The Friction Tax: What the Data on Founder Fundraising Reveals About Systemic Inefficiency - and Why Better Infrastructure Changes the Equation

Shawn Jhanji
May 8
6 min read

There is a cost that does not appear in any startup's profit and loss account, that no investor has to justify on a returns attribution sheet, and that no regulatory framework currently requires anyone to measure. It is the cost of raising a round.

Not the dilution. The time. The travel. The legal fees. The months of founder attention diverted from product, team and customers. The opportunity cost of pitching 100 investors to close 5. The asymmetry of information that means a founder with the right university, the right prior employer, and the right accent reaches Series A in months, while a founder without those markers spends years building the same case.

This is the friction tax. It is real, it is substantial, and the data on who pays it most is not ambiguous.

The Numbers That Frame the Problem

Start with the structure of the UK venture capital market. According to Diversity VC's Equity Record, 71% of partners at UK VC firms attended a fee-paying school. The wider UK population sends just 7% of children to independent schools. The gap between those two figures is not incidental. It is the outcome of a system that selects investors through networks that are themselves socioeconomically concentrated, and those investors then use those same networks to source, evaluate and back founders.

The downstream effect on founder access is documented. Research published by the Investing in Women Code found that just 2p of every pound of UK venture capital investment reaches female-founded businesses.

Extend Ventures, in its Diversity Beyond Gender report, found that less than 2% of VC funding flows to Black founders. The British Business Bank's Small Business Equity Tracker has consistently shown that founder access to equity capital is geographically concentrated in London, structurally concentrated among founders from professional family backgrounds, and severely limited for founders from underrepresented groups.

The 2026 Rise Report found that 81% of Innovate UK's funding assessors were male. Three in four UK tech founders cite access to growth capital as their primary obstacle. The average Seed to Series A journey now takes 29 months, up from 18 months in 2019. The fundraising process itself has lengthened significantly, requiring founders to sustain operations through increasingly extended capital-raising cycles.

These numbers do not tell a story of exceptional talent being missed at the margins. They describe a system in which the primary variable determining access to capital is proximity to networks, not the quality of the business being built.

Why This Is an Efficiency Problem, Not Just an Equity Problem and The framing matters.

The case for reform is sometimes made in terms of fairness, which is correct, but it is also incomplete. Funding concentrated among founders with a narrow set of demographic characteristics is, in purely mechanical terms, a market inefficiency. It misallocates capital away from the full distribution of commercial opportunity.

McKinsey's analysis of underestimated founders, published in 2023, estimated that the economic value locked in underfunded but commercially strong founders represents one of the largest untapped opportunity sets in the private capital market. The research found that businesses founded by underrepresented entrepreneurs were systematically undervalued relative to their fundamentals at point of investment, and that the returns on those investments, when they were made, compared favourably with market averages.

The Boston Consulting Group found that female-founded companies generate 78 cents of revenue per dollar invested, compared to 31 cents for male-founded companies. The performance differential is not in favour of the founders who receive more capital.

This is what efficiency analysis looks like when applied to capital allocation. The system is not selecting the best bets. It is selecting the most familiar ones.

What Is Changing

The picture is not static. Several things are moving, and it is worth being specific about what is and is not working.

First, data collection is improving. The UK Diversity Data Alliance, formed in 2025 by a group of startups, venture firms and industry bodies, introduced a shared framework for gathering demographic data about founders and their backers. Better data is a precondition for accountability. If fund managers cannot see the composition of their own pipelines, they cannot make deliberate corrections.

Second, the British Business Bank's commitment to deploying up to 500 million pounds to back diverse and emerging fund managers is structurally significant. The mechanism matters as much as the amount. By investing in emerging managers who have built pipelines into communities underrepresented in traditional venture, the Bank is effectively seeding a more distributed set of access points into the UK venture market. The money does not flow directly to founders. It flows to the intermediaries best positioned to find and back them.

Third, a growing number of funds are experimenting with selection processes designed to reduce the role of network proximity in deal sourcing. Blind pitch processes, open application windows, structured scoring criteria applied before the warm introduction is considered: these are not yet standard, but they are becoming a recognised category of practice rather than an outlying exception. The funds doing this, including Ada Ventures, Cornerstone VC and Impact X Capital, are reporting that the quality of deal flow from open pipelines compares well with network-sourced pipelines, even controlling for stage and sector.

The Infrastructure Question

The third change is the one most relevant to this publication's editorial territory, and it is the least mature of the three.

Tokenisation is not, by itself, a solution to founder access. The barriers that keep underrepresented founders from reaching capital are not primarily technological. They are structural: concentrated networks, pattern-matched selection, concentrated geography, concentrated socioeconomic background among the people writing the cheques. Putting those dynamics on a blockchain does not fix them.

But infrastructure matters at the margin, and the margin compounds over time. Here is the specific argument.

The mechanics of a traditional fundraising round require a founder to find qualifying investors through personal networks or warm introductions, conduct dozens of individual meetings and follow-on conversations, manage a legal and administrative process that typically costs tens of thousands of pounds in legal fees, maintain a cap table that becomes increasingly complex with each round, and wait through a diligence process that can stretch to six months.

Every step in that chain favours founders with existing network access, founders who can sustain extended runways through slow processes, and founders who have the legal and administrative support to manage complexity without dedicated infrastructure.

Tokenised equity infrastructure, built properly and deployed within the appropriate regulatory perimeter, can compress some of those costs. Automated compliance removes some of the legal overhead from round administration. Digital cap table management reduces the administrative drag that compounds through a company's life. Broader distribution to qualifying investors within a regulated framework means that a founder who has not been introduced to the right angel through the right accelerator can still reach a wider pool of potential backers. Visibility is key.

The Brickken survey, published earlier in 2026, found that 53.8% of RWA issuers cite capital formation as the primary motivation for adopting tokenisation infrastructure, rather than secondary liquidity. That finding applies upstream too. If the primary case for tokenisation among issuers is better capital formation, the same structural argument extends to early-stage founders.

Where This Is Heading

The honest answer is that we do not yet know whether tokenised infrastructure for early-stage founder fundraising will materialise at scale in the UK, or on what timeline. The FCA's final fund tokenisation rules, published in May 2026, advance the regulatory infrastructure for fund structures. They do not yet create a clear pathway for startup equity tokenisation at seed and Series A scale.

But the direction of the structural argument is clear. The friction tax is real. It falls disproportionately on founders who are already disadvantaged by the network dynamics of traditional venture. Infrastructure that reduces that friction is not a complete solution, but it is a meaningful one.

The more important work, for now, is on the data, the fund structures, and the selection processes. Open pipelines, blind scoring, better demographic tracking, emerging managers capitalised to reach underrepresented founders: these are the proximate interventions that will move the market fastest in the near term.

Tokenisation infrastructure sits behind those interventions as a longer-term efficiency gain. The case for it is not ideological. It is structural. Better plumbing for capital formation helps every founder who is currently paying the full cost of the friction tax.

Key Takeaways

71% of UK VC partners attended a fee-paying school, versus 7% of the wider population. The network effects of that concentration shape who gets funded.
Female-founded UK businesses receive just 2p of every pound of venture investment. Fewer than 2% of VC funds reach Black founders, according to Extend Ventures research.
Female-founded companies generate 78 cents of revenue per dollar invested compared to 31 cents for male-founded companies, per BCG research. The returns data does not justify the allocation gap.
The average Seed to Series A journey now takes 29 months, up from 18 months in 2019. The lengthening fundraising cycle compounds the disadvantage for founders without runway or network support.
The most proximate interventions are better data collection, open application pipelines, and emerging manager funds targeted at underrepresented founder communities. Tokenisation infrastructure is a longer-term efficiency gain that reduces round administration cost and broadens the pool of reachable qualifying investors.

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