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One of the most difficult challenges many entrepreneurs make is how to finance the growth of their startups. Many begin by putting in their life savings, maxing out available credit and mortgaging everything they own before turning to the "three Fs" - friends, family and fools. But for those not born into a wealthy family and without a Rolodex of investor friends, personal financing and the three Fs will only go so far.
Large corporations can fund growth through the sale of stock on an exchange like the Dow Jones Industrial, S&P 500 and NASDAQ. But for companies between the three Fs phase and the stock market phase, venture capitalists (VCs) can be the difference between a perennial small business and a major enterprise with millions or more in revenue and large numbers of employees.
The Role of Venture Capitalists
A venture capitalist is a person or entity that invests in a business to facilitate growth in exchange for equity (ownership) in the company. For example, a venture capitalist might invest $10 million in startup to fuel future growth in exchange for 30 percent ownership. If the company goes belly up, the VC is out $10 million. But if it grows into a multi-billion-dollar organization, the VC has made huge profits.
In other words, VCs have the potential to turn great ideas and competent leadership into fortunes for themselves and the entrepreneurs they bet on. But some experts estimate VCs are missing out on huge potential profits by overlooking traditionally underserved groups.
Leaving Money on the Table
Carla Harris is the vice chairman of Morgan Stanley and head of the Global Wealth Management and Multicultural Client Strategy Group. In an article she wrote for CNN, Harris says, "there's a problem with how some VCs are identifying the next big thing: They're leaving out female and ethnically diverse entrepreneurs. In doing so, VCs are leaving money on the table. By Morgan Stanley's estimate, this funding gap is a trillion-dollar opportunity."
Harris provides an overview of research conducted by Morgan Stanley on investments in women- and minority-owned businesses, including surveys with VCs. Her article is worth a read in full, but the bottom line is that by overlooking these groups, investors are missing out on enormous potential profits, while many women and minority entrepreneurs are without the financial stimulus they need to move their companies to the next level. By extension, all of us are missing out on the new and innovative ways these entrepreneurs have come up with to meet our needs and satisfy our wants.
Just one more example of how—and why—inclusion is a business imperative. Venture capitalists, are you listening?
Related: How Long Ago is Long Enough? Or, Is the Answer “Never”?