By Skoden Ventures, via Medium
April 27, 2023
It’s not hard to find the sky falling. Whether it’s the collapse of Silicon Valley Bank or the gloom bells of recession, doom and worry seems to be the tone of current economic news. The United Nations says we’re in a “code red” moment for humanity, and gross domestic product (GDP) growth continues to shrink across the globe.
Publically, we put on a brave face and extol innovation, but privately we express bewilderment at how the economy could stall for so long and work so poorly for so many. The language heightens, the despair grows, and investors fall back on old habits, debunked biases, and outdated misperceptions.
And what do they miss? A burgeoning $10 trillion opportunity.
The next great leap in global prosperity and productivity is being led by historically undercapitalized talent and supported by the trends driving the future of consumer demand. All over the world, Indigenous, Black, Brown, and women entrepreneurs are building a genuine economic course correction.
Fortunately for humanity, tomorrow’s entrepreneurial leaders are driven primarily by their principles and their determination to build a sustainable and equitable economy for all. Even better: they share these principles with the next generation of consumers, who already hold the majority of global spending power.
Who hasn’t seen this coming? The old guard of venture capitalists. Who is stimulating this new economy and already getting a healthy return in the bargain? A quiet tide of impact investors who’ve seen what other investors are missing.
Since 2012, $10 trillion of potential wealth from BIPOC-led businesses has been lost because venture capital has overwhelmingly skewed toward companies led by white men.
That’s an astounding figure, and it makes resoundingly clear that profit and equality are not incompatible. But for years venture capitalism has failed to course correct. They’re not familiar with the markets of BIPOC-led businesses, they don’t review pitches proportionately, and they overestimate the risk of these businesses.
The facts, however, don’t point to risk. They point to success:
- Over the last decade, the number of new BIPOC-led businesses was 10 times the overall growth rate for small businesses.
- Since 1997, BIPOC-led firms have realized returns in the top quartile of the private equity market 7 out of every 10 years.
- BIPOC-led companies have outpaced non-BIPOC businesses in growth of paid employees by 27%.
- BIPOC-led companies are twice as likely to export.
- According to McKinsey & Company, 40% of BIPOC-led small businesses “added new services to support their communities and employees” during COVID-19. Non BIPOC-led companies? Only 27%.
- Companies founded by women deliver twice the revenue per dollar invested as companies founded by men.
- If VCs invested in women at the same rate they invest in men, a report by the Boston Consulting Group suggests this could boost the global economy by 3 percent to 6 percent — up to $5 trillion dollars.
We’ve seen that the future agrees with these powerful numbers, and we’ve invested in that future with proven success for a decade. Yet we look around and don’t see other investors catching up. This is a reality that, up to this point, has hampered the potential of BIPOC-led founders. But these systematic barriers are no match for the future of consumption and production. And investors stuck behind old gates will see those gates crumble, and if they don’t come outside soon enough, they will miss what has grown beyond them.
WHAT GOT US HERE AND HOW WE GET OUT
First, how have we arrived in this moment? Outdated devotion to models of growth-at-all-costs has driven us to a precariousness we see in every avenue of global life, from COVID, to China’s declining population, to the war in Ukraine. How can an economy grow if there is no healthy society or planet where that growth can take place? This is where the old models have rutted us. But stuck is not the same as doomed. We are not doomed because the population being handed this moment is rising to meet it.
By 2026, the largest generation in the US will be Gen Z, those born between 1997 and 2012. They’ve been raised — along with their Millennial older siblings — on information overload and hustle culture, and they are determined to reshape what it means to lead a successful and happy life. Faced with a 24/7 onslaught of bad news, they are rejecting the chaos of the past for a calmer, more determined future that is principle-driven and sustainable.
They want what Entreprenuer.com calls “job placement for neighbors and a cycle of money that stays in the local economy.” This means generational wealth, not in the sense of a mansion on the hill that stays, crumbling, in one family for years. Rather, the new definition of generational wealth is an interconnected community with deep roots and the rich social interactions that are proven to lead to more long-term happiness.
And they’re announcing these principles with their dollars, which are quickly growing to dominate the economy. In 2022, Business Insider calculated that Gen Z spending power has doubled in the last 3 years — an impressive figure factoring in the challenges of the pandemic and social unrest. Together, Millennial and Gen Z consumers — the most diverse generations in history — command $2 trillion in spending power.
What are they spending it on? They’re spending it on authenticity and sustainability. They are savvy, frugal, and unafraid to insist on their beliefs:
- Nearly a quarter of Gen Z consumers report boycotting a brand.
- A whopping 94% believe that companies have the responsibility to make the world a better place.
- Gen Z consumers drive growth in creative sectors because 73% need “more self-expression to lead a happy, healthy life.”
- And they listen to each other, not faceless brands, with 65% reporting that they make buying decisions based on social media influencers and online discourse.
These attitudes about consumption extend to Gen Z’s mindset on investment. In 2021, Bloomberg, TARA, and GAIN hosted a “global virtual exchange” called “Next-Gen Connect: 2021 and the Future of Investing,” which polled 600 students from 48 high-powered universities and discovered 45% think the most important goal of investing is ensuring “a better tomorrow,” and 40% said the main thing they looked for in investment opportunities was “companies with a purpose.”
A whopping 94% of Gen Z believes that companies have the responsibility to make the world a better place.
And it extends to Gen Z founders as well. Gen Z entrepreneurs are fiercely mission-driven, with a staggering 96% saying they would turn down VC funders who didn’t align with their principles. This is a generation that sees itself as the last chance for humanity and is acting accordingly. Nearly half want to start their own business, and since COVID began, the number of Gen Z entrepreneurs who consider themselves “authentic activists” rose from 16% to 22%.
What’s clear is this: the future of value is a future of values.
We have seen this future first hand because we have been early investors in the exact kinds of companies that reflect these principles.
Skoden is Native American youth slang for “Let’s go then!” And we believe it’s the ideal word to reflect the confident and communal vision we share with the founders we’ve invested in.
If there is impatience there too, it’s because we’ve already seen what these value-driven, BIPOC and women creative entrepreneurs can do, and we’re ready for the rest of the investment community to catch up.
We’ve been embedded in the communities of consumers and entrepreneurs we’re discussing for a decade. Entrepreneurs love working with us because we understand them and share their principles. And investors we’ve connected with these entrepreneurs have seen the fruits of their success. Companies we have accelerated and been early investors in — like Meow Wolf and Embodied Labs — have seen over $200 million in annual revenues and have raised over $315 million to explode into $467 million (and rising) in value. The kicker? 54% of these founders have been women, and 52% are BIPOC.
These companies do not fall into the trap of separating profit from principles. Their profits are driven by their uncompromising commitment to their principles. That’s what tomorrow’s consumers want to see. That’s what they want to spend their money on. And that’s why we’ve already proven our success as investors.
These founders traffic in the industries that are growing because they are the industries where Gen Z is satiating its hunger for authenticity: entertainment, food, fashion, wellness, art & design, and educational technology. Gen Z consumers want to lead meaningful lives, connecting to their identities and cultures, curious about learning the best ways to live together, and embracing self-care and comfort as an antidote to the burnout they see in the previous generations that relied on resource exploitation to pursue more for more’s sake.
Hence the 7.4% growth in the culturally-specific foods, the 11.5% growth in arts and entertainment spending, and the fact that 85% of luxury sales are driven by Millenials and Gen Z. These consumers are living to learn — with the ed tech market estimated to be at $210 billion by 2026 — and learning to live, with the wellness market rising to a $450 billion behemoth.
LEAVING THE OLD WAVE BEHIND
But is the old wave of investors seeing these trends? If they are, they are whiffing on these opportunities. In 2021, venture capital investment in women-founded startups shrank to 2%, the lowest since 2016. BIPOC entrepreneurs also struggle to get their foot in the door: 2019 data from the Federal Reserve suggested BIPOC founders receive at least part of the funding they seek only 66% of the time, compared to 80% for white-led startups.
Why is venture capital specifically so important? It is the lifeblood of real growth. Since 1974, 42% percent of all US company IPOs were venture capital-backed. And a whopping 63% of all market value created by public companies in the last half century has been stimulated by venture capital. Venture capital steers the biggest boats of the economy, but they’ve been missing the biggest potential waves.
What are these investors missing? They are missing a sea change in the expanding buying power of communities previously relegated to a “minority” status but on track by 2045 to represent the majority of the US population. BIPOC buying power is increasing by $120 million annually, a growth of remarkable resilience when we consider that BIPOC communities have faced historic oppression and been disproportionately affected by pandemic and recession hardships.
Venture capital steers the biggest boats of the economy, but they’ve been missing the biggest potential waves.
And why are investors whiffing? Cultural biases lead them to believe both that BIPOC and women-led startups are riskier, but this simply isn’t true. Morgan Stanely reports that “when multicultural entrepreneurs receive angel capital, their returns consistently match the market yield rate, while women-owned firms yield returns that lead the market by 2%.” That lack of angel capital doesn’t hurt only businesses: missing out on those potential returns hurts investors.
Investment that smartly anticipates this inevitable shift could significantly impact not only those investors’ bottom lines but the economy as a whole. Bay Street Capital Holdings, citing a report from Mckinsey & Company, reported that “closing the Black–White and Hispanic–White racial wealth gaps would boost consumption and investment within the U.S. economy by an additional $2–3 trillion.” That’s a powerful figure — double the contribution, for example, of the entire agriculture and food sector to the US GDP. In those trillions left on the table, significant potential ROI is lost, evaporating in the fear and bias of antiquated beliefs about who a successful entrepreneur is “supposed” to look like.
LET’S GO THEN
Given our experience growing undercapitalized ventures, our unique deal flow, our ability to accelerate entrepreneurial talent, and our proven growth platform for pre-seed companies, Skoden Ventures is ideally positioned to attract and invest in emerging BIPOC entrepreneurs. These investments will capture financial returns and generate positive cultural, social, human, and ecological impacts.
We share the mindset of tomorrow’s consumers that creativity is essential across every industry, and that’s why we anticipated the growth we’ve been seeing in the education, media, fashion, and food industries.
And we’ve established deep relationships with the entrepreneurs leading this growth. That means Indigenous, Black, Brown, and women entrepreneurs, building businesses in these growing sectors that delight and inspire customers with stories, services, and products that reflect and reinvigorate diverse cultures, people, and places.
Charly Kleissner, co-founder of Toniic, describes our present moment as a split into two roads. The first road, as Kleissner describes it, is one of pretending that we don’t need to change, a road that “cements existing power structures” and suffers the inevitable erosion of cement, leading to predictable “environmental and societal collapse.” Meanwhile, the second road “allows for the emergence of a regenerative financial and economic system serving humanity and the planet.”
This emergence is already underway, with the tidal shift in the values and passions of tomorrow’s consumers and the radical ways their desires for a more integrated, community-driven, and ecologically sustainable lifestyle will shift the global economy.
There will be no way to cling to wealth generated in a bygone world. Tomorrow’s success belongs to those who will live there, those who have already demonstrated the capacity to solve massive social and ecological problems by changing the way they consume and root their lives.
If you want to be part of that future’s wealth, the hand wringing needs to stop. Get onboard the $10 trillion dollar ship of change. Talk to funders who already speak the language of Gen Z founders and consumers, who have already done the work to establish the networks of trust that will be essential to tomorrow’s high-powered growth. Investors who linger in the code red moment will miss the code green solution.
In today’s economy, the safe bet is not yesterday’s biases. The safe bet is an investment in the BIPOC and women entrepreneurs who are determined to see their communities thrive, who are not banking on a past that never included them but are steering for a future where we all prosper.
Skoden Ventures invests in Indigenous, Black, Brown, and women founders building growth companies in entertainment, experiential tech, creative products, and services.
Find out more about our mission as well as how to pitch for investment at skodenventures.com. Have questions? Email us at email@example.com