Bloomberg Línea — Despite the fact that the Latino population reaches 19% in the United States, this community represents only 2% of the total number of professionals in venture capital and 3% in private equity funds as partners in institutional VC firms, according to the Latinx VC 2022 annual report.
While this shortage of Latinos is something that is seen from year to year, the report indicates a slight improvement in the representation of Latinos and Latinas non-partner professionals in institutional funds, as these executives represented 1% in 2021.
On the other hand, Latino professionals at the partner level in institutional funds represented 2% in the previous year.
Yet, the figure is concerning when considering that 77% of institutional private equity firms have no Latino professionals. Meanwhile, 3% of institutional private equity firms have more than two Latino investment professionals.
Distribution
Forty-six percent of Latino professionals work in emerging venture capital funds, or funds of less than $100 million, and 48% in smaller venture capital funds.
Growth in non-partner hiring at larger funds and an increase in the number of Latinas working at VC funds drove these numbers lower than in 2021.
In terms of gender, 63% of all Latino male investors are partners or managing directors, compared to 42% of Latino women. However, it seems that the likelihood of reaching partner level decreases as the size of the fund increases.
In conclusion, reveals the report, the number of Latino investors increased from 145 to 197 between 2021 and 2022. In particular, there has been an increase in funds of more than $100 million, from 60 to 107 total investors. The report indicates that part of this increase is due to the identification of Latino investment professionals previously non identified by the LatinxVC network.
“There are 50 Latino partners in funds of more than $100 million, and 27 of those 50 partners came from an operating background before joining venture funds in a senior position,” the report said.
Some reasons
The allocation of capital to Latino entrepreneurs and investors has remained stagnant. In fact, Latino-led startups received only 1% of investments made by the top 25 venture capital firms between 2007-2017.
According to the report, research has shown that private equity markets are homophilous. That is, despite the dynamic nature of private equity, the industry has traditionally been led by homogenous groups that are not representative of the diversity in the US.
This phenomenon is referred to as “birds of a feather.” “Researchers argue that venture capitalists prefer to hire, invest or co-invest with those who are similar to them in characteristics such as gender and ethnicity,” the authors of the report said. “This type of hiring practice perpetuates the cycle of Latino underrepresentation.”
Little is known regarding the benefits of diversity in venture capital, but researchers have pointed to positive effects on ethnic matching in the U.S. venture capital market.
In 2015, they found that a shared ethnicity between founder and VC increased the likelihood of investment match by 21% incrementally. In addition, the report indicated that co-ethnicity between the parties (founder/VC) leads to an average funding of $3 million and more favorable deals for entrepreneurs.