Venture capital investments in minority businesses have a solid return, a foundation advancing entrepreneurship announced Wednesday.
In a study conducted by the Ewing Marion Kauffman Foundation, combined investments exceeded a 20 percent rate of return, compared with 17 percent for the S&P 500 stock index over the same period.
The findings may reassure investors who think helping minority businesses get started is a high-risk move, the foundation said.
“We want people to feel good about their investments, but we also want them to know they’re not trading off their income or appreciation” by investing in minority-targeted venture capital funds, said Rhonda Holman, a vice president of the Kauffman Foundation of Kansas City, Mo.
Coauthor of the study, William Bradford of the University of Washington, said minority enterprise capital investing is not “social investing.”
“There are biases in the market,” Bradford said. “This niche is and should be profitable from an economic perspective.”
Minorities, especially black Americans, are 50 percent more likely to start up a business than any other demographic group, according to the study.
But getting funds to start and grow a business is a major hurdle for any entrepreneur and even more difficult for a minority, Holman said.
Minority-owned businesses generally form small clusters that require less venture capital funds than mainstream businesses – a problem for mainstream investors who prefer to invest large chunks of capital – and at the same time, require the same amount of investment due diligence, she said.
Bradford and Timothy Bates of Wayne State University tracked 117 investments from 24 venture capital funds operated by members of the National Association of Investment Companies, a group with an interest in financing minority business enterprises.
The average investment per firm was $562,000. The average gross yield per firm was $1,623,900, according to the study.
The report found that public pension funds are the largest source of start-up capital for minority businesses, while corporations contributed the fewest dollars among traditional sources of venture capital funding.
It also found that unlike the broader venture capital market, minority funds shied away from high-tech investments, allowing for a diverse portfolio and increased profitability, Bradford said.
