Oct 7, 2021 - Economy

Latino businesses get scant venture capital

Illustration of a shadow of a hand hovering over a large pile of money.

Illustration: Aïda Amer/Axios

Less than 1% of funds from the top 25 venture capital and private equity firms wind up in the hands of Latino-owned businesses despite the fast pace of Hispanics opening up new enterprises, a study found.

Why it matters: The meager VC and PE investment going to Latinos highlights the lack of capital Hispanics face when trying to launch businesses, and prevents growth in one of the fastest-growing segments of the U.S. economy.

Details: Latino businesses received less than 1% of the $487 billion invested across a sample of the top 500 largest venture capital and private equity deals in 2020, according to a study by Bain & Company, the Stanford Latino Entrepreneurship Initiative, and the research nonprofit firm Latino Donor Collaborative.

  • That lack of investment comes as Latino entrepreneurs are responsible for about 50% of net new small business growth in the US over the past decade, according to data from 2007 to 2017.
  • Those Latino-owned businesses are growing in annual revenue faster than white-owned businesses, the study said.

Yes, but: Researchers found that as Latino-owned businesses approach the $1 million revenue mark, the companies start to struggle with profitability and cash flow. That makes them difficult to scale and or to accelerate growth.

  • Latino-owned businesses don’t have easy access to early-stage equity investments and face lower rates of approval and funding from banks.
  • Instead, those business owners turn to expensive forms of debt, including hard-money lending.
Janie Isidoro, owner of My Corazon, a Chicano business in downtown Hanford, Calif.
Janie Isidoro, owner of My Corazon, a Chicano-owned bookstore in downtown Hanford, Calif. Photo: Al Seib / Los Angeles Times via Getty Images

The intrigue: If Latino-owned businesses were as equitably funded as those owned by whites, they could generate $1.4 trillion in additional revenue today and $3.3 trillion in additional revenue by 2030, the study concluded.

What they're saying: "Our problem starts even earlier. Even when we're talking to angel capital investors...a white-owned business is 40% likely to get full funding from an angel. A Latino-owned business is 13% likely, " Hernan Saenz, the leader of Bain & Company’s Global Performance Improvement, told Axios.

  • "We don't have the capital structure to grow fast enough, and so venture capital and private equity is not able to grab us either."
  • "We are less likely to seek funding for whatever reason. So I think there has to be an education component to this to teach Latino business owners how to pitch to angel investors and venture capital investors," Saenz added.

Don't forget: The total economic output of U.S. Latinos reached $2.7 trillion in 2019 and would be tied for the seventh-largest GDP in the world if U.S. Latinos were an independent country, according to a detailed study by the Latino Donor Collaborative.

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