VCs Are ‘Missing a Trillion-Dollar Opportunity’

Venture capitalists admit that there are “too few” women and diverse entrepreneurs in their portfolios — but doing something about it isn’t a top priority.

Illustration by II

Illustration by II

Most venture capitalists say they want to invest in more women- and minority-owned businesses — but when they are presented with the opportunity, they often dismiss it as “not the right fit,” according to Morgan Stanley.

The bank surveyed nearly 200 venture capital firms and diverse entrepreneurs on the lack of funding for women- and minority-owned businesses. Among the VCs surveyed, 60 percent acknowledged that there were “too few” women and minority entrepreneurs in their portfolios.

This is not due to lack of good opportunities: Eighty-three percent of survey respondents said it was possible to prioritize investments in diverse businesses while still maximizing returns — although that figure dropped to 67 percent for respondents identifying as white and male.

One of the top reasons VCs cited for passing on diverse founders was that companies were “not the right fit.” Morgan Stanley reported that VCs also frequently gave the excuse of “market-related issues.”

Morgan Stanley concluded that venture capitals are missing out on a “trillion-dollar opportunity,” noting diverse customers “represent a huge opportunity to capitalize on consumer segments with plenty of room for more growth.”

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Among surveyed VCs, most found that portfolio companies with female ownership delivered returns that were at least as good as other portfolio companies, if not better. Sixteen percent said female founders delivered higher-than-average financial returns, while 39 percent said female and male founders performed about the same. And almost half (45 percent) were unsure how women-owned businesses did.

VCs were even more out-of-touch with the performance of minority-founded companies. More than half (53 percent) did not know how their financial returns compared to the rest of their portfolios, while 9 percent cited outperformance and 36 percent found them average. Just 2 percent said non-white owners underperformed.

Although many respondents agreed that investing in diverse entrepreneurs was “important,” it was not a top priority for the majority of firms.