ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

Struggles of Entrepreneurs Based on Investors’ Perception

Oct
12

The first quarter of 2017 was closed with a total financing of $27 billion worldwide and the hot sectors in the world of Venture Capital (VC) have been fintech and technology. Despite the booming industry, VC has its own ups and downs.

 

Overlooking Entrepreneurs

Innovation has always been at the heart of the United States and the country has always encouraged entrepreneurship, yet, the ideas are often overlooked when it comes to immigrants and women in the sector.

Jerry Nemorin, the founder of LendStreet, is a fine example of that case. He initiated a company to support individuals who find it difficult to pay off their debt. He looks for people who are struggling with loan repayments, buy and consolidate their debt and refinance it at a fair rate of interest. Despite such a brilliant idea, he struggled with raising funds. According to him, investors recognize a defined pattern and the chances of funding the idea of a black person who is out to solve poor people’s problem are very low.

However, he is not alone. There are a large number of entrepreneurs with brilliant ideas who have been struggling with raising funds. Less than 1% investment in new startups goes to people of color, whereas, 10% investment goes to female entrepreneurs. Only 15% of the Unicorns that are making over $200 billion have made it to the real-world industries for day to day dealings.

 

Blind Spots – Another Cause Behind the Struggles

In an economy that promotes innovation, a lot of the best ideas are left out of the conversation due to blind spots.

  • Bias

Bias is the first blind spot that they face. Although, investors don’t do that intentionally, yet, it happens. Investors tend to invest in the ideas that come from people like them.

A study was conducted by the National Bureau of Economic Research in which it was identified that applications that read ‘Greg’ got more calls as compared to the résumés that had the word ‘Lakisha’. This is not surprising, because only 5 percent of the partners in VC firms are female, whereas, people of colors are significantly lesser than that, i.e., less than 1 percent. Hence, the distribution of funding is largely based on the decision makers who are investors in this case.

  • Availability Bias

This is another blind spot that comes in the way of funding the brilliant ideas. Investors tend to invest in the ideas that are closest to them, or the last good idea they heard, versus the best. Almost 80 percent of the money goes to the firms that are situated within 30 miles of the investors.

  • Two-way Thinking

Lastly, most investors have two-way thinking when it comes to funding the ideas. Many people believe that they should focus on making a profit from a business, regardless of whether it is good or bad for the society at large, while engaging in philanthropy and nonprofit activities for the benefit of the society without paying much heed to financial sustainability.

Jerry’s idea supports this ideology, i.e., making a profit from a business that helps people in paying off their loan.

 

Overcoming the Blind Spots

Although, these blind spots are deep-rooted, yet, people can overcome these obstacles if they make an intentional effort to welcome new ideas. Kapor Capital intentionally invested in LendStreet to support Jerry’s idea. As a result, an initial investment of $500,000 turned into a portfolio of 40 million dollars, which enabled Jerry to refinance the financial statements of thousands of families in the U.S.

 

These ideas are available in abundance, but investors have to look closely and more carefully to fund new startups based on the merit so as to reap substantial benefits.

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