Judging from the increasing preponderance of listicles, ads, articles, promotions, and events offering all manner of tips, tricks, and hacks, it seems many people are casting about these days for shortcuts to improve their personal life, professional station, or organizational performance. Even the current US administration’s highly problematic “make America great again” slogan has at its core a notion that there are readily achievable gains to be seized.
So in the spirit of the moment, we offer our own suggestion for those seeking superior returns on investment, whether corporate or venture: diversify.
But don’t just take our word for it. Here we gather just a few of the voices offering the insights you need to take action.
Why bother?
We start with the obvious: why should I try something new? What’s wrong with what has worked for me so far? Fair question.
In a recent LinkedIn post, Sukhinder Cassidy Singh answered this way: “If you knew of a proven way to significantly increase your company’s bottom line that hadn’t been implemented yet in your company, would you jump on that opportunity? Or would you just shrug your shoulders and keep doing things the same way you’ve always done, hoping for a different outcome?”
Enough said.
What opportunity?
The next question, of course, is whether the opportunity is worth the effort to undertake a new initiative. After all, change requires a reallocation of attention and other critical resources. So is it worth my while?
Speaking directly to business readers, FastCompany offers some market perspective: “There are enormous untapped opportunities in the startup [sic] for products and services that cater to the 80% of the U.S. population that is a person of color, female, or both. Multi-ethnic consumers in the U.S. boast a combined buying power of $3.4 trillion, a number that’s anticipated to increase exponentially over the next five years.”
In the same article, FastCompany spotlights Mandela Schumacher-Hodge, Diane Henry, and Stefanie Thomas — three Black women founders and VCs who are putting capital to work in companies addressing those largely untapped opportunities.
Turning more explicitly to the investment opportunity, American Banker puts forward the case for an arbitrage play: “Mitch Kapor at Kapor Capital and Darren Walker at the Ford Foundation have articulated this potential the best. It can be summed up in the quote, ‘Talent is equally distributed, but opportunity is not.’ Ability and intelligence cut across race, sex and gender orientation, but opportunity (and you can fill in access to capital) does not.
“This is an arbitrage play for those who identify talent that the majority of the VC community has discounted and overlooked…. Arbitrage Opportunity No. 1: Out of the $60 billion that VCs invested last year, $1.5 billion went to women-run companies. That is roughly 2%. But studies show female chief executives in the Fortune 1000 drive three times the returns as S&P 500 enterprises run predominantly by men. Arbitrage Opportunity No. 2: Of the thousands of venture deals done between 2012 and 2014, so few black female founders raised money that, statistically speaking, they registered as zero…But black women constitute the fastest-growing group of entrepreneurs in the country today. They have over 1.5 million businesses — a 322% increase since 1997. These businesses generate more than $44 billion a year in revenue.”
Similar arbitrage opportunities exist among managers as well. Among the learnings from their Symposium on Equity, Diversity, and Inclusion in Social Finance, NYU Wagner found a compelling opportunity case: “… according to a report compiled by KPMG on behalf of the National Association of Investment Companies (NAIC)—a consortium of minority and women-owned private equity firms and hedge funds—minority and women- owned funds outperform the rest of the private equity sector, including the buyout subset, across three industry benchmarks (Net IRR, Net MOIC, and DPI).”
But what about risk?
Ah. This is where things really get interesting. For decades the prevailing wisdom has held that larger, repeat funds offered superior returns and lower risk over smaller and first funds. That seems intuitively reasonable, so it must be true, right?
Not necessarily.
It turns out that including up-and-coming funds — of which there are many led by people of color, women, and other overlooked managers — in your investment strategy might actually reduce the overall performance risk in your portfolio.
In 2010, SVB Capital concluded that funds under $250M outperformed those above that size.
More recently, Pitchbook reported that in the past five years first funds have outperformed their repeat peers. “The most likely explanation for the improving performance of first time funds relative to their more established competitors is that first-time funds are more likely to pursue niche strategies, whereas incumbent firms are raising increasingly large pools for generalist strategies.”
Are these opportunities hard to find?
Another excellent question. There has been much hand-wringing about “the pipeline problem,” essentially asserting that more capital would naturally flow to such high-quality commerce and investment opportunities if only they were more abundant or more readily available.
We assert that there is no pipeline problem. Rather, there is a network problem.
How to find opportunities associated with diversity? It’s not that difficult, actually, but it does take initiative to step out of your network and look around.
As Geri Stengel points out on Forbes, if you are based in a city, chances are there are vibrant opportunities in your immediate vicinity. “Cities play a unique and critical role as the breeding grounds for entrepreneurs who start and grow innovative scalable companies that drive economic growth and create jobs, according to research by Richard Florida, Jane Jacobs and Paul Romer. The density of interactions among people, the diversity of people — women, minorities, LGBTQ and immigrants — as well as the tolerance — for new ideas, breaking established norms, ambiguity, pivots and even failure — stimulates and encourages breakthrough ideas.”
Who are the people in your neighborhood? You might find it’s highly rewarding to get out of your usual routine and go meet some of them. [We can also help with some introductions and/or pointers, if you like.]
Resolved.
Change often starts with a simple resolution, a decision and a commitment to take a new tack. There are many ways and many places to begin. If you’re ready to go public with your resolution, you can join with others who have already taken the plunge by signing on the Diversify Access to Capital Pledge.
For our part, Reinventure Capital is raising a fund to invest equity and debt capital in early growth stage (breakeven or so) companies led by women and people of color. We know from prior experience and from daily encounters that these overlooked founders represent tremendous untapped potential to achieve higher outcomes.*
We’re proud and humbled to be in extraordinary company with other founders, investors, and organization leaders who are also connecting the dots to create a multitude of higher outcomes.
Please join us.
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record provides direct evidence that it is indeed possible to consistently invest for both financial returns and social value creation. To learn more, please contact us.