In the United States today, the greater Asian American and Pacific Islander (AAPI) community faces a unique set of biases that interfere with its ability to raise venture capital or obtain loans to start businesses. That is true despite the fact that the community as a whole has become an impressive economic force in the US. As the country’s fastest-growing minority group, AAPIs have more than doubled their purchasing power—which is twice the rate of that of the general population––to $1.3 trillion between 2010 and 2020, according to a 2022 report from the University of Georgia on the multicultural economy.

Moreover, the AAPI community has driven some of the world’s most successful businesses. LinkedIn, Yahoo!, YouTube, and Zoom all have AAPI founders or cofounders.So do the well-known food purveyors Panda Express and DoorDash; the fitness companies Peloton and Fitbit; and the fashion brands Vera Wang, Old Navy, and Zappos. More than 26% of all billion-dollar-valued startups in the last two decades had at least one AAPI cofounder, per research by Stanford’s Ilya Strebulaev––signaling that AAPI entrepreneurs punch well above their weight versus the US population at large.

AAPI-founded startup businesses also have a high rate of success, as measured by the team compositions of recent initial public offerings. A paper by David Teten and Katherine Boe Heuck showed that among the world's top-45 VC-backed exits through 2021, 33% of the 103 founders were Asian or Asian American.

And yet, the most recent Diversity in US Startups report from RateMyInvestor found that of the $68 billion invested by the top-100 VC firms in 2018 and 2019, just 25% of all recipients were Asian business founders. AAPI entrepreneurs received a greater portion of the funds than those who were Black or Latinx, but much less than white founders, who received 77% of the entire transaction volume. This article describes a BCG examination of the kinds of biases AAPI communities face and strategies for dismantling them.

Why Funding Levels Are Low

From December 2022 through March 2023, we conducted ethnographic interviews surveying capital access within the AAPI community. Our methodology included conversations with approximately 15 investors, academics, and entrepreneurs across industries, as well as anecdotes from select AAPI entrepreneurs and external reports analyzing access to venture capital. Previous BCG research has found a lack of AAPI representation at the highest executive levels in most industries. Financial services is no exception. A lack of top investment decision makers from the AAPI community, along with a number of cultural misperceptions, tend to block such investment.

Because funding deals are often based on personal connections and subjective perceptions of a founder’s potential, individual networks can play a significant role in entrepreneurs’ ability to secure venture capital, private equity, or even loans from an institution.

Several biases can place AAPI business owners at a disadvantage. Researchers at Stanford University have found that white male asset allocators and private equity investors often struggle in gauging the competence and performance potential of businesses led by people of color. Such misperceptions translate into overlooked opportunities, according to a 2019 report in PNAS Journal.

We have identified two predominant biases that arise when investors review AAPI-owned businesses.

• Bias  #1: The Model Minority Myth. The “model minority” myth asserts that AAPIs are hard-working, capable, and self-sufficient—and as a result, do not need assistance. This myth might seem innocuous or even beneficial, but it can have unintended consequences—particularly when it comes to diversity initiatives that exclude AAPI candidates.

  The COVID-19 pandemic presented an especially salient case of how the model minority stereotype paints AAPI entrepreneurs as self-reliant. Amid the rise of anti-Asian sentiments, overall sales for Asian-owned businesses dropped 26% in the first month of the pandemic, compared with a 17% drop for white-owned businesses. Despite the greater decline in sales, Asian-owned businesses were less likely to receive government financial aid. According to the Reimagine Main Street national survey conducted from April to May 2021, AAPI small business owners had a 66% funding rate through the Paycheck Protection Program versus 75% for whites.

  One of the reasons for the lower funding rate may be that many AAPIs lack long-standing relationships with banks. Last year Bank of America’s annual Women & Minority Business Owner Spotlight survey found that 31% of AAPI business owners said they had no relationship with a lender. In the 2023 survey, 78% of AAPI entrepreneurs said they planned to finance their business in the year ahead. The majority said they would obtain funding from credit cards or personal savings, and only 24% intended to seek bank loans.
  

• Bias #2: Perceived Lack of Leadership Qualities. Tied to the model minority myth, AAPIs are perceived as diligent, passive, and rule-abiding instead of creative, assertive, and visionary––characteristics typically associated with natural leaders.

  Harvard admissions officers commonly use phrases such as “quiet and shy,” “science and math-oriented,” and “hard workers” to describe AAPI applicants. Jackson Lu, an associate professor at MIT Sloan School of Management, authored a study in Journal of Applied Psychology comparing perceptions of different ethnicities in MBA courses. East Asians were considered the least creative.

  When Asian students graduate and try to start businesses, investors listening to their entrepreneurial pitch might reflexively buy into these stereotypes, even misinterpreting their ideas as less novel or groundbreaking than they are. AAPI business founders are often misperceived as “copiers, not creators,” Michael Chen, a cofounder of Unity Angels, told us in an interview. His organization is a Los Angeles-based investment syndicate that connects AAPI entrepreneurs and investors to better address these biases collectively.

  Unity Angels has also observed that AAPI cultures tend to value politeness and modesty in social contexts, which in turn translate into perceptions of passivity in dealmaking or reluctance to self-advocate for funding. While these traits are by no means applicable to AAPI entrepreneurs across the board, the perception of such values can sometimes make investors less likely to fund AAPI-owned ventures.

  In many cases, investors might not see the full picture, which presents an argument for greater cultural sensitivity. Fortunately, business leaders and decision makers in general are starting to recognize different styles of engagement.

  The conventional view of how an entrepreneur should come across—boisterous, opinionated, rule breaking, and risk taking—has been shown numerous times to be an inaccurate predictor of success. Conversely, Susan Cain, author of Quiet: The Power of Introverts in a World That Can't Stop Talking, notes that individuals with more introverted attitudes are less likely to take unnecessary risks—a quality that serves most entrepreneurs well.

The cultural biases that may put Asian founders at a disadvantage in receiving funding are exacerbated by the underrepresentation of AAPIs as investment decision makers. White males comprise 58% of everyone working in the venture capital industry, compared with 26% identifying as AAPI.

While 26% may seem like a promising representation, nearly all are in junior, non-decision-making roles. Within investment funds, senior partners make the final decisions on which startups receive funding and often reap the greatest rewards financially and reputationally. Among these senior ranks, white males overwhelmingly hold the decision-making roles, controlling 93% of venture capital dollars. White females control 3%, and other minority groups, such as AAPI, Black, and Hispanic/Latinx men and women, control a combined total of just 4%.

Underrepresentation in decision-making roles is self-reinforcing. Without mentors and advocates who look like them, AAPIs are less likely to advance to higher echelons and opportunistically create impact within their organizations.

Some AAPI investors have attempted to start venture capital funds of their own, but in many cases encountered obstacles when raising capital from institutions and individuals. This, too, may have to do with perceptions exhibited by asset allocators who find it difficult to judge the potential for funds run by people of color.

Dismantling the Barriers

Despite the perpetuation of cultural biases placed on AAPIs, the venture capital ecosystem has made progress in countering these misperceptions and boosting AAPI representation and visibility.

AAPI-owned VC firms accounted for 19% of US-based investors on the 2023 Midas List from Forbes and TrueBridge Capital Partners, which ranks the top-100 tech investors globally. Being ranked on this list marks an achievement at the highest levels and serves as an inspiring example. It also shines attention on AAPI leaders in the venture capital world, which can help open career pathways for others.

Organizations dedicated to supporting AAPI entrepreneurs represent another path to progress. Gold House Ventures, a leading venture fund that invests in Asian Pacific founders and businesses, operates a circular model in which the fund’s fees and profits are redirected into the larger nonprofit partner, Gold House, which is also a strategic partner of BCG. This structure provides funds to invest in the Asian Pacific diaspora, thereby aligning incentives across founders, investors, and the broader venture capital community. Gold House Ventures investors are also predominantly Asian Pacific by design, resulting in greater wealth creation opportunities for the community. Similar funds that seek to advance gender, racial, and socioeconomic equity are increasingly embracing this strategy.

To support the AAPI segment in the business world, investors can take three initial steps:

Include AAPI populations in diversity, equity, inclusion, accessibility, and belonging (DEIAB) initiatives. Many large investment organizations and funds have made bold commitments to minority-owned funds and founders. For example, Cambridge Associates recently committed to investing $82 million in minority-owned funds. On the record, the firm states that financing minority-owned investors and entrepreneurs is a winning and socially responsible strategy.

To fund more diverse teams would be good business, too. Studies have shown that for startups with diverse founders, the average exit multiple––the ratio of the exit value to the initial investment—is 30% greater than those with solely white founding teams.

Because of the model minority myth and meritocracy, however, DEI programs often overlook AAPI communities. In a study by Diversity VC, Black-focused funds were five times more represented and Latinx-focused funds were three times more represented than AAPI-focused funds. To consider AAPI entrepreneurs as minority founders and develop or expand a fund’s existing DEIAB definition would serve as a critical starting point to closing the funding gap.

Re-evaluate subjective criteria about what makes a good entrepreneur. In the past, many VCs have relied on “gut feelings” about entrepreneurs. To some extent this can create a self-fulfilling prophecy in that entrepreneurs who receive a great deal of backing are in a good position to succeed. Not all have measured up, however, and VCs are starting to recognize the need to codify their criteria based more on the business model and less on an entrepreneur’s personal style or vision. Investors should undergo unconscious-bias training, which could assist them in seeing past existing cultural barriers and evaluating businesses and teams in a more formal and impartial way.

Build more diverse investment teams to foster inclusivity in the VC ecosystem. The makeup of the investment team itself can have a significant effect on a fund’s fortunes. Studies have consistently shown that diverse teams build not only more inclusive cultures, but superior returns as well.

For example, research published in a 2018 Harvard Business Review article, “The Other Diversity Dividend,” found that having a diverse management team can improve a venture capital fund’s overall returns as well as its performance at the individual portfolio-company level. The researchers also found that shared ethnicity between investment partners—which in the case of VC firms overwhelmingly means collaboration between white males—was linked to lower success rates when it came to acquisitions and IPOs. Moreover, the social-impact investment firm Rogue Insight Capital reported in Forbes that diverse teams generate 30% higher multiples on invested capital than homogenous investment teams. And a 2019 study by Morgan Stanley found that one of the most effective steps VC firms can take to recognize the best investment opportunities is to hire more women and multicultural managers on their own teams.

All of these studies point to the fact that diverse teams can help dismantle cultural and unconscious biases, leading to more objective and informed decision making. Inevitably, such teams appeal to a wider range of the market and thus increase a fund’s top-of-funnel deal flow.

Access to capital is a key component of a more diverse economy, but diversity in general has been shown repeatedly to deliver economic and societal benefits for all involved stakeholders. Capital invested in AAPI-owned businesses likely creates a much wider impact than just financial returns, opening up new business opportunities, new markets, and new sources of wealth. Investors and fund managers who embrace greater inclusivity can build a notable competitive advantage—while those who don’t are likely to be leaving money on the table.

BCG and Gold House are strategic partners in an initiative to bring BCG’s expertise and capacity to Gold House and its ecosystem. The shared goal is to collaborate on research and thought leadership as well as to foster a more equitable business environment that champions AAPI talent and access to capital.