Why diversity matters

Embracing diversity has been shown to benefit businesses significantly.

Any well-run business should seek to widen its talent pool as much as possible. So it should come as no surprise that encouraging diversity can actually benefit your bottom line.

Indeed, analysis from management consultancy McKinsey has, in its words, “reaffirmed the business case for both gender diversity and ethnic and cultural diversity in corporate leadership”.

In a 2019 study, McKinsey found that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than businesses in the fourth quartile.

In the case of ethnic and cultural diversity, its business case findings were equally compelling. In 2019, top-quartile companies outperformed those in the fourth quartile by 36% in profitability.

As the study had found previously, the likelihood of outperformance continued to be higher for diversity in ethnicity than for gender.

Entrepreneurs

It's therefore depressing to find that business owners and entrepreneurs from ethnic minority backgrounds face persistent disparities in business, with disadvantages inherent in the system playing a key role.

This was the main finding in a recent report, Alone, together: Entrepreneurship and diversity in the UK, published by the British Business Bank and management consultants Oliver Wyman. The report was based on a survey and follow-up interviews conducted in 2020 with 3,727 people who are either aspiring entrepreneurs or running a business they started themselves.

The report identified two key areas as barriers to success:

1. Access to capital
2. Access to business networks - so-called 'social capital'

Entrepreneur Piers Linney, a non-executive director of the British Business Bank, argues that social capital is “the biggest invisible obstacle” holding back ethnic minorities.

“Access to social capital can be synthesised to a degree through groups and communities and outreach, but it will take generations to really develop an equal playing field.

“Access to finance is also obviously key. Just look at the impact schemes like the British Business Bank's Start Up Loans programme can have in under-represented communities — one in five of its loans go to people from ethnic minority backgrounds.”

Linney is keen that the Government does everything it can to foster equality of opportunity.

“Of course, the Government can and must do more. The British Business Bank's 'Alone, together' report will feed into the Commission on Race and Ethnic Disparities, established by the Prime Minister, which will hopefully drive further progress at a national level.”

He is equally passionate that businesses also play their part.

“Businesses of all shapes and sizes need to work harder to access under-represented talent. The investment community needs to do the same, and not expect founders of colour to know how to approach them, or even that they exist at all. Too many are using the same lazy old networks, only hiring or investing in people who look like them or share a similar life experience.”

Shockingly, Extend Ventures, in a report entitled Diversity Beyond Gender, corroborates this failing.

“Black founders received just 0.24% of venture funding and female founders only 11% of venture funding in the last 10 years. However, Black people and women represent 3.5% and 51% of the UK population respectively.”

This report analysed data on venture capital investments into companies that were founded and received funding between 2009 and 2019. It then presented findings based on the perceived gender, ethnicity and educational background of some 3,784 entrepreneurs who have started 2,002 companies and received that funding.

This data-led research also showed that Black female entrepreneurs experienced the poorest outcomes. A total of 10 female entrepreneurs of Black appearance received venture capital investment (0.02% of the total amount invested) across the 10-year period, with none so far receiving late-stage funding.

Indeed, there was just one early-stage (series A or B) venture capital investment recorded for a Black female, compared to 194 early-stage investments in white female entrepreneurs.