Finding funding for a new business venture can be challenging under any circumstances, but underrepresented groups, such as women and people of color, often face additional hurdles.
Rashmi Menon, entrepreneur in residence at the University of Michigan’s Ross School of Business, discusses barriers to entrepreneurship and how venture capital can become more inclusive. She will moderate a virtual panel discussion March 26 with entrepreneurs and venture capitalists working to expand equity, as part of the Ross School’s Business and Society lecture series.
One critical aspect of entrepreneurship is finding funding. You’ve mentioned over the past five years, less than 3% of venture capital funding went to Black and Latinx founders. Are there other stats demonstrating the scope of the problem?
In 2018, women-founded startups received less than 2% of total venture funding. If you look at women of color, it’s actually 0.2%. Other statistics cover the trillions of dollars under management-everything from VC funds to private equity and other funding. Only about 1.3% of that funding is controlled by firms that are owned by women. And these stats are equally disproportionate when you look at other underrepresented groups.
One of the common arguments posed against diversity is that diversity hampers quality, but the statistics just don’t bear that out. For example, women-founded startups, on average, have twice the return of male-founded startups. So, without systemic barriers, more money should be invested in women-founded startups.
You’ve pointed out while finding funding may be the most obvious barrier, there are many others. What are some examples?
Yes, there’s so much more than just funding involved in barriers to entrepreneurship. A recent study on entrepreneurship in Israel found that the No. 1 factor for success of an entrepreneur was the wealth of the founder’s parents. If your parents are more wealthy, you probably went to better schools, you have a better network, you have more access to mentors, you have better access to prestigious career and educational opportunities.
Then, after graduation, we have a number of students who are very passionate about starting businesses, but they simply cannot afford to do so because they have to earn an income to pay off their student loans, or they may need to devote their earnings to supporting other members of their family. In addition, Jeff Bezos, for example, received a substantial amount of money from his parents to start Amazon.
Underrepresented groups in entrepreneurship are often less likely to be able to count on family for capital to start their businesses.
What are some of the broader societal barriers?
When we look at how entrepreneurs are represented in media and in academic literature, we typically have that image of a cisgender, straight white man, usually from an upper-middle-class background. Entrepreneurship gets a lot of coverage these days, but who gets the majority of it? Elon Musk, Jeff Bezos, Bill Gates, Mark Zuckerberg. We have the same problem when we look at the academic world: Who is brought in as a guest speaker? Who is taught as a case study example in a class?
The result, I think, is a lot of self-selection takes place. I think that people from underrepresented groups don’t necessarily see themselves as people who could be entrepreneurs because when they read about entrepreneurs, those people are not like them, and that happens time after time after time.
As a result, a person from an underrepresented group often doesn’t choose that startup path. They’re not taking the entrepreneurship classes, they’re not doing the Zell Lurie Institute programs, because they’ve been conditioned to believe “that’s not for me.” I literally had a woman come into my office hours once and say, “I don’t know if I really deserve to be an entrepreneur.” It broke my heart.
What are some things that should be done to address these issues?
We need to make outreach as broad as possible. Part of what we need is for people to understand that this is something everyone can do.
On the academic side, it would be great to see universities put more of a focus on this. When you have guest speakers coming to classes, make sure they are from a diverse group of people, so we’re not seeing the same type of person over and over again shown as the model of success.
I’ve made a commitment to myself that any case study I write is going to feature an entrepreneur from an underrepresented group. Universities could provide grants for writing case studies about entrepreneurship by underrepresented groups. If you start teaching a lot of these case studies in classes, different students might consider this path.
The issues post-graduation are more complex. What if there were a fund set up so that people who graduated could have a year’s worth of funding to work on a startup idea, that would allow them to spend that year getting their business off the ground? Or maybe some student loan forgiveness could assist people who choose to start a business after graduation.
There are more and more funds now focused specifically on funding underrepresented groups, and I think that’s fantastic. But it’s still a trickle. It’s still a very small percentage. We could use more of that.
We also need to create more networks of mentors-not necessarily all mentors from underrepresented groups, but there really should be cross-pollination. We want mentors from underrepresented groups to mentor both entrepreneurs from underrepresented groups and from nonunderrepresented groups. I think that would be of tremendous benefit as well.
Finally, broadening the definition of entrepreneurship and providing resources for multiple entrepreneurial paths can also be helpful. Much of the media coverage and funding tends to go to high-growth, venture-backed startups, which tend to take millions of dollars and many years to get off the ground.
But entrepreneurship comes in many forms, including businesses which can be relatively self-supporting or done as a side hustle. Broadening the resources (e.g., mentorship and funding) and media and case study coverage around these types of businesses could also broaden opportunities for entrepreneurs from diverse backgrounds.
At the upcoming panel discussion you are moderating, what do you hope people will learn or gain from attending?
I want people to understand what career paths look like for entrepreneurs, and particularly entrepreneurs from different backgrounds. I think it will be interesting to hear about what challenges these entrepreneurs face, both because of the group they’re coming from but also in general, since entrepreneurship is a difficult career path. And hopefully we’ll hear a little bit about how they overcame those challenges.
We’ll talk about these systemic barriers-funding, but more than that. I would also like to get into how we can build allies, how we can break down some of these systemic barriers. The burden should not only be on the underrepresented groups; everybody needs to be a part of the solution. How can we build the ecosystem that’s necessary to make this happen?