Large private foundations, bank foundations, and individual donors can become better investors by helping women and minorities gain more access to investment capital, a new study has found.
The study, by the New Venture Fund and Arabella Advisors, cites research that says just 2 percent of venture-capital funding goes to women entrepreneurs, and less than 5 percent of entrepreneurs backed by venture-capital firms are led by African-Americans or Latinos.
The report, which credits a wide variety of sources for its statistics, outlines the financial upsides to inclusive investing. Startups with women founders generate more revenue per dollar invested — an average of 78 cents versus 31 cents for startups with all-male founders.
“There’s a clear opportunity to align good intentions and values with investment decisions, which is currently not happening across the sector,” said Shelley Whelpton, senior managing director at Arabella Advisors. “This is less of an academic report and more about showing what’s possible,” she said of the case studies.
JPMorgan Chase provided support for the study.
Setting Goals
One foundation leader quoted in the report said inclusive investing “is not about finding a binder full of brown people” or “a binder full of women.” Instead, the leader said, “we need a bigger play that goes beyond offering training on bias and diversity and focuses on changing the systems within our institutions.”
The report says private foundations can use the power of their endowments “to influence the practices of asset managers.” Whelpton said establishing clear goals, like setting aside a certain percentage of the portfolio to focus on ventures founded by women or minorities, would help.
“If you’re a foundation and your mission is to address inequity, and you want to open up opportunities to address gender and racial bias, you can do so with your grant making,” she said, adding that there is a culture of risk among some asset managers who say finding women and people of color to invest in can be cumbersome. Another way to change that narrative, she said, would be to hire a diverse staff of asset managers.
Role for Bank Foundations
Bank foundations should try to coordinate lending models with Community Development Financial Institutions, the report said, to expand the market for who has access to affordable loans. Their brands can help sell the case for inclusive investing on a geographic basis, too.
“More than three-quarters of startup investment goes to California, New York, and Boston,” said one bank-foundation leader. “Geographically, we are missing everything in the middle. We are missing a lot of ideas and innovation that need attention and seeding.”
Whelpton said the Detroit Development Fund is an example of an investment group that can encourage others to pay more attention to the Midwest. She also said grant makers that focus on the Appalachian region can take up causes related to drug addiction, social mobility, and hunger.
Rallying Peers
Individual and family donors have the power to rally their peers to the cause, the report said. That includes creating mandates for donor-advised-fund assets and complementing existing equity pledges.
One grant maker who was not named in the report summed up the issue: “Investment decisions are made in very small rooms by a small group of people. They are also highly personal. Beyond bias and prejudice, it’s very human of investors to make decisions based on people they trust,” the grant maker said. “Your network will get you access to individuals and institutions that can make those investment decisions, but historically they’ve been closed off to women entrepreneurs and entrepreneurs of color.”
The report named Black Female Founders, a membership organization that works with black women tech founders on networking, and Backstage Capital, Vamos Ventures, and Black and Brown Founders as examples of important networks in venture capital.
If investors overlook key opportunities, the report said, they’ll miss out on people like Lynzi Ziegenhagen, founder of Schoolzilla, which works to improve schools through data and analytics, and Kesha Cash, founder of the Impact America Fund, who Whelpton said is “a rock star” among peers.
Cash and Ziegenhagen, as well as other leaders cited in the report, struggled to find investors. Their stories, Whelpton said, show what it takes to get them on a better track.