19 Dec BUCKING THE BIAS – INVESTING IN MORE FEMALE AND REGIONAL ENTREPRENEURS
The UK is a hotbed of entrepreneurialism – and needs to be to remain and increase our competitiveness with fast growing economies in Asia and even more so when out of Europe.
With the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), we have incredibly generous tax reliefs to encourage investors to invest in new start-ups. Investors can receive up to 50% of their investment into a start-up business back in the form of a refund from their income tax bill, and there are more reliefs from capital gain tax and inheritance tax. The recent budget revised the scope of EIS to further increase the attractiveness for investors of supporting high growth businesses.
But the budget did not address an inequality in where private capital is directed.
Why is the vast majority of private investment directed to businesses without a female founder? Why is it that the most private investment ends up invested in businesses in London and the South East? What other bias do we have in connecting investors’ capital with the start-ups that need it to innovate and grow?
At Worth Capital, we run The Start-Up Series – a nationwide monthly competition from which we get a large volume of deal flow to assess, around 100 to 120 businesses a month. From this we generally select one investment per month to receive a £150,000 investment from an SEIS fund. We have just finalised our 11th investment. In the same way we encourage the entrepreneurs we work with to, we’ve been looking at our data and making some comparisons to other established businesses in our industry.
The success or otherwise of our decisions is judged in the long term – we anticipate our investors will get an attractive return over 5 to 7 years from a portfolio of seed investments. So after just a year we cannot judge how that is going to pan out (although all our businesses are making strong progress so far). But we can look at our decision making and see if there are any differences appearing that mark us out from our competitors.
There was one element that we have been aware of for a while. HMRC statistics show 65% of SEIS funding for start-ups was directed to London and the South East of England in 2015/16. Our first competition winner is based in Liverpool, our second just outside Manchester, the third Birmingham. We were delighted that we didn’t fall into the London bubble. At the end of the year we find 45% of our funding has gone to businesses outside London and the South East.
We were more surprised when we looked at the gender of the businesses receiving our funding. A report by The Entrepreneurs Network (supported by Barclays and published in March this year) found that private funding in 2016 was split 91% to businesses without a female founder, with only 9% to business including a female founder. Even on crowdfunding, where you might expect a more democratic split, a Nesta report in 2016 found only 23% of crowdfunding was directed to female founders. We have a 70% male to 30% female ratio of entries to the Start-Up Series. But our funding ends up directed 59% to business without a female founder and 41% to those with. Although we don’t positively discriminate, women end up outgunning their male competitors.
This might give us a liberal minded warm fuzzy glow, but as investment professionals what does it mean and is it likely to improve the performance of our fund? We can only speculate at this stage but we expect that 3 factors might be at work – and if so they bode well for our decisions versus our competitors:
- We have a six-week distillation process that properly digs into the businesses, much more comprehensively the further a business gets into the competition. And we have some clear criteria that we have built up from 12 years of angel investing. We are rigorous in reminding ourselves of our criteria and challenging ourselves whether we are maintaining our objectivity. We suspect that this helps us to eliminate the inherent bias in white, middle-aged, London based males (like us and the vast majority of investors) that gravitate towards the type of person they are and know.
- We don’t ask anyone to ‘pitch’ at any point in our competition. We think too much emphasis in early stage investing is put on the ability to pitch an idea, where confidence and bravado can disproportionately outweigh insight, analysis and thoughtfulness. We still value the ability to succinctly put across a market insight and idea (the first part of our competition only asks for a 2-page summary or a 2-minute video), but this doesn’t have to be face to face where personality come overcome commercial nous.
- So far, our competition has been for consumer businesses (although now we have subsequently opened it up to B2B businesses). Our first criteria focus is on the strength of insight into a market need or opportunity. We think that both location and gender might have a role to play in the strength of empathy with real consumers and the ability to see problems that need solving or opportunities to be exploited. Often people based in London can have an abnormal view on real life for the family high streets across the UK. Businesses that have the potential to achieve real scale rarely base their insight on what is going on Shoreditch High Street or in wealthy London suburbs. We can wonder whether women are generally more empathetic to the world around them and therefore have stronger insight. But certainly, women as a gender make up a much higher than male share of consumer spending.
So for investors, what’s the take-out? There are biases, usually subconscious, at work in the minds of any investor and in their selection process. How are these biases being actively eliminated? Is there commercial and investment logic in the spread of resulting portfolio of investments? Whilst no investor should positively discriminate it should be a sign of good deal flow, distillation and criteria to end up with a portfolio which mirrors the entrepreneurial talent in the country, rather than mirroring the look and location of the investment professionals making the decisions.