Rejecting racism and promoting efficient venture capital are too important to American innovation and prosperity to sacrifice them on the altar of equity.
Rejecting racism and promoting efficient venture capital are too important to American innovation and prosperity to sacrifice them on the altar of equity.
V enture capital is the engine of America’s innovation and growth. Over the last 40 years, venture capital has provided funding to dozens of the best-known U.S.-based companies, including Amazon, Amgen, Apple, Cisco, eBay, Facebook, FedEx, Google, Microsoft, PayPal, Twitter, Uber, and many others.
Few business transactions are more rigorously vetted than potential venture-capital investments. Firms hire top students from elite business schools and provide them with intensive training, direction, and tools as they identify, exhaustively analyze, and negotiate opportunities, recognizing that successful investments have to generate sufficient profits to pay overhead, make up for losses, and generate strong rates of return.
I have founded, co-founded, invested in, and advised close to 200 start-ups. My results include spectacular returns and losses. At present, I am actively involved with about a dozen early-stage companies, ranging from pre-operating vehicles seeking seed financing, to companies in registration for their initial public offerings. The founders of these companies include Asians, blacks, Hispanics, whites, men, and women.
Progressive publications, such as a frequently quoted 2020 McKinsey article, and “Entrepreneurial Inequity,” just issued by the Alliance for Entrepreneurial Equity (AEE), parrot the same statistics, conclusions, and mandate for “equity” in venture capital. Their analyses are disconnected from the prerequisites for business success and offer false hope to underprivileged Americans.
The core of the progressive demand for “equity” is the categorization of individuals by race, gender identity, and sexual orientation, followed by the proportionate allocation of benefits.
AEE’s study uses indicia of disproportion as evidence of wrongdoing. For example, AEE reports that blacks and Hispanics own, respectively, 2 percent and 6 percent of small businesses; men own three times the number of small businesses owned by women; and, in 2020, women and blacks received 2.3 percent and 1.2 percent, respectively, of U.S. venture-capital funding and were allegedly “shut out” of federal contracts, receiving 9.4 percent of spending.
AEE claims that barriers are rampant throughout the entrepreneurial ecosystem. Without evidence, it claims that it costs at least an additional $250,000 more for a “Black or Brown entrepreneur to start the same, exact business as their white peer,” because of purported higher interest rates and lack of access to free assistance. AEE concludes that entrepreneurial inequity is the most unrecognized contributor to the racial wealth gap in the United States.
This is sophistry. Successful entrepreneurship is an engine of wealth creation when ingenious, hard-working individuals develop and successfully execute a plan to meet a need by marketing an innovative product or service. That is something only a small percentage of people can do. It does not occur by fiat. Funding can be awarded by decree, and failing businesses can be propped up by grants, loans, or contracts selected by race or gender, but that is not success. It is socialism, which has repeatedly failed. Yet it is central to the administration’s approach to “diversity, equity, and inclusion” (DEI) for minority-owned businesses.
AEE observes that 38.5 percent of full-time MBA students are women, 9.4 percent are Hispanic, and 8 percent are black. It implies this is a result of wrongdoing, disregarding personal choices. For example, women receive more doctoral degrees than men, and they outnumber men in law, medical, and graduate school. Blacks receive a greater percentage of master’s degrees than their proportion of the population.
AEE also observes that black entrepreneurs on average have about $35,000 of capital, compared with $107,000 for whites. In practice, there is no meaningful difference, particularly taking into account the willingness of talent to work for free for undercapitalized entrepreneurs. With rare exception, neither sum is sufficient to fund a wealth-creating venture.
AEE’s answer is that the Federal Reserve Banks’ 2021 Small Business Credit Survey found that while 40 percent of white-owned businesses recently received their requested non-emergency financing, only 31 percent of Asian-owned, 20 percent of Hispanic-owned, and 13 percent of black-owned businesses did so. But this data is unreliable, because the Fed can’t access supporting information and used self-reported results from a “non-random” email survey.
The analysis also is misleading because the Fed’s survey found that between 2019 and 2020, minority-owned businesses reported more significant negative effects as a result of the Covid-19 pandemic, and Asian-owned firms were most likely to expect further decline. At the time of the survey, 79 percent of Asian-owned firms and 77 percent of black-owned firms reported that their financial conditions were weak, compared with 54 percent of white-owned firms. Though the Fed noted that among firms with good credit scores, businesses owned by people of color were less likely to achieve their financing goals, credit ratings are less important than a company’s current financial condition, or its projected ability to service debt or generate profits.
AEE is playing a numbers game. Harvard Business Review observed that even when women venture capitalists specifically seek women-founded opportunities and make the decisions, the percentage of funding received by women rises to less than 5 percent. Because of set-asides, minorities and women are eligible for contracts for which whites and men may not compete. The administration has ordered 11 percent of federal contracting dollars to be awarded to small minority businesses and intends to increase the allocation to 15 percent by 2025.
Relying on the same data used by AEE, McKinsey advocates “equitable outcomes.” In plain-speak, it proposes that the 14th Amendment, 160 years of federal civil-rights statutes, many state constitutions and state civil-rights laws, the capabilities of the entrepreneurs, the quality of their business plans and their ability to successfully execute those plans, the potential for investors to recoup and derive a profit, and the risk to workers who join these companies, be ignored. Instead, McKinsey would have the government, banks, and private investors fund black entrepreneurs in proportion to their percentage of America’s population. There is no indication that McKinsey sets an example in its business activities or that its article is anything more than virtue-signaling, or a business-development effort.
AEE adopts McKinsey’s vision and calculates that there should be 1.6 million more black- and Hispanic-owned businesses, with nearly $2 trillion in sales. Presupposing the math is correct, for this hyperbole to eventuate, the economy would have to absorb these new businesses without inefficiencies, price changes for inputs or outputs, or an impact on existing businesses, and with linear growth in GDP; and all of these businesses that failed to attract funding would have to succeed, without any investor losses.
The issue is not discrimination by profit-oriented venture capitalists. People of different backgrounds have different interests, as is made clear by their educational choices. Because of affirmative action and DEI, they may also have different capabilities, even when they receive the same credentials. Business success ultimately is about capabilities, not credentials.
Though individual choice should not be ignored, it is reasonable to believe that given the right tools, more women and people from underprivileged families of all races might seek and successfully deploy venture capital. The solution is not equity. Rather, it is to change the paradigm by reducing crime, encouraging child-rearing within families, improving primary education, and stopping the slide into progressive victimhood and social-justice overdrive.
Rejecting racism and supporting efficient venture-capital investing are too important to American innovation and prosperity to sacrifice them on the altar of equity.