The Real Reason Minority-Owned Businesses Aren't Getting Funded
A new report released by Morgan Stanley found that the majority of investors and bank loan officers do not think there is a funding imbalance for women and minority-owned businesses (WMBEs) in the United States. Specifically, 80 percent of respondents believe that WMBEs get the amount of capital that they deserve to run and grow their businesses. However, this belief does not align with the reality of the investments being made. In fact, investments in WMBEs are 80 percent lower than the median investment in businesses overall. This means that investors have a large blind spot when it comes to how they are investing in these businesses. But why is that?
Investors Are Less Exposed to Minority-Owned Businesses and Don’t Seek to Diversify Candidates
Over 40 percent of investors said that they “very frequently” review businesses led by men. Thirty-six percent of investors said the same about businesses led by non-minorities. Compare that to only 17 and 18 percent of investors, respectively, who said they “very frequently” review women and minority-owned businesses. There is obviously a significant gap in how often investors are reviewing different types of businesses.
Not only are investors not reviewing proposals by minority-owned businesses as often, but they aren’t concerned with improving that fact. According to the survey, nearly 40 percent of male investors said that investing in women-owned businesses is not a priority at all, compared to only seven percent of female investors. Similarly, 31 percent of white investors say they do not prioritize investing in minority-owned businesses.
Investors Judge Minority-Owned Businesses Differently
According to the survey, investors cited that displaying confidence is disproportionately important for women and minority-owned businesses. A quarter of respondents said this was true for WMBEs, while only 14 percent of them said the same for businesses in general. This poses a barrier to WMBEs, as it is not a measurable, obvious criteria, and it is not applied evenly across the board.
Investors See Minority-Owned Businesses to Be Higher-Risk
The report found that investors think that WMBEs are twice as likely to perform below market average, as compared to non-minority and male-owned businesses. This assumption prevents WMBEs from receiving funding, and does not actually align with reality. In fact, when businesses run by people of color receive capital, their returns consistently match the market. Women-owned businesses actually lead the market by two percent.
Why are these findings so important?
I spoke to Carla Harris, Vice Chairman of Wealth Management and Senior Client Advisor at Morgan Stanley, about why the findings in this report are so important. Harris said this report provides a “real opportunity to illuminate investors’ perception of what is happening versus the reality.” Shedding light on this disparity can help trigger a change in this area. Change is necessary, because not only are women and minority-owned businesses not receiving capital at an equitable rate, but investors are also missing out on huge economic opportunities.
According to the report, WMBEs could account for $6.8 trillion in gross receipts if they matched their percentage of the labor force and if business revenues were equal to traditional firms. This would represent nearly three times the current output of these companies, which means there is a missed opportunity of $4.4 trillion. “The marketplace has not been aware of the depth of opportunity,” says Harris, “because how could there be such a large economic opportunity that isn’t being taken advantage of?”
Clearly, there is a big gap between perception and reality, and this gap is hurting business-owners and our economy. So, how can investors and bank lenders do better? The study proposes seven ways that lenders can help even the playing field of entrepreneurship.
Set Targets, Not Quotas: Rather than framing it around what they “must” do, investors should set goals for who they *want *to reach. Harris says that this should be intentional, and investors should do their own research about emerging industries, so they can find the right businesses to fund.
Hold Themselves Accountable for Measurable Outcomes: Track statistics on how many diverse companies they see and how many diverse companies they invest in. They should share these statistics with their partners to hold themselves accountable to do better.
Expand Their Reach: Investors can’t just wait for these businesses to come to them. They need to seek them out to reduce barriers. This could look like holding “pitch days” targeting multicultural or woman-owned businesses, attending related conferences, etc.
Reconsider Your Screening Criteria: Rather than requiring things like an advanced degree from an ivy league university, investors should focus on the hard skills and ideas of the entrepreneurs. Harris recommends that investors “Get your arms around the depth of that market and opportunity. Is that entrepreneur uniquely suited to solve this problem?”
Be Transparent: Most business owners don’t know the process and criteria for securing investments in their business. If investors think a business isn’t a good fit for their investment, they should be upfront about why that is.
Provide Clear, Prescriptive Feedback: Not only will specific feedback help the business owner to improve their pitch for next time, but it will also potentially help the investor reflect on the real reasons why they aren’t making an investment.
Hire More Women and Minorities On Your Team: As mentioned above, white and male investors don’t prioritize woman-owned or minority businesses. Having diverse voices and viewpoints on your team will change the conversation around who is deserving of investment.
If you are an entrepreneur looking for funding, Harris has advice for you, too. You should make yourself as visible as possible in the investment world. “The more they see you, the more they will be comfortable with you”, Harris says. Be aggressive and attend meet-and-greets and other events with investors. And if you do get in front of investors, take every opportunity to educate them while you’re selling your idea. Make sure that you’re bringing the statistics about your market, and the problem that you’re trying to solve. Show them why you’re the best person to invest in.