For digital natives the term “broken record” means the same thing that it means for generations that had to deal with broken, or more accurately, scratched or debris-ridden records. At the risk of sounding like, you guessed it, a broken record: Diversity in all of its forms leads to the best possible outcomes. But in business, the push for inclusive diversity may hamper scaling it because the focus has been “what” as opposed to “how”. This is true for any business and especially true for tech-driven new economy businesses. Scale is key to sustaining activities and businesses in any field of endeavor.
From governments and the policies they enact, to boardrooms and the management teams they govern, to universities and the young minds they help shape, to philanthropic foundations and the missions they pursue, to investors and the allocations they make, to executives running down a marketing strategy - more diversity is a good thing, lets take this as a given. It does not matter if you look at it through a social justice lens or through a mercenary profit-maximizing lens. So what?
In early June, The Aspen Institute’s Latinos and Society Program is bringing together a broad set of stakeholders and perspectives to bear upon a persistent and important part of the diversity challenge. The group will be trying to answer a big question: Why do Latino-owned businesses fail to scale? You can substitute the word “Latino” for “African American”, “Veteran”, “Native American”, “Women Owned”, or any underserved slice of our country’s population.
Interestingly, this same dynamic applies to mainstream Americans in our heartland. I wrote about the parallels between traditionally defined underserved groups, like Latinos, and this massive and mostly white demographic. The fact is that families in Beattyville, Port Gibson and East LA have a lot more in common than not, but this is another story.
The vast majority of Latino-owned businesses are underserved, yet a good number of them are superbly capable and scalable businesses. Failing to scale leads to a panoply of corollary challenges that institutionalize and calcify this sidelined reality. Is there a way to break the cycle? Yes. Can underserved groups do it alone? No. The expected outcome of the Aspen convening is to crystallize a set of concrete, actionable and high impact solutions to address the scaling challenges affecting Latino-owned businesses and by proxy, the economy as a whole.
Despite of all the tech-driven advances made via decades-in-the-making confluence of seismic innovations; the digital divide continues to get bigger, wealth gaps continue to widen, and access to productive economic activity along with the capital that fuels it remains elusive. The digital economy and hyper-efficient future of work should, in theory, help unlock potential for everyone. But it is not. While more on-ramps increase prosperity, lower friction and enhance pathways to scaling, they are scantly and sporadically reachable.
I have witnessed this with career chapters that include being an investor, board member, entrepreneur, ex policymaker, Fortune 500 line executive and currently as a venture capitalist at Fenway Summer backing entrepreneurs innovating at the intersection of finance and technology. It has been a great ride so far but this multi-lensed view has led me to a sad realization. While change has been relentless and on the whole, positive, many of the challenges underserved populations face, including Latino-owned businesses, remain the same as when I started my career.
In February 2016, I took a second look at a paper Angel Morales and I wrote at the turn of the century. We explored the dearth of venture-backed Latino-owned businesses as a final paper for a graduate school class. Our professor, the inimitable Josh Lerner, liked the paper and encouraged us to submit it to the Journal of Private Equity. The paper was published, much to our surprise, and the editor gave it a lengthy title: “Hispanic-American Venture Capital: Financing the Growth of the Latino Market”. It was written long ago but what was happening in the economy mostly fueled by the internet/dotcom boom is not unlike to what’s going down today, with some notable differences.
The promise of technology driven prosperity was, and continues to be, bright and exciting. But when we dug a bit beneath the surface, what we saw was that within underserved markets, a massive capital formation gap existed not dissimilar to its looming presence today. This capital formation gap is arguably one of the biggest roadblocks preventing Latino-owned businesses from scaling.
While there are differences between the dynamics of what was happening in the late 90’s vs. today, what stands out to me are the parallels across several dimensions of the entrepreneurial economy and its investment cycle. The piece we published almost two decades ago points to the fact that almost nothing has changed. Specifically, the root causes haven't changed. Those include things like lags in wealth creation, comparative lack of buying power, educational access difficulties, thin professional networks, political underrepresentation and the blind spots of traditional credit and lending. These issues, it shall be said again, apply to every underserved groups and I worked on them firsthand during my stint as a senior official and policymaker in President Obama’s administration.
Below are passages from the “oldie but goodie” article from almost two decades ago:
ONE
“The solution lies in increased access to capital, particularly equity funding. Capital access is a prerequisite for increased participation in the mainstream economy. To sustain growth, Latino companies need greater access to supplies of capital at all critical stages of business development, including equity and seed capital. Difficulty accessing traditional debt financing, and the relative lack of personal/family wealth in the Latino community (which often serves as a measure of either explicit or implicit collateral for a loan), exacerbates the problem. Without dependable pools of equity capital to fund Latino firms in their early stages, the majority of these firms will continue to conduct business as ‘mom-and-pop’ operations. Like their ‘mainstream’ counterparts, Latino firms will need to access venture funds to finance expansion and to tap into the expertise and the relationships that often come packaged with venture capital.”
TWO
“Had many of today’s largest U.S. companies not been able to access the “right” pool of early-stage equity capital decades ago, some of them probably would not exist today, and many might not have achieved their present success. Venture funds often serve not only as the best source of financing available to new businesses because of the business expertise and contacts provided—but often as the only source of financing, as debt financing (until, perhaps, very recently) has been largely unavailable to early-stage companies. The key to catalyzing Latino businesses’ growth that will allow them to approach parity with other American businesses lies in venture capital.”
THREE
“Though the U.S. capital markets are as efficient as they come, often times fundamental changes in the way an industry conducts its business—whether it be the commercialization of a new technology or addressing a previously ignored market—can take many years to evolve. An appreciation of the Hispanic opportunity, and ultimately an enhanced degree of financing for its early-stage ventures, would represent a fundamental change in the U.S. private equity industry currently suffering from the ‘chicken-and-egg’ problem that so many movements endure before capturing critical mass. In order for financiers to provide dedicated capital to Latino firms, it must be demonstrated that the Latino market offers a sufficient number of profitable opportunities to justify dedicating such capital. Yet the primary hindrance to new Hispanic firms is the lack of capital. Clearly, the availability of dedicated capital and the existence of promising firms must coexist in the same entity—a condition that would, in essence, describe a ‘Latino incubator’.”
FOUR
“Despite much of the cynicism about incubators, proponents and detractors agree that entrepreneurs can only benefit from all the new incubation resources flooding the market. The most frequently cited advantage of incubators is that they allow entrepreneurs to ramp up their companies very quickly—an imperative for first-mover advantage in today’s super-competitive market. Not only do incubators eliminate the need to look for office space, equipment, and Internet services, but they also foster an environment that encourages the exchange of ideas. Another major benefit, particularly for entrepreneurs at VC-backed incubators, is a tight connection with their patrons. This supports and speeds them through rough patches, and speed is the operative word. The amount of time one can spend to seize a business opportunity has been drastically shortened—from two years down to just six months. The most significant advantage of incubators isn’t the services they offer but the fact that they actually work… It may give you the spit shine you need—plus a personal introduction— to find venture backing.”
FIVE
“For historical socioeconomic reasons, including a lack of access to relevant business networks, the early-stage “development gap” among Hispanic firms will have to be met by entities structured more like incubators than traditional private equity firms. If they are to demonstrate the explosive growth of their mainstream American counterparts, Latino firms will require truly active early-stage investors—not passive check writers with a commitment to attend board meetings once a quarter. In many critical respects, Latino owners and managers will resemble the management teams of today’s Internet firms. The entrepreneur of the 1990s embodied youth, intelligent and creative ideas, and non-traditional perspectives. But these characteristics alone did not create success. It was the harnessing of these ephemeral qualities by the right people and the right institutions, to create competent managers and viable business models, that produced the Internet revolution in the second half of the decade.”
SIX
“Furthermore… Latinos have not prospered economically to the same degree as has mainstream American society. For this and other related reasons, [Hispanic-owned businesses] will continue to be smaller in scale and scope than other U.S. start-ups, and Latino entrepreneurs will continue to suffer from inferior access to the relevant business networks…”
Broken record stuck on a great guitar riff, but stuck nonetheless
Given the breakneck speed of change and innovation, one would want things to scale faster and more inclusively in the next two decades compared to the last two. Our country’s undisputed but continually challenged global economic dominance is fueled by the innovation capabilities of our small businesses - and we want them all out on the field taking swings, stealing bases, trading players... you get the picture.
The turn of the century passages above are a blast from the past and simultaneously, back to the future. This slow changing landscape has arguably helped further concentrate wealth, push talent to the sidelines, and driven capital under investment. The good news is that there is a lot of opportunity to improve and I hope that the group being convened in early June deep in the mountains of Colorado finds some lynchpins that help break the logjam.
Most important of all today is Memorial Day and without the selfless valor of those who have fought and died for our way of life, all of this would be for naught.