The impact of institutional sources of capital upon the minority-oriented venture capital industry

Abstract

Venture capital (VC) funds specializing in investing equity capital in minority-owned businesses have grown rapidly over the past decade, fueled by the willingness of major institutional investors to support this traditionally neglected niche. We investigate impacts of public pension funds upon the minority VC sector. These funds, providing over half of all capital invested in minority VCs, selectively invest, seeking to fund only those VCs likely to generate high returns. Although they attempt to pick the winners, our findings indicate that they have failed to do so. The influence of public pension funds upon the minority VCs is nonetheless real, skewing investing away from traditional practices and toward those of the venture capital mainstream. In the process, minority VCs funded by pension fund money invest in high-tech fields more than other minority-oriented VC funds do. Further, they are less likely to fund minority-owned small firms, focusing increasingly upon firms owned by nonminority Whites. Neither of these trends has resulted in increased returns. Rather, diverting minority-oriented VCs away from their traditional mission of investing in minority firms operating in a broad range of industries has resulted in lower returns over the years studied.