![Calvin Cooper NCT Ventures]()
By Calvin Cooper
Sweeping demographic changes are on the horizon that will forever change the market as we know it. By the year 2044, ethnic minorities will constitute a majority of the American population, according to the U.S. Census Bureau. This monumental shift is one of the underlying driving forces behind an increased focus on the economic empowerment of historically underrepresented communities. From the world’s largest venture capital funds, like Andreessen Horowitz, to regional firms, like NCT Ventures, fund managers are taking steps towards investing in the minority businesses of the future. And companies like Intel are implementing game changing strategies that will both advance economic equality in this country, while strengthening their company’s competitive edge.
Whether you’re a seasoned investor, corporate executive, supplier diversity professional or an entrepreneur seeking to start your own company, brace yourself … change is coming! Understanding the intersection of venture capital and supplier diversity can give you new ideas on how to seize opportunity in the face of changing times.
Why Are Venture Capitalists Leaning In?
Before joining the NCT Ventures investment team, I worked in supplier diversity which helped cultivate a passion for this space. Although I help raise capital for our fund and assess opportunities across all sectors that we invest in (regardless of founder demographic), the intersection of supplier diversity and technology entrepreneurship is something that our team is more excited about than ever.
Minority and women owned businesses constitute an under-served market when it comes to access to capital, and the private sector institutions that support these companies are ripe for disruption. As venture capital investors, we look for disruptive opportunities in under-served markets. Entrepreneurs with diverse backgrounds often have unique insights into markets that lead to new ways of doing business; thereby uncovering previously untapped opportunities. However, according to CBInsights, only 1% of venture backed founders are Black. This is very problematic.
Not only is diversity intrinsically valuable, investing in under-served markets is an opportunity for attractive returns. There is a lot of research to support this strategy, including research by the National Association of Investment Companies that show fund managers investing in diverse entrepreneurs often generate superior returns when compared to the market. This aligns with our firm’s experience. When we look at NCT’s investment history, we’ve noticed that previous investments in companies with diverse founders have done remarkably well.
Get Ready for Disruption
Nationally, over $100 billion is spent annually by America’s leading corporations with women and minority owned businesses. These companies range from paper companies, to parts manufacturers, commodity distributors, and construction companies. There is a pipeline of minority owned companies in a wide range of sectors, but where minority entrepreneurs are largely absent are in higher growth, higher margin sectors, such as software and technology.
The thing is, when you think of ‘good old boy networks’, you don’t think about diversity. However, oddly enough there are two types of supplier diversity movements going on;
- Traditional: corporations that are improving diverse spend within the status quo
- Disruptive: corporations that are pushing for transformational change
Intel falls into the disruptive category. Their commitment to diversity extends beyond traditional methods and into waters less ventured. By 2020, Intel plans on spending $1 billion with diverse owned businesses, and they’re working cross functionally to make this a reality. Although several Fortune 500 companies already spend in excess of $1 billion per year with diverse owned companies, what makes Intel different is that they are also focusing on growing more diverse companies in the tech space.
Intel is Changing the Game
Coincidentally, I had a conference call with Lisa Lambert, a Managing Partner at Intel Capital on the day that they announced the launch of a $125 million Diversity Fund. Lisa is now leading the largest venture capital fund ever created to focus on female and underrepresented minority entrepreneurs. What’s very exciting about Intel’s announcement, is their commitment to diversity across the board, and how their reach is likely to help drive a movement to disrupt traditional supplier diversity, opening new doors for diverse entrepreneurs across the entire industry. This is great validation for how we’ve been looking at this market.
I caught up recently with Minea Moore who leads Intel’s supplier diversity program. What was most striking about our conversation is that Intel’s commitment to supplier diversity pushes the envelope. In order to grow more diverse tech companies, they’re thinking about diversity in a broader way. They’re not just looking at certified minority business enterprises (MBEs) that are 51 percent owned and controlled by underrepresented minorities, which is the norm. Intel is also growing it’s spend with companies that have diverse founders, leadership teams, and those that are substantially minority owned but may not meet the certification threshold.
“Approaching diverse entrepreneurship beyond the scope of what certifies a company as MBE helps open the door for minorities to raise capital and grows companies in emerging industries. This may be outside of the status quo, but true to Intel’s history, we’re pushing the boundaries,” stated Minea Moore. “Our strategy mirrors the intent of supplier diversity, which is to drive economic empowerment and wealth creation in diverse communities.”
INTEL’s STRATEDY IS CUTTING EDGE.
Certification Policy and Access to Capital
Growing a tech company often requires institutional investors like venture capitalists to fund product development and fuel sales growth. When competing in emerging industries, MBEs are competing against well-funded venture backed companies.
Unfortunately, sticking to decades old policy requirements inhibit minority entrepreneurs from raising venture capital while maintaining their MBE certification. The 51 percent-minority ownership requirement does not align with investor standards. The average venture backed founder retains 21% ownership after their first series of venture investment. The tradeoff between equity ownership and getting the capital needed to grow a company is one that many entrepreneurs have to make. However, this decision is more complicated for minority entrepreneurs. Certified MBEs have to decide between access to institutional capital, and risking existing customer relationships if they lose MBE designation.
Don’t Get Left Behind
Entrepreneurs that are seeking to grow companies in low margin, low growth traditional sectors are in for an uphill battle. Opportunities in the future are going to be in emerging industries where access to capital is critical to competitiveness. Restrictions that impede access to capital should be revisited in light of changing times.
Purchasing teams face challenges trying to balance supply chain consolidation, cost reduction and risk management while still growing spend with diverse entrepreneurs. Consolidating diverse vendors, or growing companies in emerging markets will take access to capital, and institutional investors can play an important role in this evolution. Fund managers and corporations that are taking steps towards capitalizing on this opportunity are ahead of the curve.
Following traditional supplier diversity “best practices” isn’t good enough. It’s time to embrace the future and start thinking about “next practices” when it comes to encouraging diverse entrepreneurship.
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