May 2013 No. 407
William E. Jackson III and Timothy Bates  pages.
Under contract number SBAHQ-10-M-0257.
The number of minority-oriented equity capital
funds grew significantly during the period of the
1990s. Early financial performance was positive,
but more recently, these funds have invested in fewer
minority-owned businesses and have increased their
non-minority-owned high-tech investments. To better
inform these equity capital funds and public support
for these funds, research is needed to evaluate these
Minority-owned businesses have been smaller on
average than non-minority-owned businesses. In this
study minority ownership refers to firms predominantly
owned by African Americans, Latinos, and
Asian Americans. Studies and data have consistently
shown that minority-owned businesses have also had
less financing than non-minority-owned firms—a
possible cause for their smaller size. Minority-
oriented equity companies were created in an effort
to increase capital for this underserved market.
Minority-oriented equity companies grew in numbers
over the last few decades. Like all equity companies,
their financial performance was affected by the
growth of the technology run-up in the 1990s and the
subsequent bursting of the bubble in 2000.
Controlling for factors such as the industry of the
businesses in which the funds invested and the bursting
of the capital bubble in 2000, the researchers
found that investing in minority-owned businesses
increased returns for minority-oriented equity capital
funds. The fact that investments in minority-owned
businesses netted large returns indicated that this was
an underserved market.
The models also found that the newer funds and
funds that were active in the management of the
firms had higher returns. Investing in high-technology
companies and participating in syndicated investments
tended to lower returns. It is not clear if syndicated
investment returns were lower because they
tended to be riskier and larger than other investments
or because the venture capital funds tended to look
for partners on investments they believed would not
perform as well as their other investments.
The research also uncovered evidence that minority-
oriented equity capital funds that funded a larger
share of minority-owned businesses were less likely
to be active in the management of these businesses.
Overall, minority-oriented equity capital funds
that used a “follower” strategy—for example, funding
syndicated investments, non-minority-owned
businesses, and high-tech firms—tended to have
It is not clear if the results from the research are
skewed from the massive run-up in venture capital
funds in the 1990s and the very slow recovery of the
market after the bursting of the bubble in early 2000.
The findings suggest that effective support for minority-
oriented equity capital would require steering
funds toward newer ventures, encouraging involvement
in the management of the investments, and limiting
these funds’ investments in non-minority-owned
Scope and Methodology
In 2001, 24 of 38 members of the National
Association of Investment Companies responded to
a survey about their funds’ traits and investments.
Follow-ups were conducted in 2004 and 2007. From
these minority-oriented VCs, about 300 investments
were tracked to the year 2006.
This report was peer-reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting
the director of economic research at advocacy@sba.
gov or (202) 205-6533.
This report is available on the Office of Advocacy’s
website at www.sba.gov/advocacy/7540. To receive
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This document is a summary of the report identified above,
developed under contract for the Small Business Administration,
Office of Advocacy. As stated in the report, the final conclusions of
the full report do not necessarily reflect the views of the Office of
Advocacy. This summary may contain additional information, analysis,
and policy recommendations from the Office of Advocacy.