Minority-owned ventures, despite barriers to capital, deliver superior ROI

Bill Bradford

Does discrimination exist in financial markets?

It’s too big a question to be answered with a single study. But new research by William Bradford, the Business and Economic Development Endowed Professor of Finance at the University of Washington Foster School of Business, points to an irrational racial bias at work in the equity capital markets.

For the study, Bradford collaborated with Timothy Bates of Wayne State University and William Jackson of the University of Alabama. Their work confirms prior findings on unequal access to capital—specifically that minority-owned businesses have a harder time raising venture capital financing than their white-owned counterparts, reducing their negotiating power and forcing them to sell equity for less.

Despite being underfinanced, these minority-owned firms are overperforming.

In three empirical studies of the portfolios of minority-oriented VC funds that invested in both minority- and white-owned firms, Bradford and his co-authors find that firms owned by minorities perform better and are more profitable, on average, than firms with white owners. And minority-owned businesses tend to deliver a greater return on investment.

“Our results are consistent with but do not prove racial bias in VC markets,” says Bradford, who also serves as faculty director of Foster’s Consulting and Business Development Center. “Bias against financing minority businesses by mainstream VC firms creates a profitable niche. The disparate treatment of minority clients does not result in the loss of profitable opportunities for minority-oriented VC funds but, instead, higher profits.”

“Are minority-owned businesses underserved by financial markets? Evidence from the private-equity industry” was published in the March 2018 issue of Small Business Economics.