BOSTON – October 4, 2021 – New research from Bain & Company, conducted in collaboration with the Stanford Latino Entrepreneurship Initiative at Stanford Graduate School of Business and the Latino Donor Collaborative, shows that Latino-owned businesses in the US offer some of the highest potential, yet most overlooked, opportunities for investors.
“The economic output of US Latinos is now more than $2.7 trillion, making it the seventh largest economy in the world, tied with France” said Hernan Saenz, the leader of Bain & Company’s global Performance Improvement practice. “Latino entrepreneurs have the capacity and capability to drive massive growth for the US economy, but they need the funds to do it. Our research suggests that the traditional supply chain of capital is broken for Latino-owned businesses. Although Latinos are contributing ever increasing amounts of capital to our financial system, the funds are not flowing back to scale Latino-owned businesses. It’s up to investors to lead the way in closing this gap.”
Latino entrepreneurs are responsible for about 50% of net new small business growth in the US over the past decade, according to data from 2007 to 2017, and they are growing in annual revenue faster than white-owned businesses. However, Latino-owned businesses have received just 1% of all investments from the top 25 venture capital and private equity firms over the past decade. And in 2020, Latino-owned businesses made up less than 1% of the $487 billion invested across a sample of the top 500 largest venture capital and private equity deals.
“While Latino-owned businesses tend to grow at a faster clip than white-owned businesses when they are young, we see a critical slowdown at the $1 million revenue mark,” said Tevia Segovia, a partner in Bain & Company’s Financial Services practice. “Investors should take note of the Latino-owned businesses approaching this threshold and inject them with the affordable capital and equity investments they need to scale and unlock significant wealth creation.”
Bain & Company found that as Latino-owned businesses approach the $1 million revenue mark, they appear to start to struggle with profitability and cash flow, making it harder to scale and resulting in decelerated growth. However, there is significant reward for those that do manage to push through that barrier. The Latino-owned businesses that break through the $5 million revenue mark grow at a rate almost double that of white-owned businesses.
Equity investment can be the great enabler of growth for Latino-owned businesses. Latinos are funding an increasing share of the US economy. The pension funds they pay into are allocating increasing amounts to venture capital and private equity—growing alternative investments from 11% of allocations in 2006 to 26% of allocations in 2016. And although roughly 46% of private equity funds came from pension funds in 2020, these funds do not make their way back to Latino-owned businesses.
Unlike debt, equity investments do not require using immediate cash flow for repayments, so they cash can be directed toward growth. Yet Latino-owned businesses are not getting access to the equity investments they need, experiencing problems accessing funding at all stages. For example, less than 2% of deals in the seed, angel, early-stage and late-stage funding rounds go to Latino-owned businesses. When working with angel investors, they are nearly 30 percentage points less likely to have all their funding needs met. And because Latino-owned businesses are stunted by the high cost of growth capital, they are only about half as likely as their white counterparts to make a pitch to a private equity firm.
“It’s time to take action in bringing equity capital to the conversation—not words, but hard dollars,” said Sol Trujillo, chair and co-founder of the Latino Donor Collaborative. “This new research offers a much-needed, unassailable roadmap to get them started.”
Banks also have an important role to play to capture this opportunity. Over their entire life cycle, healthy Latino-owned businesses experience lower odds of being fully funded by national banks. And more mature Latino-owned businesses—those with greater than $1 million in revenue—are 16 percentage points less likely to be fully funded by national banks compared with their white-owned peers.
Banks can be a part of the solution by making it easier for Latino-owned businesses to be approved for loans with more equitable criteria, including renewed and clear credit assessment models. It will also be important to establish relay partnerships with community development financial institutions. Banks and community development financial institutions can provide wraparound services, including training, consulting and software support to help Latino-owned business. Finally, banks can explore and deploy equity investment vehicles to fund higher growth businesses.
A few key investors are leading the way. Camino Financial, Founders First, LiftFund, Palladium Equity, and other players focus their investments on Latino-owned businesses of all sizes. This group encompasses both debt and equity, as well as community development financial institutions and for-profit investors, all of whom see strong potential in Latino-owned businesses to realize returns and drive impact in parallel. But today’s efforts are not at the scale needed to match the growing role Latinos play in our economy. They need greater access to low-cost capital, particularly in the form of early equity investments, to give these businesses a fair shot at growth.
No single approach to this problem will work. Latino-owned businesses aren’t all the same. Size is the most important variable for understanding their capital needs, but across sizes, there are distinct needs, behaviors, and levels of awareness.
In collaboration with the Stanford Latino Entrepreneurship Initiative, Bain & Company has mapped out the current topography of Latino-owned businesses in the US to help financial institutions and other investors develop appropriate products and strategies—and raise awareness among Latino-owned businesses—to close the funding gap and finally unleash the full potential of Latino-owned business growth in the economy.
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