Birkbeck’s Dr Grace Bo Peng and UIC Barcelona’s Dr Yannis Pierrakis shared research into inequalities in venture capital and entrepreneurial finance in our latest CIMR Debate in Public Policy.
Venture capital plays a significant role in economic development through the emergence of new firms, technologies, industries and markets. However, it is also a contributor to uneven development, as investment tends to be concentrated in the core economic regions of a country and male entrepreneurs are more likely to gain funding than their female counterparts.
In this CIMR Debate in Public Policy, jointly hosted with UIC Barcelona, Dr Grace Bo Peng, Lecturer in Management at Birkbeck, and Dr Yannis Pierrakis, UIC Barcelona, shared research into the uneven distribution of venture capital investment.
The debate was chaired by Dr Marion Frenz, Deputy Director of the CIMR.
The effect of crises on investments in female-founded ventures
Grace began the discussion by presenting findings from her research into the impact of two major crises – the Global Financial Crisis and the COVID-19 pandemic – on facilitating or constraining investment in female-owned ventures.
The COVID-19 pandemic has been widely documented as damaging for female entrepreneurs: women have suffered more from the crisis than men in the labour market and we have seen a huge drop in female-founded ventures.
Grace contrasted this phenomenon with the situation after the Global Financial Crisis, where there was a significant increase in female-founded businesses. Her research has explored how these two crises could lead to such different outcomes. The 2008 financial crisis, caused by a dearth of regulation, saw global GDP drop by 2%. In contrast, the COVID-19 pandemic struck at a time when markets were relatively healthy. Grace’s findings confirm the hypothesis that the 2008 crisis reflected poorly on the male dominance in the finance industry. As a result, new venture investors were more likely to invest in female entrepreneurs. However, despite the widespread impact of COVID-19, the pandemic has left the venture capital industry comparatively optimistic about the future of the investment market. Investors looking for secure and perceived more competent individuals for their funding have a bias to turn to male entrepreneurs. The pandemic continues to have a disproportionately negative effect on entrepreneurs from minority backgrounds.
The implications of internationalisation of the venture capital industry on regional economic development in the UK
Yannis explored an alternative view of inequality in venture capital industry through his research into internationalisation and regional economic development. He highlighted that venture capital investments are typically concentrated in core economic regions of a country, for example London and the South East in the United Kingdom, or Barcelona and Madrid in Spain.
As foreign venture capital investments are becoming more prominent, Yannis’ research aims to understand their impact on local economies. In the UK, 50% of venture capital funds are invested outside Britain and we see a high proportion of foreign investment in London, the East of England, the South East and South West. The US is the main investor in the UK. Yannis commented on the ‘London effect’, where even when foreign investors are not investing in London businesses, they prefer to co-invest with a London-based fund.
Yannis highlighted the following key findings from the research:
- Foreign Venture Capital investments have become a significant part of UK investment and are a dominant supplier of VC finance in later rounds in some UK regions.
- Regional disparities in investment are impacted by the volume of Foreign Venture Capital investments in different regions.
- Stand-alone investments are still very prominent, but foreign investors prefer to invest in, or with, London firms.
One potential disadvantage of foreign investment is that investors often require that companies relocate to the fund’s country of original, causing a ‘brain drain’ in local regions. Yannis called for a coherent policy approach that both attracts foreign investors and seeks to strengthen the domestic ecosystem. For example, the British Business Bank could encourage industry targeted foreign co-investments with local funds.
Looking to the future: a collaborative, inclusive model of investment
Discussant Dr Muthu De Silva, Assistant Dean (Research) at Birkbeck, reflected on the macro- and micro-perspectives offered by Yannis and Grace in the debate and highlighted three interesting trends:
- The research demonstrates a very strong rationale for co-investment by foreign venture capitalists and local venture capitalists. This could help to overcome some of the challenges of foreign investment, such as a lack of local knowledge or overcrowding local investors.
- There is a strong rationale for strengthening the local eco-system, which could attract more foreign investment and build on each locality’s unique strengths.
- Further research is needed to identify which traits are more desirable in specific crisis environments, and how these can be disassociated from gender.
We would like to thank our speakers Grace and Yannis for their insightful presentations.
