The government’s recent policy reversal around access to funding for women and ethnic minority startups is good news. But it remains nothing short of shocking that we got there in the first place.

For those who missed it, the last seven months have been a total rollercoaster for many UK women and ethnic minorities in the world of startups and angel investors, a significant and growing proportion of which are in tech.

In 2023, as part of the Autumn Statement, the UK government made significant changes to what is known (in legal jargon) as ‘financial promotion exemptions’ for high-net-worth individuals (HNWI), a policy tweak that went on to disproportionately inhibit angel investors (especially women and ethnic minorities) from investing in women-led startups and ethnic minority businesses (EMBs). Here’s why.

Without the HNWI certification (also known as a ‘sophisticated investor’ certification) an individual in the UK cannot legally invest in private companies as an angel investor. But this pool of people was cut down last autumn when the UK government raised the financial threshold for individuals to certify as HNWIs, setting the bar to £170,000 in annual income and £430,000 in net assets, up from (the far more accessible) £100,000 income and £250,000 in assets.

And so, from January 2024 (when the new threshold came into effect), one suddenly had to be much richer to legally invest in private companies, an amendment that hit women and ethnic minority investors (and therefore startups) the hardest. How so?

Because systemic sexism and racism still exist across the UK, meaning women and ethnic minority groups earn less than their counterparts. Women, in particular, are even more likely to earn less since many work part-time, due to stereotyped gender roles around child care and the home.

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On the other hand, for male individuals or those from privileged demographics (who earn more), the threshold change was not hugely concerning or prohibitive. But for women-run startups and EMBs, meanwhile, the alteration spelled a funding and equity disaster. Suddenly, far fewer women and ethnic minority investors were eligible to put their hard-earned money into private companies of their choice, namely women-run startups and EMBs, since we know that women and ethnic minorities are far more likely to invest in those demographics compared to their counterparts.

There are, of course, good reasons for having a law and threshold around HNWIs and angel investors in the first place, as it protects individuals in the public from being lured into investing in private companies, some of which fail to provide complete and transparent information about themselves when advertising investment opportunities, unlike public companies. But the new threshold did way more harm than good.

In the Autumn Budget of last year, the government claimed it was adapting the HNWI eligibility in step with changes in technology, social norms and inflation, as per a 2021 HM Treasury consultation. But what remains most infuriating and shocking is the fact that, after a consultation that lasted many months (and was 37-page long), not a single section discussed the negative impact of the proposed legal change on underrepresented groups.

To add insult to injury, two years later in November 2023, the Treasury released a consultation response which, across its 32 pages included all but a short paragraph (section 2.7) on adverse effects for disadvantaged groups: “Responses that disagreed with raising the thresholds expressed concern with how increased thresholds could negatively impact the angel investment market. These respondents raised concerns that increasing the thresholds could reduce the potential for broadening angel network participation, including among less represented groups such as women and ethnic minorities. They also raised concerns that lower angel investor participation in the future could reduce SME investment, particularly for younger start-ups”.

Women and ethnic minority entrepreneurs are being overlooked

Many are still asking what is worse: the fact that the Treasury devoted so little attention to this matter over a period of several years, or the fact that the note was included in the consultation response and then brazenly ignored by the government who then implemented the new threshold in January of this year.

Either way, this case highlights a deeply disappointing and concerning carelessness on behalf of the UK government, a manoeuvre that suggests a lack of women and ethnic minority representation in decision-making. It also raises a much-asked and long-overdue question: does the UK government take seriously its advocation of women and ethnic minorities in business and entrepreneurship? Following an outcry from the UK startup community in the first few months of this year, Westminster reversed the HNWI amendment (effective as of late March). This, plus the newly formed women-led high-growth enterprise taskforce, has been good news, but much more work is needed.

It remains the case that start-ups led by women continue to receive a fraction of the venture capital funding of male-led companies, despite a record number of women starting businesses in the UK. In fact, just 3.5% of equity raised in investment deals in the first half of 2023 went to businesses with an all-woman founding team, compared to 85.1% of funding secured by all-male teams. A stark and devastating state of affairs that has huge implications for the growth of the UK’s all-important SME economy.

Following the fiasco and wasted resources of a years’- long policy flop, as detailed in this piece, the government must do way more to show that it cares about women and ethnic minorities in business, and as such, the longer-term health and growth of the UK’s world-class startup community.