September 5, 2001
Ground-breaking study to target investment gap hindering minority entrepreneurs
While the U.S. Census Bureau reported earlier this year that the number of African American- and Hispanic-owned businesses are on the rise, such businesses still do not receive equal access to the venture capital crucial to staying competitive, according to a University of Washington researcher.
In an effort to find out why, William Bradford, a UW Business School professor, is launching one of the nation’s most comprehensive studies ever undertaken on minority access to start-up funding.
A previous study co-authored by Bradford showed that minority-owned businesses attract less venture capital compared to similarly situated entrepreneurs. Bradford will explore what efforts can be made to even out that statistic.
With a $200,000 grant from the Kauffman Center for Entrepreneurial Leadership, Bradford and Wayne State University professor Timothy Bates will study the incentives needed to increase investing in minority-owned companies by venture capitalists. Their study is the first of its kind sponsored by the center, an arm of the Ewing Marion Kauffman Foundation.
“We hope we will provide knowledge so that future investors in minority ventures can better understand these firms and the best ways to go about investing in them,” said Bradford.
By surveying venture capital firms that do invest in minority-owned businesses, the researchers hope to debunk some of the reasons that other firms do not invest in such businesses.
The researchers cite several hypotheses on why minority businesses do not receive an equal amount of venture capital: including racial discrimination, a gap in minority business skills and venture capitalists interests in investing prefer in larger companies.
“We feel that venture capital firms are missing important and significant investments among minority entrepreneurs,” Bradford said. “However, there is no data on how many VCs on average invest in minority firms, nor how much on average they invest in entrepreneurs.”
The lack of investing in minority businesses harms the economy, Bradford said.
“Minority entrepreneurs are becoming a larger part of the business community,” he said. “Although on average they start with lower capital, they employ a higher rate of minority workers than do non-minority business owners and therefore they are more influential in reducing the minority unemployment rate.”
In addition, Bradford said, minority entrepreneurs save at a higher rate than minority workers.
“Important by-products of a higher rate of minority entrepreneurship are higher savings rates for minorities and the general economy and lower wealth concentration among non-minorities in the U.S.,” he said.
Bradford works closely with the business school’s Business and Economic Development Program, which through student consulting assists business owners.
Michael Verchot, the program’s director, said he has seen the need for this type of research for several years.
“We have worked with many businesses who have not had access to enough capital to stay afloat,” Verchot said. “We need to know if and how VCs and other early-stage investors look at African-American companies. Only then can there be work done on providing further economic opportunities for African Americans and other minorities.”
The study’s results are expected to be due out in June 2002.
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For more information contact Bradford at (206) 543-4559, bradford@u.washington.edu, or Verchot at (206) 543-9327, mverchot@u.washington.edu.
