Morgan Stanley Survey

VC Firms Are Missing the Opportunity to Increase Investments in Women and Multicultural Founders, Despite Widespread Acknowledgement of the Competitive Advantage Associated with These Companies

Increasing the number of companies led by women and multicultural entrepreneurs is not a top priority among the venture capital industry, despite data suggesting VCs acknowledge the opportunity to maximize returns, according to a new report and survey released by Morgan Stanley today.

The survey of a combination of nearly 200 U.S.-based VCs firms and diverse entrepreneurs who have successfully raised venture capital, suggests that the VC industry is not taking steps known to increase either their exposure to diverse entrepreneurs or the likelihood that they will invest in more women and multicultural founders.

“Today we released a report about VCs for VCs that offers investors ways to seize the opportunities women and multicultural-led companies present,” said Thomas Nides, Vice Chairman of Morgan Stanley. “This report is part of Morgan Stanley’s strategy to broaden access to capital for multicultural and female innovators, and spotlight the opportunities they represent.”

“Our research indicates that with a few subtle shifts in their approach, VCs can better position themselves to take advantage of these entrepreneurs and generate superior returns. I hope that this report will help to inspire more firms to re-evaluate their investment strategies so they can capitalize on these opportunities that have historically passed them by,” said Carla Harris, Morgan Stanley Vice Chairman, Global Wealth Management and Multicultural Client Strategy Group Head.

Among the survey’s key findings

VCs have a reputation for investing in new, emerging and unfamiliar markets, better known as “expansion risk.” However, when they encounter diverse entrepreneurs, VCs are rigid in applying their definitions of fit and are unlikely to look at businesses led by women and multicultural entrepreneurs as opportunities to take calculated expansion risks, compared to other new investment areas.

• The top type of risk VCs are likely to take to maximize returns are calculated expansion risks, and on average, 20% of the companies in their portfolios represent an expansion or divergence from their typical investments; and
• 88% of VCs view the lived experiences of underrepresented entrepreneurs as a competitive advantage in identifying problems to be solved and markets to be addressed.
• Yet, “not the right fit for me” and “market-related issues” are among the top reasons cited by women and multicultural founders for VCs not investing in their companies.

The lack of diversity among VC firms contributes to the funding gap.