minority-owned business

Why Investing in Minority-Owned Startups is Key to Unlocking Innovation

Despite being a critical force in the future of the U.S. economy, people of color are disproportionately hurt by lack of access to capital. While diversity and inclusion initiatives are en vogue in Silicon Valley, the reality is that access to funding remains a tightly-guarded gateway to success — and venture capitalists today are missing the mark when it comes to putting their money where their messaging is. The American entrepreneur is changing, and the time has come for investors to keep up.

According to the U.S. Census Bureau, the non-white population in the U.S. is expected to rise to 56% of the total population by the year 2060, and the world of tech will surely follow suit; the MBDA predicts that this demographic shift will position minority-owned businesses as a critical part of the national economy by 2044. Nonetheless, non-white CEOs still face immense barriers when entering the startup game. Some studies have indicated that 16% of non-white business owners overall report a negative impact on their profits, specifically due to a lack of access to capital.

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With barriers like these in place, it should be no surprise that 77% of founders are white, and mostly male — despite the attention diversity and inclusion initiatives receive in tech culture today. That white majority in tech is hardly representative of the reality of our economy or its future.

As an Asian-American woman and a venture investor myself, I know this to be true — that investing in startups owned by people of color is key to unlocking innovation, elevating underserved communities and fostering long-term economic success.

Related: A Practical Guide to Diversity for Startups and Entrepreneurs

Investing in minority-owned startups is not just socially responsible, it’s fiscally responsible

Supporting minority-owned businesses is both a socially responsible move and an economic necessity. Investing in minority founders is poised to have some very tangible benefits. The National Association of Investment Companies recently released a report on the promising economic positioning of minority business enterprises (MBEs), which raised an interesting theory; the idea is that, if MBEs were to reach the average revenues generated by majority-white businesses, it would boost the U.S. GDP by a whopping $1.37 trillion.

The same report found that minority-focused funds often produce higher yields than their competitors. Such an economic boost, especially in the aftermath of a global pandemic, could be an economic game-changer. The problem is not a lack of success on the part of POC entrepreneurs, but rather a lack of commitment on the part of investors to seek out diversity in their sourcing of investment candidates. Without access to capital, even the most innovative companies will fail to scale.

Another argument for investors to get serious about investing in POC entrepreneurs is the simple truth that diversity outperforms:

McKinsey finds that ethnically and culturally diverse companies are 36% more likely to be profitable, compared to similar companies ranking low on diversity.

What can be done about the diversity dilemma?

Global diversity is paramount right now, and investors know it. The simple solution to the diversity dilemma is a demand made by many POC business owners and echoes the broader cries made by society today — we need more people at the table that look like us. Investors should donate their attention and their dollars to a candidate pool as ethnically diverse, as gender representative and as culturally rich as the society we live in. The future of venture capital should embody the future of a stronger economy, and a stronger sense of community. Diversity is the key to unlocking both.

Consider, for example, what is happening in the Houston area. By most accounts, the biggest perceived opportunities in tech lie within the parameters of mythic cities like San Francisco, Los Angeles and New York. But due to the high cost of living and the rise of opportunities in other areas, that image of tech success is changing. Houston is, by some reports, the most diverse city in the nation. It’s also poised to be the next major player in innovation.

In recent years, Houston rolled out a series of detailed plans to boost innovation and create a home for startup culture. The plans include attracting investors with a robust new innovation district, propositions for a rail system and other incentives, and has piqued the interest of some noteworthy companies; Amazon opened a new tech hub in the city just last year.

The diverse makeup of the city and the push for a burgeoning tech hub are reflective of a larger cultural movement to open the doors of opportunity in tech to a larger pool of entrepreneurs; accelerators like the Houston Exponential, DivInc and others have come on board to boost the growth of the city’s startup culture with diversity at the core. It’s no coincidence that the most diverse city in the country is also among the most competitive rising stars in venture capital.

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Houston is just one specific example, but VC culture as a whole can benefit from that same commitment to diversity. Minority-owned businesses enrich communities and foster further innovation by chipping away at the socio-economic gaps that exist between ethnic and gender identities. They provide opportunities for local communities and open the door for other business ventures to take root. Investing in businesses owned by people of color ensures that ultimately, money remains cyclically invested in diverse communities and can spark a cycle that expands to benefit the economy as a whole.

For investors, that means making a concerted commitment to seek these opportunities out. Though the data speaks volumes about the prudence of investing in startups owned by non-white entrepreneurs, venture firms must clear the hurdle of convincing investors to support them.

Organizations like the Minority Business Development Agency exist to assist in sourcing those opportunities. More niche organizations like the Black Business Association, Code2040, the National Hispanic Business Group and the Female Founders Alliance can help entrepreneurs to target specific communities for investment. The onus is on investors to recognize the pervasive biases inherent to access to capital, and to demand accountability from lenders, banks, boards of directors — and themselves.

The benefits of elevating startups owned by people of color are clear. To wear down the pervasive systemic biases that prevent minority entrepreneurs from accessing the same opportunities as their white colleagues, venture investors must lead by example.

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