Unlocking the US Economy
By some accounts, the United States is looking at a majority-minority future as soon as 2050.
Whether we do, or do not, reach the tipping point by mid-century (or even sooner), this much we know now: The minority population is growing — in fact, minorities are the fastest growing segment of the U.S. population — which means minority business owners, workers, and consumers hold the power to reinvigorate the U.S. economy.
But if we know minority groups are critical in the future of American business, why is there still such an obvious lack of startup founders who are black, Latino, female, and/or LGBTQ? According to a 2014 Census Bureau report, only 17.5% of businesses were minority owned, despite their making up 38% of the overall population.
It begs the question — what might America gain from a business landscape that actually reflects the people of this country?
And how do we get there anyway?
Is it really as simple as changing the way venture capitalism looks and operates in the U.S.? (TLDR: Yes, we think so.)
“Buying power” to the people
It’s been well-documented that the buying power of minority groups have grown the past several years, and by all accounts the numbers will continue to rise. Here are just a few stats that point to the incredible, undeniable force that is the American minority consumer:
· African-American buying power, estimated at $1.2 trillion in 2016, will grow to $1.5 trillion by 2021, making it the largest racial minority consumer market. Source
· In 2016, U.S. Hispanic buying power was larger than the gross domestic product of Mexico. Source
· The combined buying power of blacks, Asians and Native Americans was estimated to be $2.2 trillion in 2016, a 138% gain since 2000. The same time period saw the buying power of Asian-Americans grow by 222%, Native Americans by 164% and blacks by 98%. All of those markets are expanding faster than the buying power of whites, which increased by 79%. Source
· LGBT consumers have four times the buying power of Hispanics and African Americans, two times the buying power of Asian Americans and four times the buying power of millennials. Source
· There was a 20% increase in LGBT buying power between 2006 and 2012, and at current rates, growth could exceed $1 trillion by 2020. Source
· Women drive 70–80% of all consumer spending. Source
The astronomical growth of minorities in the United States not only has the power to affect consumer spending and GDP, but these groups could have an important impact on our country’s job health, too.
According to the Minority Business Development Agency — a Federal Government agency solely dedicated to the growth and global competiveness of minority business enterprise — U.S. minority business enterprises represent 29% of all firms, only 11% of which have paid employees. According to the MBDA’s website, if minority businesses were to obtain entrepreneurial parity, the U.S. economy would realize 13 million more jobs.
These numbers make it clear that the key to unlocking the American economy — and accelerated business growth — lies within currently underrepresented communities. The smartest existing companies are already aware of this fact (although actually reaching these highly valued and sought-after consumers is a different story).
So if the minority population in the United States is rising exponentially and minority consumers hold the key to America’s economic growth, then why aren’t we seeing more minority-led businesses and startups in America?
“There’s empirical evidence that they have been disproportionately denied access to capital when they apply for it,” said Christine Kymn, an economist at SBA Office of Advocacy.
In the same CNBC article, Lisa D. Cook, an associate professor of economics at Michigan State University and a former member of President Obama’s Council of Economic Advisers, goes on to explain, “Smaller loan sizes seem to be linked to higher failure rates. Access to credit is a big barrier.”
It’s no wonder underrepresented founders aren’t getting the capital they need from investors when VC firms themselves are so homogenous.
According to a 2016 study performed by the National Venture Capital Association and Deloitte University Leadership Center for Inclusion, “Women make up 45% of the venture capital work force, mostly in administrative roles, but just 11% of investment partners, or the equivalent, on venture investment teams. African Americans make up 3% and Latinos 4% of the venture capital workforce. None of the 217 firms with more than 2,500 employees had an African-American investment partner.”
Tinia Pina, the CEO and founder of the startup Re-Nuble, took to TechCrunch to write firsthand about her difficulty finding investors as a woman of color.
“Over time,” she says, “a systematic lack of funds creates a bottleneck effect, as I cannot invest in something until I am sure of its return, and must evaluate everything in hindsight. Indeed, the number-one reason cited for an early stage startup to fail is lack of funds, making my limited access to investment opportunities a truly detrimental blow to my company.” Despite the variety of fundraising options entrepreneurs have at their disposal, “none compare to the impact of traditional investors.”
For change to happen, it must happen from the very top down.
Business that represents
You can see why we think a focus on funding currently underrepresented entrepreneurs has the power to profoundly impact business, spending, and jobs in America.
The data is all there. Diversity in startup leadership is a win-win for consumers and business owners alike: On the one hand, consumers will have the opportunity to see themselves, their issues, needs, and desires represented in new products and the marketing of those products — and spend accordingly. Rather than give their power away, with more minority-led businesses, underrepresented groups would be able to support and grow their own communities.
Meanwhile new minority-led startups will be tapping into the incredible buying power of the population segments they represent, fueling returns and boosting the economy in the process.
But in order to get capital into the hands of black, Latino, female, and LGBTQ founders who are necessary to drive this incredible change, there must be a revolution in the VC industry.
Where most VC companies and investment firms see minority founders as an unproven commodity (or simply do not see them at all), we think they represent the future of business and the path to a stronger economy — which is something we can all get behind.