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Latino/a businesses are the fastest growing demographic in the US, Stanford finds

October 12, 2023
By: Conor Gowder

Latino- and Latina-owned businesses represent the fastest growing demographic in the U.S. business ecosystem, growing revenues and creating jobs for all Americans, according to the Stanford Graduate School of Business. The number of Latino/a-owned businesses grew by 34% from 2007 to 2019, while existing businesses grew at a median rate of 25% between 2019 and 2022. Even at these rapid rates, there is still room to grow. Estimates from McKinsey show the potential for Latino/a owners to generate an extra $2.3 trillion in economic benefits, given equal funding opportunities.[1]

Latino/a entrepreneurs and funding

A 2023 Stanford report revealed that although more than 10% of all Latino/a-owned businesses were in technology fields, they received less than 1% percent of all VC funding in 2021. A more current McKinsey report found Latino/a founders to have received a slightly higher 1.5% of all VC funding in 2022.

These numbers are even more lopsided when broken down by gender. Only 0.1% of VC funding went towards Black and Latina women founders, meaning that Latina women founders received under a tenth of a percent of VC funding.

Latino/a-owned businesses face significant obstacles to growth, including accessing capital and securing contracts from the government and private sector. Despite these impediments, the number of Latino/a-owned businesses grew by 34%, compared to a 7% decline in the number of white-owned businesses, from 2007 to 2019. Additionally, Latino/a-owned businesses grew at a median rate of 25% from 2019 to 2022, while white-owned businesses grew 9% over the same period. These figures come from the Stanford report mentioned above.

Where will these Latino/a entrepreneurs get the additional funding needed to generate these economic advantages?

The role and importance of Latino/a VC investment professionals

Latino/a entrepreneurs are at a disadvantage when it comes to fundraising. VCs are significantly more likely to invest in those of the same ethnicity; a 2020 SEC report shows a 21% higher likelihood. However, Latino/a VCs are rare; according to SomosVC’s 2022 annual report, Latino/a VC investors only make up 2% of the industry total despite comprising 19% of the U.S. population.  This represents 197 people, while in 2022, approximately 64 million Latino/as were living in the U.S.

Diverse investment teams would help alleviate the issues caused by a lack of Latino/a VCs. A diverse team is preferable because research has shown that the more similar the investment partners are, the worse their investments perform. A Harvard Business Review article cited that shared ethnicity between investment partners reduces their investment’s comparative success rate by over 26%.

 

Figure 1: Distribution of Latino/a VCs nationwide.

Of the small portion of institutional VC firms currently employing Latino/a investment professionals, many are concentrated in just four regions: the Bay Area, New York, Los Angeles, and Miami.

These locations also have some of the highest populations, concentrations of Latino/as in the nation. The Bay Area has a Hispanic or Latino/a population share of approximately 30%, New York has 19%, Los Angeles has 47%, and Miami has 69%. The U.S. is 19% Hispanic or Latino/a.

Latino/a investors, despite being few, are rapidly growing the assets they manage. At the time of SomosVC’s annual report publication, there was a 12-month increase of 3.6 times in assets under management. Additionally, from 2021 – 2022, the number of funds between $26 and $50 million nearly doubled, while the number of funds over $75 million more than doubled. SomosVC adds that larger fund sizes allow fund managers to gain access to a more extensive variety of capital sources.

 

[1] This estimated figure assumes Latino/a-owned business ownership matches their population share and business revenues match peers’. Estimated by McKinsey.

entrepreneurship, venture capital, funding