Investing in Broadband in Emerging Domestic Markets is Key to Economic Recovery
Limited capital is among, if not, the number one reason minority and women-owned start ups fail.
Rather than running away from business owners in this market, investors should be running to them especially if they consider the fact that these businesses are part of emerging domestic markets which studies conclude are key to the economy’s recovery. These markets include the rapidly diverse population of people in the United State that have become more educated and have their increased purchasing power as compared to previous generations. The emerging domestic markets have also been defined to reference business enterprises with growth potential that face capital constraints due to systemic undervaluation as a result of imperfect market information. Ethnic- and women-owned firms, urban and rural communities, companies that serve low-to-moderate-income populations, and other small- and medium-sized businesses make up the bulk of companies in these markets.
The National Association of Investment Companies shared this about these markets on a fact sheet on its website:
- In the last 10 years, there has been a renewed interest by institutional investors in identifying businesses and real estate opportunities in emerging domestic markets. This growth in investor interest is driven, in part, by the recognition that changing demographics in the United States has resulted in a significant increase in minority purchasing power and business development by minority owned firms.
- Over the next 40 years, 85% of the U.S. population growth will come from non-white ethnic groups.
- The current size of the United States Hispanic and African-American consumer market is larger than the GDP of all but nine countries in the world.
- The Internal Revenue Service predicts that Latinos will soon own 1-in-10 businesses. Overall growth rates in the number of minority-owned businesses are 3-to-4 times higher than for white-owned businesses.
- Minority firms’ sales are growing 34% per year—more than twice the rate of all other firms.
- Small businesses provide approximately 75% of net new jobs in the nation. In California, small businesses comprise over 98% of all businesses and businesses with less than five employees make up over 88% of all businesses in the state.
- Woman-owned firms, particularly among ethnic women, increased at a rate 5 times greater than all firms. The rate of African-American women owned firms increased by 12% annually, as compared to 2% for all firms and just under 4% for all woman-owned firms.
These numbers can have an amplifier effect in the broadband and tech industries given statistics stating that minorities are among the fastest growing users of broadband. This data can also translate to mean that companies that target companies delivering broadband services and products to emerging domestic markets stand to grow exponentially faster and may possibly have a higher success rates than those that may not invest in this market.
And it is not just an assumption I made up. This position is supported by a study that NAIC released last year that is worthy of reviewing which concludes, in sum, that investing in these markets will be essential for the recovery of the US economy. An earlier report found that private equity firms targeting the Emerging Domestic Markets have been shown to be highly profitable. “Minorities and Venture Capital: A New Wave In American Business,” a 2003 study conducted by Tim Bates and William Bradford, summarized the analysis of returns of venture capital firms investing exclusively in minority-owned businesses between 1989 and 1995. The mean and median internal rates of return (23.9 percent and 19.5 percent respectively) supported the author’s findings that “minority enterprise venture capital investing is very profitable.”
Notwithstanding all the evidence and support for investing in these markets, investors remain hesitant. It should come as no surprise then that some who live and work in emerging markets or make up the demographic of those markets are not sitting around waiting for majority owned banks and funds to come to their rescue.
My next post will look into minority-owned and run investment clubs that are stepping up to the challenge by providing seed, private and mezzanine capital to this market.
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