Minority and Women Entrepreneurs and Barriers to Securing R&D Funding for High-Tech Ventures

Photo of business people meeting at a table

Guest post by Amol M. Joshi, Oregon State University 

 

There is an ongoing but unresolved debate that has been rapidly heating up over the last several years. The central question in this debate is: How do we help minority and women entrepreneurs overcome barriers to securing R&D funding — the lifeblood of new high-tech ventures? On one side of the debate, a number of observers believe that the fundamental problem is supply or simply a lack of a critical mass of minority and women participants in science, technology, engineering and math (STEM) fields. On the other side of debate, many people believe that the problem is demand or basically a lack of interest among funding providers in making investments and supporting ventures led by minority and women entrepreneurs. There is some evidence supporting both sides of the debate.

For example, on the demand side, critics of the venture capital (VC) industry decry the fact that minorities and women are rarely represented in the ranks of managing partners and key decision-makers who screen and invest in promising new technology ventures. According to a 2016 survey by the National Venture Capital Association, women and minorities comprise only 11% and 22%, respectively, of investment partners at U.S. VC firms.

These critics argue that the lack of diversity among investors leads to cognitive biases and/or blind spots in fairly evaluating and valuing ventures led by minority and women entrepreneurs. As a result, many high potential ventures are unable to create and commercialize new technologies due to a lack of funding. In 2016, my co-authors (Todd Inouye and Jeffrey Robinson) and I began a research project to explore the demand side question of barriers to R&D funding in a new way. We recognized that outside of VC funds, the major sources of seed stage funding in the U.S. are the Federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs. After engaging in a number of discussions with government leaders in the U.S. Minority Business Development Agency (MBDA) as part of the National Town Hall on Inclusive Innovation we started to wonder: How does agency workforce diversity influence Federal R&D funding of minority and women technology entrepreneurs? In other words, if the problem in obtaining VC funding was the lack of sufficient representation of minorities and women as decision-makers, might the same problem also be occurring in the Federal government across the various agencies participating in the SBIR and STTR programs and awarding R&D grants?

We decided to explore how the demographic diversity of grantor agencies affected the odds for demographically diverse grantees to successfully transition from initial (Phase I) to follow-on (Phase II) Federal R&D grants. We analyzed 52,126 Phase I SBIR/STTR awards granted by 11 Federal agencies (2001–2011). We hypothesized that “if an agency employs a more diverse workforce, this may drive more outreach to minority and women technology entrepreneurs. There may also be more accessibility, approachability, and visibility in the initial grant applicant recruitment process and during the subsequent, but equally critical period of technical assistance.” (Joshi, Inouye, and Robinson, 2017)

As described in the excerpt below, “Our most relevant and impactful finding for policymakers is that the general level of diversity (racial, ethnic, and gender) within grantor agencies exhibits a consistently positive and highly significant relationship with the likelihood of successful transition from Phase I to Phase II for all grantee firms. This means that all else being equal, Phase I awardees are more likely to obtain follow-on Phase II funding if the granting agency is more diverse. Phase II funding is critical because it bridges the private R&D funding gap between proof-of-concept and commercialization. If policymakers aim to achieve higher commercialization rates and thereby strengthen the national system of innovation, a heretofore overlooked lever might be unpacking how Federal agency workforce diversity may be enhanced going forward.” (Joshi, Inouye, and Robinson, 2017)

We also find that “Funds from SBIR and STTR tend to have a disproportionately larger impact on minority-owned and women-owned small businesses than other types of firms. This implies that sustained funding of SBIR and STTR programs is vital for supporting minority and women technology entrepreneurs, who may have limited access to alternative means of financing their technology ventures and commercializing their innovations.” (Joshi, Inouye, and Robinson, 2017)

We are now extending our original study further by investigating how R&D grants and access to credit affects U.S. small to medium-sized enterprises (SMEs) in their global export activities. Our preliminary findings indicate the minority and women entrepreneurs also encounter significant barriers to exporting their products around the world. We look forward to sharing the results of this follow-on study with you in the near future.

We thank Michael Verchot and the team at the UW Consulting and Business Development Center for organizing two special conferences on Minority Entrepreneurship in 2016, where we presented earlier versions of this research and obtained valuable feedback from conference participants. This study was funded in part by the Kauffman Foundation and the Rutgers Center for Urban Entrepreneurship & Economic Development.