Necessity vs. Opportunity
3 min read · Dec 1, 2023
New Power Labs
Td;lr: There is a pattern of underrepresented entrepreneurs launching businesses out of necessity rather than opportunity. Understanding the barriers faced by necessity-entrepreneurs in the social finance ecosystem and the unique gaps they are addressing can help us level the playing field.
We are back with part two of four in our series (revisit part one here). New Power Labs, in a joint effort with SVX, led research to better understand the barriers faced by overlooked communities in accessing social finance. In the second part of our four-part series, we unpack one of the reasons capital deployers might overlook underrepresented entrepreneurs: the type of businesses they run.
Many entrepreneurs from underrepresented groups launch businesses out of necessity (due to a lack of employment opportunities) rather than opportunity (choosing to pursue a business idea or market opportunity they find promising and exciting). Many social finance funds, it turns out, tend to prioritize opportunity entrepreneurs.
Necessity entrepreneurs are seen as less enticing for traditional investors. They tend to have more cost-effective strategies and modest financial targets. They may be already indebted, not have access to wealth nor the ability to secure debt for their businesses. The gap in funding exacerbates inequalities between necessity and opportunity entrepreneurs. Many entrepreneurs who started out of necessity have gone on to create highly successful businesses. Building a unicorn is not the only path to generating wealth and value to society.
Many traditional investors generally prefer opportunity entrepreneurs, who typically have higher levels of formal education, an executive background and expertise, and a broader personal and professional network. Opportunity entrepreneurs also often have more ambitious financial goals and may seek rapid growth, scalability, and long-term success.
The distinction between necessity and opportunity entrepreneurs has implications for the types of businesses they establish, their growth trajectories, and their interactions with investors and funding sources. If we aim to unlock the full potential of social finance through investing in underrepresented leaders, implementing strategies that flow capital to necessity entrepreneurs is critical.
Contributed by: Tom Vargas
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