Before a company sells for billions of dollars, it starts as an entrepreneur's big idea. Typically, somewhere in between are venture capitalists, who invest in startups with hopes of a hefty payday if the companies make it big. A recent study from researchers at New York University’s Stern School of Business and University of Munich shows VCs are more likely to back companies if the executives are the same ethnicity as the investors.
The findings have profound implications for entrepreneurs of color, though they don't come as a surprise to them. At the South by Southwest Interactive Festival recently, African-American entrepreneur Wayne Sutton recalled times he appeared at conferences and was mistaken for a member of the service staff.
“It’s hard enough just to try to launch a product that the world can use,” Sutton says. “But overcoming those biases as a minority entrepreneur is even double hard.”
The research supports what many minority startups have long believed, that investors have a tendency to back people who look like them. Entrepreneurs of color see the problem as one of investors afraid to step beyond what they know.
“A venture capitalist provides money, but also provides a lot of blood, sweat and tears,” explains Melissa Bradley, an African-American who started a venture capital firm after seeing firsthand how finding investors can be frustrating for minorities and women. “They’re there with you day in and day out and so there’s this implicit nature around if I have something in common with you already at the onset, that we’re probably gonna do pretty well down the road.”
Bradley says she’s raised tens of millions for minority and female-owned businesses and profited.
Both Bradley and Sutton say minority entrepreneurs shouldn’t despair. Both believe in the power of a great idea to break through, no matter who pitches it.
Deepak Hegde, the NYU management professor who co-authored the study, agrees. He adds that the findings may point to changes VCs could make.
“Startups tend to come from multiple communities,” Hegde says. “A venture capitalist that has a diversity of partners in its ranks might be in a better position to identify these opportunities and evaluate them better.”
After all, the last thing investors want is a billion dollar opportunity missed, lost in a blind spot.