Inequalities in Tech/VC During a Crisis (& The UK Startup Relief Fund)
What’s become evidently clear over the last few weeks is that the COVID-19 crisis is exacerbating already existing social inequalities across the board. Sadly, we are already seeing the acute impact of this in hospitals: 35% of COVID-19 patients are BAME people despite this group making up just 14% of the UK population (there’s lots of reasons for this but socioeconomic status plays a major role too.)
Meanwhile, the tech VC industry’s inequalities (around 1% or less of venture funding goes to black founders or all-female founding teams) will not be immune from worsening in the current climate. And though health is clearly the most important thing we need to think about in this crisis, we also have to consider structural inequalities that could widen when deploying relief packages in general.
This brings me to the gist of this blog post, which is to briefly comment on the recently announced £250m government fund (“the Future Fund”) to support UK tech companies. To be clear, I think this is a step in the right direction that I hope will be a net positive for the UK. However, I also wonder how much consideration was given to the structural inequalities it might exacerbate. For instance here are two quick points to consider:
- First, the rescue package is a bridge loan and the government is very clear about this in the term sheet it published. What’s the purpose of a bridge loan? It’s to support a ‘previously funded’ company through a rough patch. In effect bridge loans (plus other cost-saving initiatives in a company) provide cash runway through a dip and eventually to a subsequent equity round or a sufficiently profitable position to pay off the loan. But bridge rounds only work if there’s already a syndicate of investors who believe that the company can be bridged to success. And so to ensure ensure tax payers’ money goes to companies that are most likely to succeed, the government is using as a proxy for future success: (a) previous fundraising achievements (at least £250k in last 5 years) and (b) willingness of private investors to provide at least £125k in a round.
- Secondly, and consequently, you are unlikely to raise new funding via a bridge loan if you’ve never raised a material amount of equity funding before and/or lack a group of private investors ready to support you. Now when we have a disproportionately tiny fraction of VC funding going to underrepresented groups, any government scheme that uses bridge loans with the above requirements is prone to a ‘Matthew Effect’ of sorts i.e. for those who already have, more shall be given. In other words: It’s the previously well-funded companies that will benefit most from the government bridge loan scheme.
Taking these two points together you can see that despite efforts of the government to support startups, the proposed scheme could in fact exacerbate the inequality of fundraising opportunities already inherent in the tech/VC ecosystem.
What can we do about it? There are some immediate actions that can help and my friend Check does a great job putting forward ideas in this blog post. The government could also consider other proxies for likelihood of company success besides fundraising history and which would warrant supporting a startup. For example, maybe we do away with the £250k fundraising history requirement altogether for startups which were generating some revenues or, we create a short list of achievements, any one of which would make a company eligible.
Meanwhile and more broadly, we have to remember to continue work on alleviating structural inequalities whether we are in a crisis or not. For the tech ecosystem, this means working to make technology careers, entrepreneurship opportunities, and venture capital funding more accessible to groups that are structurally disadvantaged, lest they be even more disadvantaged when a crisis hits.
Overall, it’s good to see the government taking action to protect the UK tech ecosystem and I also appreciate it’s unrealistic to support absolutely everyone. However, it would have been good to see support packages — not just with startups either — that take into account the structural inequalities that are at risk of being exacerbated by COVID-19.
