Women and multicultural entrepreneurs represent a huge investment opportunity, something to which U.S. venture capital firms give lip service. But most VCs do not actively pursue investments in such firms, according to a new study by Morgan Stanley.
As a result, VCs are leaving money on the table and hurting returns.
The Brunswick Group, a business consultancy, conducted two surveys in the U.S. between Aug. 19 and Sept. 13: one of 58 venture capitalists with an average equity check of $9.4 million; and one of 141 female or multicultural founders who had raised VC funding for at least one of their businesses (91% of participants had raised at least $1 million in venture capital).
The surveys defined multicultural as “Black/African-American, Hispanic/Latino, Asian and all other nonwhite persons.”
Sixty percent of the VCs said their portfolios held too few companies founded by women and multicultural entrepreneurs, and 83% said they could prioritize investment in such companies and maximize returns.
However, three in five VCs reported that diversifying their portfolios was not a firmwide priority. Of the white male venture capitalists in the survey (a quarter of the sample), only 33% said they prioritized companies founded by women, and just 13% did so in companies with multicultural founders.
According to the report, even investors who said they sought to invest in diverse entrepreneurs used outdated methods that could be holding them back: 96% sourced investment opportunities “directly from my own network,” and 89% used “warm introductions/referrals from someone I know.”
Possibly as a result, half of male VCs believed that there were not enough female entrepreneurs, and two in five said the same about multicultural ones.
The report said that diversifying investment professionals could help firms improve their exposure to women and multicultural entrepreneurs.
Among those that said they had hired more diverse fund managers, limited partners, partners or board members, 71% said this was a very effective way to diversify their portfolios.
In addition, female VCs were much likelier than their male counter parts to have made a point of diversifying their portfolios. And two-thirds of multicultural founders said they had had more success with diverse VC firms.
Still, only 11% of entrepreneurs in the survey said they had interacted with VC firms that had gender and racial diversity.
The Right ‘Fit’
The report noted that VCs have consistently made big bets, frequently with no precedent or data other than their conviction that those investments would succeed.