Redesigning Corporate DEI Initiatives
By Daniel Begovich, Jorge Nam, and Tomás Pfeffer
Executive Summary
The capital commitments made by leading corporations toward DEI initiatives have been substantial and undoubtedly a step in the right direction, but there is more that can be done. The pervasive challenges faced by minority entrepreneurs are consequences of deeply-rooted structural barriers to access: access to financing, access to established networks and know-how, access to the ‘benefit of the doubt’ (and so on). As such, isolated solutions are limited. But this is not a zero-sum game. For DEI initiatives to become iteratively more effective and more regular, the incentives and feedback between key stakeholders (corporations, distributors of capital, and entrepreneurs) must be more aligned.
Our Solution
The usual formula currently is for a corporation to allocate some headline-generating sum of money to a few specific companies, or to outside funds. The risk-return of such an allocation is not the primary concern for this corporation, and so there is already a limited incentive for this money to be distributed most effectively. Our proposed solution is a redesigned system that seeks to incentivize the distributors of these funds to be highly effective while benefiting from their privileged access to entrepreneurs who might exist outside the traditional visibility of established corporations.
We propose that a company creating this initiative (in this example Apple) give these funds to a vehicle made up of emerging minority managers. These emerging managers will be minority entrepreneurs that have exited their business endeavors or have successfully grown their business venture and have the desire, capacity, and plan for becoming fund managers. This financial backing better aligns incentives, as managers have an opportunity to create a proven track record. By empowering managers who have been in the position of current minority entrepreneurs, they may be the best fit to help identify eligible entrepreneurs in their communities and help them accordingly. Given that these emerging minority managers have had the experience of scaling their businesses, they can provide mentorship, education, guidance, and a network on top of the funding.
As the fund matures and entrepreneurs grow their businesses, each stakeholder benefits from compounding upside within this ecosystem. Apple now has the chance to expand its procurement network further, gain the opportunity to potentially partner with innovative ventures, earn a return on its investment, and provide contract or fulfillment opportunities for these ventures. Minority entrepreneurs who were previously ignored since they lacked the appropriate credentials now have Apple’s support and manager mentorship. This opens up the door to opportunities to work with banks like SVB, which could provide minority entrepreneurs with invaluable financial planning both personally and for their businesses. Emerging managers can leverage their track record and financial upside to attract continued investment from other sources (whether as part of DEI initiatives or not) in subsequent funds.
On May 25th, 2022 the Redesigning Finance students presented their work to a panel of in-person and virtual panel of experts working within Apple, Silicon Valley Bank, and entrepreneurs in various industries.
