According to a new study from Stanford University, in collaboration with the private investment firm Illumen Capital, venture capital funds managed by a person of color are judged more harshly by professional investors than their White counterparts with identical credentials. The findings also suggest that minority-owned venture capital firms actually face more bias when they are successful. Currently, fewer than 1.3 percent of the $69.1 trillion in global assets under the four major asset classes (mutual funds, hedge funds, real estate, and private equity) are managed by women and people of color.
“It’s not simply a pipeline problem,” said lead author Jennifer L. Eberhardt, the Morris M. Doyle Centennial Professor of Public Policy, professor of psychology, and faculty co-director of SPARQ at Stanford. “African Americans who are most qualified, those with the best track record, are getting blocked the most.”
For the study, the research team asked 180 asset allocators to evaluate four venture capital funds that were led by either Black or White men. The investors were presented with four one-page summaries of the funds’ credentials and performance history. There were two versions with a Black male managing partner leading either a stronger or a weaker team, and two versions with a White male managing partner leading either a stronger or weaker team. The investors were then asked to rate each firm’s overall performance, investment skills, competency, social fit, their expectations of how much the fund could raise, and how likely they were to take a meeting with the team and begin the investment process.
The results found that the investors rated the stronger White-male-led firm marginally higher than the stronger Black-male-led team. When a firm’s credentials were weaker, investors favored the Black-led, racially diverse team. However, the professional investors expressed that they were not likely to invest in either of the weaker teams.
Additionally, the researchers found that when the investors evaluated the White-led teams, they could easily distinguish between the stronger and weaker firms. However, when they were asked to rate the Black-led teams, they had a harder time distinguishing between the stronger and weaker firms.
“While it is important to work on populating the pipeline, we need to think about how to continue supporting diverse teams who have already established themselves as strong performers,” said Sarah Lyons-Padilla, a research scientist at Stanford’s SPARQ. “Our results suggest these teams may not receive as much consideration as their White-male-led counterparts.”
The researchers stress that when investors undervalue high-performing funds led by people of color or overvalue those led by White men, they may not realize that they are missing opportunities for higher financial returns.
“Investors should be knowledgeable about successful firms led by people of color,” said Hazel Rose Markus, the Davis-Brack Professor in the Behavioral Sciences at Stanford. “They can counter their biases by developing specific investment criteria and establishing a transparent process for making decisions.”