Venture capital firms are passing over investments in companies led by women and multicultural entrepreneurs despite data suggesting VCs acknowledge doing so could help maximise returns, new research shows.
The Morgan Stanley survey of almost 200 US-based VC firms and entrepreneurs suggested that despite a reputation for backing new, emerging and unfamiliar markets, VCs are “rigid” in applying their definitions of fit and are unlikely to look at businesses led by women and multicultural entrepreneurs as opportunities for calculated expansion risks, compared to other new investment areas.
The report said that on average 20 per cent of the companies in VC portfolios represent an expansion or divergence from their typical investments, a calculated risk intended to maximise returns.
But although 88 per cent of VCs view the lived experiences of underrepresented entrepreneurs as a competitive advantage in identifying problems to be solved and markets to be addressed, “not the right fit for me” and “market-related issues” were among the top reasons cited by women and multicultural founders for VCs not investing in their companies.
Morgan Stanley vice chairman Carla Harris said, “Our research indicates that with a few subtle shifts in their approach, VCs can better position themselves to take advantage of these entrepreneurs and generate superior returns.
“I hope that this report will help to inspire more firms to re-evaluate their investment strategies so they can capitalize on these opportunities that have historically passed them by.”
Nearly two-thirds of multicultural founders reported having had more success with diverse VC firms, but just 11 per cent of entrepreneurs say that they have interacted with VC firms that are diverse in terms of both gender and race.
The survey findings are featured in Beyond the VC Funding Gap, Morgan Stanley’s second annual investor survey and report examining the funding landscape for women and multicultural entrepreneurs and the investor attitudes and behaviors that perpetuate the funding gap.
Morgan Stanleys says the report offers a playbook with recommendations for VCs to help the industry take advantage of the trillion-dollar opportunity that the funding gap represents.
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