We told you so is the response of venture capitalists and entrepreneurs of color to a recent study that confirmed what they’ve known all along: investing in Black, Hispanic and Asian-owned firms makes great business sense.
A pioneering report by the Ewing Marion Kauffman Foundation on the new majority venture capital (VC) industry found that VC-backed new majority firms outperformed the S&P 500 Index. The 117 investments tracked by the study’s researchers posted a 20 percent rate of return versus 17 percent for the S&P 500.
The report focused on venture capital funds operated by members of the National Association of Investment Companies—the sole industry association for investment companies with a stated mission of investing in new majority-owned firms.
"This report dispels the most insidious myth about investing in minority-owned businesses," said Amy Domini, founder and CEO of Domini Social Investments LLC. "It signals to investors, analysts and scholars that if you overlooked this niche, fearing low returns, it’s time to take a second look."
Other key findings by Dr. Timothy Bates of Wayne State University and Dr. William Bradford of the University of Washington, the study’s co-authors:
* Venture capital investing in new majority firms is profitable. The average investment per firm was $562,000; the average gross yield per firm was about $1.62 million.
* New majority-oriented venture capital firms did not concentrate in the high tech sectors. Instead, they kept more diverse portfolios spread across sectors such as media/broadcasting, manufacturing, and even restaurant chains.
* Public pension funds, by far, are the leading source of funds for these investment companies.
The new majority VC sector constitutes well over $1 billion in capital under management and will soon hit $2 billion. However, when compared to the approximately $22 billion in total VC investing last year, it’s clear we still have our work cut out for us in terms of democratizing capital and getting VC’s and entrepreneurs of color into the money flow.
