture capital is already on the minds of many lawmakers in Washington. He said he was summoned to a hearing in April to discuss the U.S.’ venture capital landscape.

Senators took an interest in the sector after the collapse of Silicon Valley Bank in March, looking to find more ways to impose regulation. During the hearing, some senators had qualms with the lack of funding and opportunities going to their own constituents. “Now that it’s been brought to their attention in a very public way, they’re going to start taking action,” Brooks said of how policymakers are now showing more interest in the industry. “We can now use [the U.K.] report as a guideline to say, ‘Let’s do something similar in the U.S.’”

Ladi Greenstreet, the CEO at Diversity VC, was one of the many summoned by the Treasury Select Committee to share his experiences in the U.K. venture ecosystem. The Treasury had already responded to the report, saying it would consider the suggestions of its select committee. “But at the end of the day, it’s politics, so I can understand that a whole bunch of other things must happen for this to be put through,” Greenstreet told TechCrunch+.

Imani Augustus, the director of entrepreneurial equity at Third Way, has been working with the National Urban League to help craft policy recommendations for Congress. She told TechCrunch+ that her team has suggested to lawmakers that firms be required to track and disclose demographic information.

“There’s no reason why, say, the Department of Commerce couldn’t launch a venture capital fund,” she said. The U.K. report suggests that the government could partner with a bank, for example.

But there has been some movement, though small and slow. Missouri Rep. Emanuel Cleaver is trying to pass legislation to amend the Higher Education Act of 1965 that would force colleges and universities to be more transparent about their capital allocation to diverse fund managers.

“It was noble to desegregate a student body and faculty, but it is nobler to desegregate economics because there are reasons things are as they are,” Rep. Cleaver said at the time.

California and Massachusetts have already filed bills related to venture capital equality. If passed, the California bill would force investors and firms to be more transparent about where and to whom they allocate capital. Massachusetts is introducing two bills, both called “An Act Relative to fair investment practices,” which would ensure that sexual harassment and gender discrimination protections extend to the venture capital industry. Transparency is the first step toward tracking disparities, but a way to accurately see where money is being allocated does not yet exist.

Brooks said that the best chance for regulation here in the U.S. would be to add a DEI (diversity, equity and inclusion) requirement to the current QSBS venture capital tax benefit. This, too, is one of the suggestions in the U.K. report. “We need to incentivize people to participate in investing, and we need to punish those that aren’t,” he said. “People forget a lot of this is American taxpayer dollars; when you invest in your pension fund or 401(k), this is your money that’s being used to make investments on your behalf to things that are 95% white men. That shouldn’t be allowed.”

The government could also enact rules that fix the pipeline problems. “The government should be prioritizing access to financial and investment education for girls and students of color from an early age,” Augustus said. The Financial Literacy and Education Commission, which was developed in 2003, could develop a national strategy on financial education, drafting recommendations for Congress and educational resources for high educational institutions, she added.

Another solution could be directing the Department of Labor to launch an industry apprenticeship program focused on venture capital, similar to its Industry Intermediaries program, which has helped strengthen the workforce in the trucking industry and care economy, Augustus said. “Federal and state agencies could expand apprenticeship opportunities in high-demand industries for workers from underrepresented and underserved populations,” she said.

Although the government may be starting to show interest in helping venture capital be more equitable, not everyone thinks so. The nonprofit American Alliance for Equal Rights, which played a role in the U.S. Supreme Court’s decision to reject affirmative action in college admissions, is suing Fearless Fund, alleging — of all things — discrimination based on race for how it allocates small-business grants.

And venture capitalists themselves might not be as eager to play along. “They don’t want more regulation. They don’t, and they’ll fight it,” Brooks said.

But eventually, it will be out of their hands. “At this point, we need a complete overhaul, and they’ll either have to adapt — like how founders do — or retire and let someone else take their place,” he said.