Businesses run by women and people of color receive a sliver of the funding that those run by white men do. A new report from Morgan Stanley puts a finer point on why: Investors are biased.
In a survey of more than 200 investors and lenders, researchers found that funders see fewer pitches from women and minority entrepreneurs, and when they do, they hold them to higher standards. "Everyone has preconceptions and biases and investors are no different (both known and implicit)," the study's authors wrote. "But these seldom work for the benefit of women and people of color when trying to source funding."
As a result, investors leave major profits on the table. "By illuminating that gap, we aim to open investors' eyes to the opportunities they are missing," James Gorman, chief executive officer of Morgan Stanley, wrote in the report.
Some of the bias plays out when investors project future performance. Funders are twice as likely to think women and minority-owned businesses will perform below market average compared to those run by white men.
In fact, once minority-owned businesses receive angel capital, they perform in line with peers, according to the report. Firms owned by women typically do better.
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"I'm not going to presume where people are coming from," Carla Harris, the head of Morgan Stanley's Multicultural Client Strategy Group, said in an interview. "But I wanted to pinpoint the fact that that perception of risk is out there."
Only 2.2% of venture capital funding went to all female-founded teams in 2017, according to data from Pitchbook. Black and Latino entrepreneurs received 1% of startup financing, according to the Kauffman Foundation, which is focused on assisting entrepreneurs.
Even so, 80% of respondents said they think businesses owned by women and minority entrepreneurs are getting sufficient capital. The same respondents also said they rarely see pitches from women or people of color, and when they fund those entrepreneurs, they do so at about 20% of their average commitment.
"If each one of them looked at three or four more deals from women and people of color, we will have made a difference," Harris said. "It may have been a marginal difference, but all you need is a couple of these large investors to start really making money in this space and it will catch on like wildfire."
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In the report, Morgan Stanley recommended investors take deliberate steps to solicit pitches from more women- and minority-owned businesses, offer clear feedback and improve the diversity of their own fund management.
