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 min read
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James Trotman
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James Trotman
March 4, 2024
March 4, 2024

Stale, Male and Pale: The narrowing investor landscape for early stage startups

Shift in High Net Worth Definition Threatens Women and Underrepresented Investors in Early Stage Tech Financing

As fintech platforms, in particular crowdfunding, spearhead accessible investment breakthroughs for high street consumers, the UK government introduced new regulations under the Financial Promotions Order on 31st Jan 2024. 

Aimed at safeguarding consumers and maintaining integrity within the financial system, exemptions have been in place since the legislation passed in order to balance regulatory oversight with the need for innovation, competition, and efficiency in financial markets.

The recently implemented changes in legislation have redefined what classes as High Net Worth Individuals and Self Certified Sophisticated Investors which in turn has an enormous impact on eligibility to invest in early stage startups.

Source: https://www.macfarlanes.com/what-we-think/in-depth/2023/new-rules-for-financial-promotions-for-high-net-worth-individuals-and-sophisticated-investors/

These changes were quickly implemented to keep income thresholds and liquid assets relevant in an economy reacting to a period of high inflation and rising costs. 

In practice, this results in heightened barriers to entry for an already challenging marketplace, disproportionately affecting underrepresented communities, primarily women.

The staggering impact of the new rules based on the income requirement would lead to a decline of between 75% and 100% of qualifying women based on income statistics across the devolved regions!

The impact of the new rules on qualifying as a High Net Worth Individual (HNWI). Research by Marla Shapiro (HERmesa) and Roxane Sanguinetti (Alma Angels) using data from the Survey of Personal Income 2020-2021

The Women Angel Insights Report found that between 2012 and 2022, over 5,000 female angels invested over £2bn into UK companies, creating 10,000 jobs. One of the most stark findings was that almost 25% of investments made by women angels was into female-founded companies – significantly higher than the industry average of 19%.

With a drop from 14,500 women to 3,000 in Scotland who will be classed as High Net Worth, the reducing number of female investors and capital available will have a knock on effect to the successes of early stage companies.

Coupling the impact of reducing qualifying investors with the current funding landscape of first-round seed-stage deals in 2023 down 28% year on year and at a ten-year low at 1,025. (source https://www.angels-letter.com/) there is a perfect storm brewing for early stage ventures.

Jackie Waring of Investing Women believes that the reducing number of female investors will create an “Echo Effect” on the founder community.

We have seen demonstrated across various ecosystems that an increase in the level of female investors has a corresponding effect on the number of female founders receiving investment. 

“We have worked tirelessly over the past decade to create a female friendly support network, breeding confidence in our women to seek investment and grow world leading startups. This has resulted in a 700% increase in angel investment to female led companies! 

“These changes are erroneous to the angel community and could lead to the exclusion of females within established networks as well as discouraging new entrants. Diversity in our investor pool is critical to driving economic growth.

There are still opportunities for individual females to join Angel Group Syndicates primarily through education courses such as those offered by Investing Women which enable self certification as a sophisticated investor. Being a member of an Angel group for six months can also enable the validation rule. This appears, however, to be an unnecessary delay in the deployment of capital from previously qualifying sources. If we are serious about economic growth and funding our startup community appropriately - delaying vital working capital by up to six months with the stroke of a pen will cause severe stress financially as well as rebuilding exclusionary barriers the ecosystem has worked so hard to reduce.

Prior to this change in legislation - Mint Ventures already operated a six month initiation digital education programme designed to be accessed around the busy schedules of potential female investors. This programme enables new members to join as associate angels to learn and then qualify after the 6 month period as full members. This allows them to start investing armed with the knowledge and tools to do so.

Gillian Fleming, CEO, believes this leads to a better, more rounded investor. 

Becoming an angel investor is not often a topic of conversation with women and we are making this more accessible - you can learn through the osmosis of being part of an angel group but we firmly believe in dedicated educational pathways with cohort peer to peer style learning. For Mint Ventures we believe an educated investor makes better decisions and thus supports a better ecosystem.”

Highlighting the broad brush approach of these changes however Gillian is concerned there is no consideration for the gender pay gap.

We need to see updated FCA criteria that reflects the gender pay gap and also acknowledges education and understanding rather than timescales or amount of savings as a route into angel investing”.

Mint Ventures aims to introduce new capital to the ecosystem by educating women from other backgrounds who may not necessarily have tech experience but are focussed on social, ethical and environmental purposes.

We encourage women from all business backgrounds and experience to help us innovate and drive economic growth and thus creating new pathways for capital to enter the ecosystem. Anything which discourages women from entering the investment market needs to be challenged”.

Aimed at continuing these discussions Mint Ventures are hosting a “How do we bridge the gap on angel investment” event in London on the 12th of March. UK Business Angels Association alongside partners, Mint Ventures and Investing Women Angels are also hosting a “Women backing Women” event in Edinburgh on 28th March.

There is the age-old argument that any publicity is good publicity and this backlash and discussion amongst the tech community could certainly become a call to action to any hesitant potential female investors.

An Open Letter to the Chancellor (angels-letter.com) signed by The Startup Coalition, UK Business Angels Association and over 1700 other leading investors and ecosystem influencers has been created urging the reversal of these measures.

Danae Shell, co-founder and CEO of Edinburgh-based lawtech Valla, said:

“We are currently fundraising and I have already seen the impact of these new rules, both in restricting women from investing and in creating a chilling effect around investment for women in general. The rules are confusing and the workarounds, such as angel syndicates and crowdfunding, are not clearly explained.

“This is a serious issue for us - 64% of Valla’s angel investors are women, and my own network is in Scotland, where so many women have now been disqualified. We are launching an equity crowdfunding round now and are working extra hard to let women know that they can still invest in startups this way.”

So what can we do to alleviate this feeling and encourage the inclusive and equitable ecosystem we thrive for? 

Press reporting over the weekend suggests that these changes could be reversed in Wednesday’s budget as a result of the backlash from within the investment and tech ecosystems which firmly underscores the importance of these conversations.

Together we can make a difference.

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