Editor’s Note: James Gorman is chairman and CEO of Morgan Stanley. The opinions expressed in this commentary are his own.
How good is a good business idea if you can’t get it off the ground? It takes funding to turn a business idea into reality, and unfortunately today, a white man with a good business idea is more likely to get funding than a woman or a person of color. That means missed opportunities — for the entrepreneur who can’t get funding, for the investors who could have earned a return, and for the innovation that drives our constantly changing markets for goods and services.
Of the $85 billion venture capitalists invested in 2017, just 2.2% went to female founders who weren’t working with a male counterpart, Pitchbook found. For women of color, that number drops to a negligible .02%.
This funding gap represents a tremendous barrier to entry for far too many business owners, entrepreneurs and innovators who continue to struggle to access the capital they need to grow their businesses, create new products and help their communities thrive.
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Why is it that the overwhelming majority of investment dollars goes to companies that are run by men?
There are a broad range of historic, cultural, systemic — and self-reinforcing — factors at play: everything from the monolithic makeup of investment firms, to a lack of familiarity among investors with the problems diverse entrepreneurs are solving or the market segments they’re trying to reach.
The funding gap defies any simplistic explanation or solution, but from a business perspective, the opportunity is clear.
A McKinsey & Company report from this year found that gender and ethnic diversity are clearly correlated with profitability.
One way to help more women and people of color get their great business ideas off the ground is to help them network. Like most sectors, the venture capital community is all about relationships. And in many cases, multicultural and women entrepreneurs lack the personal contacts and networks necessary to open those doors.
This year, Morgan Stanley has nine startups led by women or people of color in its Multicultural Innovation Lab, and we’ve paired each of them with a mentor. When I met with the group this summer, I urged them to use their mentor for every possible type of networking — access the people in our Equity Research division who have sector expertise they can draw on; connect with our bankers and make sure they make introductions to investors and corporate clients who work in their space.
By acting as the connective tissue between investor networks and women and multicultural entrepreneurs, we are helping to level the playing field and broaden their access to funding.
It’s exciting when we can solve for that lack of network, help someone hone their strategy and introduce them to potential investors. When it works, everybody benefits: Investors put their capital to work, entrepreneurs turn their good ideas into thriving businesses and society benefits from more innovation.
Let’s be clear: A bad business idea isn’t going to succeed no matter who came up with it. But when someone has a good idea, it’s critical to get in front of investors who can see the business potential.
The lack of access to capital for multicultural and women entrepreneurs is a market inefficiency.
The results from our lab companies speak for themselves. Last year, in our inaugural cohort of five lab participants, one business was acquired before the lab was over. And among our current nine lab companies, several have already closed their funding rounds through the introductions that were made.
Their success stories should spur more investors to look for opportunities in these underserved populations. There are great ideas lurking, they just need to be connected with an investor that can help bring them to life.