Collective Transparent today released a report outlining the disadvantages faced by minority entrepreneurs and proposing solutions.
People of color (POC) made an average of 48% less money in a survey than white male founders. With larger series of A-rounds in the hands of white men, it is understandable that there are some outliers with average higher earnings, the report reads. Given the smaller population of POCs funded, and income performance between $ 250,000 and $ 10 million, there is strong evidence to suggest that, given the same amount of capital, POC performance is likely to match, or even outperform, the standard amount funding received by founders today.
The research also shows that, statistically, women and POCs who can raise at least one introductory round of funding are more likely to perform as well as their white male counterparts.
The founders who receive the least investment capital in the open market, when they receive working capital, are more likely to generate returns on an equal footing. In our study, women founders in particular, who receive on average 32% less funding than men, can perform despite this obstacle.
The report was compiled thanks to an award from P&G Ventures, the investment arm of Procter & Gamble. Collective Transparency is a non-profit organization focused on increasing the number of minority founders raising early-stage funding.
The report dubbed the ROI: Reimagining Opportunities in Investment – A Look at Unfair Regulations That Limit Opportunities and Innovation. It addresses the systemic factors that stand in the way of disadvantaged entrepreneurs – specifically female, black and Latinx – in order to obtain the financing they need to grow their start-ups successfully.
Made in partnership with the research firm Pilot.ly, it has been drawn from more than 500 interviews with founders and investors and not only aims to understand the unique problems that underserved entrepreneurs face, but also offers practical advice which can help reduce these barriers.
There has been a long-standing inequality in access to venture capital by minority founders. In 2021, women-only companies achieved only 2% of venture capital funding. Meanwhile, black founders received only 1.4% of project funding (black women received only 0.27% of all project dollars), and U.S.-based Latino founders received 2%, according to Rule Smash.
Despite this lack of access, a key finding from the report is that women and people of color who can raise at least an initial round of funding are likely to outperform their white male counterparts.
“It is no surprise that the under-represented founders are underfunded. “This report provides valuable insights into the roots of the problems that continue to drive market inefficiency,” said James Norman, CEO of Pilot.ly and founder of Transparent Group, in a statement. “In turn, our findings have helped us create a set of recommendations that can help investors engage with a wider range of entrepreneurs and opportunities. There are a large amount of untapped returns with founders being underfunded; I hope this report will help the project to bridge the capital gap. ”
The study revealed that women and entrepreneurs of color tend to build companies that prioritize to serve the needs of their communities. Community-based companies tend to be seen as less likely to scale and therefore offer the returns that investors traditionally seek. The challenge for minority founders is how to demonstrate the benefits gained by investing in this type of business.
Among other things, outcomes, networks and fair communication spaces This has emerged as a major challenge for underfunded entrepreneurs. Black and Latino founders generally do not have the same level of access to start-up funding from the network of friends and family that traditionally helps start new entrepreneurs. Instead, minority founders rely on crowdfunding, which is generally inadequate and inefficient in its ability to raise substantial capital.
Women and businessmen of color prefer to meet virtually with financiers or at industry fairs. However, many financiers continue to communicate during happy hours and while engaging in high-barrier leisure activities at traditionally exclusive businesses, including golf and tennis clubs. This spatial separation means that many minority entrepreneurs and financiers do not find each other.
Recommendations for minority founders
The report says that minority founders should consider reforming the conversation about the company’s profitability and scalability, rather than focusing only on the outcome and potential impact on society. Balancing personal passions and opportunities for growth will help investors see the potential for financial gain.
Minority founders must also harness the power of personal accountability and social commitment. Founders who build businesses that have more impact than just the bottom line pose less risk to investors.
The report said investors should look to create safe and fair spaces to connect with disadvantaged entrepreneurs they may not meet in their existing networking circles.
In addition, they need to hire diversified investors who can understand and communicate the motivations and potential impact of minority-owned companies.
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