EntrepreneurshipInvestment

Muslim Startups are not getting Venture Capital funding – This is Bad For Our Economy

Summary:

  1. Early stage capital is a game-changer and has transformed industries and human life – but there is a concern that minorities are missing out.
  2. IFG has conducted a detailed proprietary analysis examining 953 recent deals involving 2023 founders by the top 20 venture capital funds.
  3. We found that minorities are underrepresented in the VC community, particularly Muslims who are 67% underrepresented in the start-up world.
  4. Of the top 20 venture capital firms surveyed in the UK, only 3% of financed startups have a Muslim founder.
  5. Of the 61 Muslim founders, only 2 were women.
  6. Increased venture funding could significantly move the economic needle for the Muslim community but also for the economy as a whole: 46% of Muslims live in the 10% poorest constituencies in the UK [1].
  7. To start solving this, we are asking the to-be government for a £10m pot to be put aside to invest outside of London and into ethnic-minority dense areas.

Venture is sharia-compliant but Muslims are missing out

There has been an explosion in equity financing available to startups and businesses over the past decade. This early stage capital has transformed industries and turned the ideas of ambitious entrepreneurs into household names with the likes of Deliveroo, Monzo and TransferWise all benefitting from early investment.

The UK alone has around 170 venture capital firms deploying over $5.96 Bn last year[2] and has created 13 ‘unicorns’ (private businesses valued at over $1 billion).

Equity financing allows for the sharing of risk and reward by the financier (‘Rab ul Mal’) and entrepreneur (‘Mudarib’) and forms the basis of much of Islamic finance. Why then are Muslim founders missing out? Our recent research data shows that of the top 20 venture capital firms surveyed in the UK, only 3% of financed startups have a Muslim founder.

In contrast, the Muslim community constitutes an estimated 5-7% of the UK population. This means that Muslims are at least 67% underrepresented in the venture world, and potentially over 100% underrepresented.

And if you’re a Muslim woman, you have a triple penalty: you are a woman, a Muslim, and likely from an ethnic minority. That’s why for every 1000 startup founders, only 1 is a Muslim woman.

Muslim founders are also well educated. 20% had a PhD, 23% had a Masters and 57% had a bachelors degree – none had a lower level of educational attainment.

What is particularly interesting is that 21% of Muslim founders were from Oxbridge, while only 9% of startup founders are generally. The reasons for this are yet to be fully tested, but an explanation could be that going to Oxbridge teaches those Muslims a way of acting, speaking and behaving as well as access to networks that better equips them to pitch to the largely white middle class VC fund manager community.

Of course, it’s not just Muslims who are missing out, diversity in general is certainly lacking from the VC world. A damning new report from non-profit Diversity.VC [3] shows minorities make up just 26% of the VC workforce with Black individuals faring even worse at just 3%. And this is ignoring the glass ceiling effect which further reduces diversity numbers at the board level management teams of such companies.

Diversity makes commercial sense

But why does this constant focus on ethnic or religious background matter?  Research consistently shows that homogeneity in the workplace leads to a lack of diversity in thought. More diverse teams make better decisions and perform better on almost every metric.[4]

So how did we get here?

The VC industry has been set up to work around networks. Many VCs will only look at companies recommended to them, and reject cold call applications, making it incredibly difficult to break into the industry if you are not already an insider.

The pathway to entrepreneurship starts early on, and factors such as income and educational background play a large role. Having role models and mentors to look up to also make a difference and so the lack of Muslim role models in the VC and startup industry creates a barrier in and out of itself.

Positively, these recent years have seen a turnaround in VC backed Muslim startups, with several success stories coming out of the UK.

Founded by three Muslims out of Oxford, ID verification startup Onfido now has offices in over 5 countries and have raised over £60 million in VC funding.

Muzmatch, the online courting app for Muslims has seen a huge growth in numbers and has reached over a million users and recently closed a $7m funding round.

This shows that startups run by Muslims or founded on Muslim ethical values can be successful businesses; they are role models for other Muslim-run startups to enter the industry.

Muzmatch

Muzmatch’s tongue-in-cheek ads on the London Underground poking fun at the recent Brexit trouble.

 

How do we change things for the better?

Our general election is coming up and we have the chance to make a difference. It’s time for Muslim entrepreneurs to do better and accelerate the number of Muslim-founded businesses. This is better for diversity, the Muslim community and the UK economy.

The single most impactful thing Muslims should be calling for is “promote investing outside of London and in ethnic minority pockets”.

More precisely, we should ask for a £10m pot to be put aside by the British Business Bank and, perhaps, The Ministry of Housing, Communities and Local Government to invest outside of London into ethnic-minority dense areas.

This will help accelerate the number of Muslim and ethnic minority founded businesses who are needed to contribute to our economy, to create jobs, to better our services and to create a better, more equitable world.

To read our more detailed analysis on why this is the one thing we are asking for in our upcoming election and all the ways you can get involved click here.

To show your support for this cause and to share your own experiences and thoughts, please comment below and share this article.

Please also check out our start-up funding page for more on how we are tackling this issue.

References:

  1. https://www.bbc.co.uk/news/uk-31435929
  2. https://www.uktech.news/news/new-report-shows-uk-set-for-a-record-year-of-vc-funding-20190731
  3. http://www.diversity.vc/diversity-in-vc-report/
  4. https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
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