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Trillions at Stake: Morgan Stanley Advises Venture Capitalists to Invest More in Women and Minorities

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Trillions at Stake: Morgan Stanley Advises Venture Capitalists to Invest More in Women and Minorities

Venture capital (VC) funding is crucial to ensuring forward-thinking and innovative new businesses have the financial support necessary to succeed. Although riskier than other types of investments, for early investors, investing in startups can potentially be very lucrative.

But what criteria do VC funders consider when looking for the next founder or startup team to invest in?

Despite a significant amount of research that suggests greater diversity in business leadership is profitable, venture capitalists are still not actively investing in women or minority funders. A recent report by Morgan Stanley even suggests that funders are actually leaving trillions on the table as a result of this narrow-minded way of conducting business. For anyone with an investment portfolio, it might be a good idea to conduct a Personal Capital review to see how gender or ethnically diverse it is – not because it’s ethical, but because it just might pay off. 

What did the study find?

Surveying nearly 60 venture capitalists, researchers at Morgan Stanley sought to find out why women and minority founders are not invested in. 

Some key findings from the research are:

  • 83% of those surveyed believe they can “prioritize investments in companies led by women and multicultural entrepreneurs and maximize returns”. 
  • 60% admitted that their portfolios held too few companies led by women and multicultural entrepreneurs. 
  • 88% also “view the experiences of underrepresented entrepreneurs as a competitive advantage when it comes to identifying different problems that need to be solved”. 

 However, despite the above findings, three out of five of those surveyed told researchers that “prioritizing investments in women and multicultural entrepreneurs is not a firm-wide priority”. 

Personal Capital Review: Missed Opportunities

The findings suggest that even though the investors recognize diversity in startup leadership is good for business, they still do not reflect this view through their actions and funding choices. Not only that, but they have also not made the effort to design built in policies to combat their own bias. 

For example, researchers found that the majority of the investors’ vetting methods were outdated. Many reported relying on existing networks to source leaders and entrepreneurs to invest in. This is problematic for both women and ethnic minorities, who are not likely to run in the same social circles. Morgan Stanley’s Vice Chairman, Carla Harris, suggests in a piece for CNN that to improve this, “incubators, conferences, or demo days” could be used as more appropriate avenues for connecting with up and coming entrepreneurs.

A Win-Win

Personal Capital review processes should incorporate diversity checks when evaluating portfolios as it is a win-win for investors as well as entrepreneurs. For investors, Morgan Stanley estimates that up to $4.4 trillion dollars could be lost yearly due to not investing in more gender and ethnically diverse startups – money that many would most likely rather not lose. On the flip side, women and minorities deserve to have equal opportunities as their white, male counterparts.

What can investors do to improve? Morgan Stanley gives a few suggestions that include:

  • Setting targets for the number of women and minority entrepreneurs they approach
  • Track founder diversity statistics over time
  • Expand reach by holding pitch days dedicated to women and minorities
  • Create more inclusive screening policies
  • Be more transparent about the process and criteria for gaining funding

Venture capitalists already acknowledge that a gap exists, however closing that gap through tangible actions is needed to achieve further gender and ethnic equality in today’s business landscape. 

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