Venture-capital money can play a dual role in supporting minority-owned and women-owned entrepreneurial suppliers. Such equity funding removes the cash-flow problem of debt financing during initial growth stages when money is best reinvested in the company. But even more importantly, venture money brings managerial expertise, because venture investors typically take lead positions on the board of directors; in some cases, they become active advisors in the day-to-day management of the business. Unfortunately, fewer than 4 percent of private equity firms actively invest in minority-owned businesses, and, accordingly, venture money represents an insignificant source of capital for minority firms.
Wal-Mart has led the way among corporations to address this capital gap. In 2005 it formed a $25 million private equity fund specifically to invest in helping build the businesses of diverse suppliers. Targeting nine women-owned or minority-owned businesses, the fund has a five-year life. At the time of its inception, Jay Fitzsimmons, then Wal-Mart’s treasurer and senior vice president of finance, explained the rationale: “Even though small businesses are one of the fastest-growing sectors of the economy, access to capital remains a key barrier to growth for women- and minority-owned businesses. By creating this fund, we help fill a significant void and can have a positive impact on those businesses that are ready and able to move to that next level of national and international distribution for retailers.”
Creating a de novo investment fund may not be possible for most companies. Yet collaborating with local and national venture-capital firms focused on domestic emerging markets may be a particularly cost-effective strategy. With this new type of venture capital, experts in investing in and advising this unique segment manage the business risks. In addition to building relationships with venture firms, companies can make the contractual commitments to their minority-owned suppliers that help attract the “smart money” available from such firms.
Time for Talent
Not every company may be able to tap the resources of private equity funds for diverse suppliers, but all companies can invest time in building a supplier’s management talent like an active fund manager. Most venture capitalists will say that the competence and passion of a startup’s management team ranks as high in their investment decisions as the technology, market, or other business strategy element. Companies that seek to develop supplier diversity for true competitive advantage need to select suppliers with potential and then invest to build the management capability.
This is an area in which we see a huge range of effort among even leading corporations. Some simply encourage managers from their minority- and women-owned supplier businesses to attend programs such as the Advanced Management Education Program offered by the National Minority Supplier Development Council. Others encourage such suppliers to attend company-sponsored training, but the training is typically open to all suppliers.
Mentoring programs that match women and minority suppliers with an executive sponsor have achieved mixed results. Not surprisingly, the level of the executive and his or her willingness to invest the necessary time to truly coach the supplier largely determine the degree of success. IBM set the high-water mark for mentoring with a program that was launched in 2003 and now encompasses seven minority businesses, of which two are high-potential suppliers rather than active ones. Each supplier in the program goes through a structured process facilitated by a management professor from a leading business school. The program begins with a one-day kickoff meeting in which the supplier meets the executive mentor. A two-day retreat follows shortly thereafter, and another one-day session is scheduled within a year to ensure follow-up on the agreed-upon action items.
Another innovative option is for companies to encourage two or more high-potential firms to merge. For example, one supplier may have attractive capacity in light manufacturing but may lack skills in technology management. Another may have complementary strengths and weaknesses. Astute and thoughtful supplier diversity managers may be able to convince the prospective suppliers that the sum is superior to the constituent parts.