Venture capitalists are missing opportunities to fund diverse entrepreneurs - Activate World

Venture capitalists are missing opportunities to fund diverse entrepreneurs

Despite the opportunities represented by women and multicultural entrepreneurs, venture capitalists are not making these investments a priority and missing out on significant returns. To understand why, Morgan Stanley surveyed a combination of nearly 200 US-based VCs and diverse entrepreneurs and found few made it a top priority and lacked the motivation to educate themselves on the product, market segment or opportunity these companies present. 

Lunchtime Conversations:

  • Nearly half of women entrepreneurs say that one of the top challenges they face is finding a mentor who can direct them to the resources and organizations that can help them launch their businesses. How can business leaders facilitate better mentoring?
  • SoGal Ventures is a diverse millennial fund focused on women entrepreneurs. What industry shifts are required to take the SoGal Ventures example and multiply it?
  • Given the benefits and financial returns for investing in startups led by women and multicultural entrepreneurs, why is there resistance by venture capitalists? Most importantly, how can it be changed? 

Noteworthy:

  • “Most VCs are made up of white men. They don’t have the experience or the mindset that things can be done differently. They think they want to invest in women, but until there is more diversity in the senior partner ranks, it won’t change,” – Entrepreneur surveyed by Morgan Stanley 
  • Canva Inc. announced it raised $85 million, led by Mary Meeker’s venture capital firm, bolstering its valuation to $3.2 billion – making the company, co-founded by 32-year-old CEO Melanie Perkins, one of the most valuable female-led technology startups in the world.
  • Companies serving diverse customers represent a huge opportunity to capitalize on consumer segments; for example, women drive 83% of all U.S. consumption, through both buying power and influence. 

Storyline:

Despite VC firms acknowledging the opportunities that companies founded by women and multicultural entrepreneurs present, a majority (60%) of the VCs Morgan Stanley surveyed say their portfolios hold too few of these companies. A clear majority (83%) say that they can prioritize investments in companies led by women and multicultural entrepreneurs and maximize returns. 

However, there is a disconnect between sentiments and actions. According to the VC’s surveyed, VC firms aren’t prioritizing strategies to diversify their portfolios. When asked if incorporating more women and multicultural entrepreneurs is a firmwide priority, 3-in-5 investors say no. 

Among the white male VCs surveyed, 13% prioritize investments in multicultural founders, and just one third (33%) prioritize investments in companies founded by women. This is in stark contrast to the women and nonwhite male VCs surveyed, who are almost twice as likely as white male VCs to prioritize investments in diverse founders.

Investors’ lack of awareness of women and multicultural entrepreneurs is at odds with their data-driven reputations. Nearly half (45%) of the VCs surveyed don’t know how the returns from companies with women founders compared to their overall portfolio returns. Most VCs (53%) say they were unsure about the returns from multicultural-founded companies.

Morgan Stanley recommends a series of actions to address the investment gap in companies founded by women and people of color, including: 

  • Adjusting the definition of “expansion risk” to include companies founded and led by women and multicultural entrepreneurs.
  • Having more women and multicultural professionals at every fund is one of the most effective strategies for increasing investments in diverse founders.
  • Developing a comprehensive strategy to increase the diverse entrepreneurs in VC portfolios and making it public.

Sources:  Bloomberg, Crunchbase NewsMorgan Stanley

Photo by Andrew Neel on Unsplash