From the newly confirmed head of the Small Business Administration (SBA) Linda McMahon pledging to champion women business owners to Intel Capital’s pledge to invest $125M companies founded by women and minority entrepreneurs to the Blackstone Charitable Foundation’s latest grant program to help minority entrepreneurs, more attention is being paid to start-ups owned by people chronically under-represented in venture capital deal flow.
Far more is needed, however, to open and equalize access to capital for under-represented entrepreneurs, and such equity could potentially create millions of new jobs and economic up-sides nationwide.
As hopeful as it may be to know that the SBA, Intel and Blackstone are focusing on investments in under-represented entrepreneurs, these pledges are far from enough to fix what’s broken in a marketplace where less than 1% of venture capital goes to minority-founded start-ups each year. Although about 38% of U.S. businesses are owned by women, only 2% of venture capital money goes to women-owned firms.
What’s holding back women and minority entrepreneurs from gaining equal access to capital? One barrier is the limited access that many under-represented groups may have to social and professional capital in their networks: The family and community-based wealth that entrepreneurs typically tap during their earliest stages of ideation. At the emergent stage of a start-up, a few hundred thousand dollars can help a new venture get off the ground. These investors commit in hopes that as the start-up matures, the enterprise will attract venture capital and private equity firms willing to commit millions to grow the business. These later stages of growth, unfortunately, remain beyond the reach of under-represented entrepreneurs if they cannot get initial funding to get their ideas off the ground in the first place.
Programs such as Blackstone’s three-year pilot could help fill gaps in this sort of early-stage social and professional capital. The pilot program, planned to start in Chicago, will award up to $3.4 million in funding to organizations that recruit and support diverse entrepreneurs and scale start-ups. The programs will target diverse populations, including communities of color, women, veterans, and immigrants.
A second barrier stands out within the VC community in particular. According to a report from the National Venture Capital Association (NVCA) and Deloitte, racial minorities are significantly under-represented in the field of venture capital, with non-white employees accounting for 22% of the venture capital workforce. Black employees account for about 3% and Hispanic or Latino employees 4%. Women account for 45% of the total venture capital workforce, but only 11% of the investment partners (or equivalent roles) on venture investment teams where investment decisions are made.
This lack of diversity in VC has its influence on investment decisions. Research across fields of practice finds that we feel the strongest affinity for people whose backgrounds, experience, and passions are like our own. This is similar to the propensity of hiring managers to prefer those candidates who are most similar to themselves. In investing, biases including affirmation bias, familiarity bias, and confirmation bias cloud decision-making. When entrepreneurs have different anchors and experiences than the investors with whom they are trying to connect, it may be difficult to forge the kind of connection that leads to investment.
By all measures, investors are leaving money on the table. There are areas of potential growth, scale and profit addressable by under-represented and women entrepreneurs that are simply going unexploited. The Center for Global Policy Solutions found that 1.1 million “missing businesses” not started or sustained by people of color due to past and present discrimination translates into lost opportunities of 9 million jobs that were not created and $300 billion in national income not realized.
Among the champions of opportunity for minorities is Ariel Investments Chair and CEO John Rogers Jr. who has built the largest African-American-led money management firm in the country. “We just need a chance to be on the playing field to compete and to be in the room, and often you just can’t get in the room if you don’t have the relationships, or you’re hurt by this stereotype of how people perceive you as, maybe, less than,” Rogers said in a recent Crain’s Chicago Business interview about his personal mission to increase investment in opening doors for minorities.
Today there are firms and funds committed to address the venture capital diversity gap. Among them is Backstage Capital, which invests in tech start-ups founded by under-represented people, including people of color and LGBTQ individuals. Morgan Stanley and start-up accelerators such as Y Combinator are also increasing their investments in ventures launched by under-represented entrepreneurs and business leaders. These are movements in the right direction as we see good intentions backed with significant money, yet more is needed for entrepreneurship diversity statistics to more closely resemble the composition of the U.S. workforce where African-Americans are 12% the labor force and Asians account for 6%, while women are roughly half.
Investment in under-represented minority and women leaders and their companies is a tangible way to increase opportunity — not only in funding the businesses and leaders themselves but also in terms of the jobs these enterprises create. Greater progress will of course take more than marginal or side-project investment commitments, of course. Only a marked up-tick in market demand from VCs and others for start-ups that offer unique ideas from diverse entrepreneurs will truly move the needle on making our investment landscape better reflect the talent and diversity of entrepreneurs and enterprises across the United States.
Originally published at medium.com