At Northwestern University’s Kellogg School of Management, Professor William Towns pushes his students to get comfortable with being uncomfortable.
“Somebody might end up calling your baby ugly,” Towns says he tells the students.
His recent winter-term class, Venture Equity: Dismantling Barriers to Capital, included not just MBA candidates learning about inclusive venture capital. Also attending: the founders of six Chicagoland companies. Both founders and students in the 10-week long course, on offer again this fall, pitched startups for investments from Kellogg’s new, $750,000 student-led impact fund that Towns oversees.
One of the startups, PiggyBack Network, a Chicago-based carpool service for local parents, expects to receive an investment from the fund of roughly $50,000.
The due diligence process the class teaches helps future investors learn to uncover and deliver bad news about a weak business plan that isn’t scaleable or suitable for funding. And the experience of making an investment pitch allows entrepreneurs to steel themselves to absorb tough feedback and make painful changes. “I always remind them that a double bottom line is harder than a single bottom line,” Towns says.
At leading business schools across the US, students are training themselves to become impact investors through student-led impact funds that invest in startups pursuing solutions from health care and inclusive finance to climate technologies and affordable housing.
“It is always by far the most oversubscribed and applied to” course, says Caroline Chen, the co-chief investment officer of Stanford Graduate School of Business’s $875,000 evergreen GSB Impact Fund. For last year’s impact course and fund, about 170 students out of a class of roughly 420 applied last year for 60 spots, said Chen, who graduates next year.
Impact state of mind
Over a couple of decades, the business-school funds have grown up from student clubs to part of comprehensive curricula with advanced degrees focused on impact, the environment and sustainability. Even before they get a job in finance, students are learning how to create positive social and environmental outcomes while generating a financial return.
“We always say, even if you don’t go on to work at a fund, take what you’ve learned about impact into every profession,” says Sarah Mottram, co-president of the Microlumbia Impact Fund, a $155,000 student-led fund at Columbia Business School, where she will graduate next year.
Next month, Columbia’s Microlumbia fund, launched in 2007 to focus on microfinancing in Kyrgyzstan, will officially rebrand as LEO Impact Fund. The shift reflects the fund’s investments in recent years in a broader range of impact-themed companies, including FORME, a financial education startup in Brazil, and Ilara Health, a Nairobi-based healthcare company focused on delivering diagnostic equipment and medicines.
‘Seeding an impact mindset’
Several of Microlumbia/LEO’s portfolio companies have gone on to raise outside money. In February, Ilara Health raised $4.2 million in pre-Series A debt-and-equity from investors led by DOB Equity and AAIC Investment, bringing its total fundraising to $11.7 million. In 2022, Asaak, a Kampala-based startup that provides small-scale asset financing for motorbikes, cell phones and personal loans in Uganda, raised $30 million in pre-Series A equity and debt funding led by Resolute Ventures.
The student-led funds are “seeding an impact mindset,” says Adwoa Asare, program director at Turner MIINT, an impact investing online curriculum that sponsors a global competition for student-led impact funds. “It’s being able to share with your future colleagues that there are other really valuable ways to consider investing that go beyond the setting of a bottom line.”
In April, Turner MIINT, a collaboration between Bridges Impact Foundation and the ESG Initiative at the Wharton School, awarded its top $50,000 prize to a team from London Business School to invest in Afterwind, an Oslo-based startup that recycles wind turbines into usable material.
“One of the things that’s consistent with the impact investing community is people want to share,” Bridges’ Asare says. “Folks are like, we’re happy to tell you what we’re doing and how it’s working.”
Climate skills
This year, students at Berkeley’s Haas School of Business can pursue a joint MBA and master of climate solutions through the institution’s School of Natural Resources. Wharton MBA students can choose for the first time a major in “ESG factors for business,” including environment, social and governance and impact investing. In January, the University of Michigan’s Ross School of Business s unveiled an MBA with an ESG concentration to help students “build some of the expertise they need to make an impact.”
This fall, Haas is also kicking off a student-run Climate Solutions Fund, in which students serve as investment managers who work with undisclosed outside investment partners “to structure deals” focused on solutions to climate change.
The $2.4 million equity fund, which has yet to make its first investment, is overseen by Prof. Adair Morse, a co-founder of Haas’s Sustainable and Impact Finance center.
Haas calls the evergreen fund and associated course taught by Morse the first climate fund “at a major business school to focus on complex financing strategies in private markets,” including growth and debt equity, public-private partnerships and low-carbon technologies.
MBA students accepted to the course vet US–based, for-profit companies. At this November’s pitch competition, student managers will select one company in which to invest between $100,000 and $300,000.
Eye on the IRA
Morse is a former official in the Biden administration Treasury Department’s capital access office, which works to support equitable and sustainable economic growth and financial stability. Megan Morrice, the program director for Haas’s impact finance center, said the driver for the fund’s creation was the 2022 Inflation Reduction Act, an historic initiative to tackle greenhouse gas emissions and boost underserved communities.
Climate solutions, especially for novel technologies or first-of-a-kind facilities, often involve complicated layers of capital. The IRA offers tax credits and subsidies for many climate investments.
“There was a concern that money from the Inflation Reduction Act would come, and there wouldn’t be students fresh from business school that actually had the skills to deploy that money, because they’d just been trained in traditional investing,” Morrice says.
Aspirational returns
Student-led impact funds are typically seeded by school alumni to make investments of $12,500–$300,000, usually as debt, but occasionally equity. Unlike traditional VC funds, most funds don’t charge management fees or collect carried interest, or profits from the investments. They’re typically “evergreen,” plowing their returns back into additional investments rather than making distributions.
Investment decisions are made after pitch competitions by MBA candidates who have screened local startups via connections made at school, on LinkedIn and through databases. Faculty advisors supervise the funds and bring in alumni and outside experts for lectures, networking and coaching.
A few funds aim for competitive financial returns through equity stakes, though exits to date are rare. Most target a return of capital and interest on their debt financing. Either way, the funds don’t typically make the students rich if they take a stake in a future unicorn, because they reinvest any gains for future students to manage. Debt financing is popular because the 7–10 year horizon of equity funds is too long for MBA students who are in school for only two years.
Last month, Yale School of Management’s student-run Meng Impact Investment Fund made its first investment, taking a $50,000 equity stake in Ezra, a financial technology startup in San Francisco that helps companies provide hourly employees with emergency savings accounts.
Ezra CEO and co-founder Dashell Laryea, a former Yale humanities student, says on his website that he helped start the company after being raised by a single mom living paycheck to paycheck.
Ramil Ibrahim, one of two chief investment officers for the $500,000 evergreen fund, says Meng Impact is aiming for an “aspirational return” of 15%–30%. Ibrahim, a second-year MBA, said many student funds are open to people who don’t have the experience traditionally needed for an investment fund.
The funds, he adds, provide “hands-on experiential learning” that “accelerates or opens a door to a career in the space that might not otherwise be open to them, which is pretty different, obviously, from a traditional VC fund.”
Petri dishes
Sophie Belec, the co-president of the London Business School’s student impact fund, calls the vehicles “a sandbox for learning” and “incubators for emerging VCs and founders.” They’re “ideal spaces for nurturing the next generation of impact and climate leaders.”
There’s no hard data on how many MBA student-led funds exist globally, though they number more than a dozen and involve hundreds of students.
Georges Dyer of the Intentional Endowments Network, a group of higher-education and other endowed institutions pursuing mission-aligned investing, says the last few years have seen increasing interest in student-led funds.
“The students gain essential experience, building their understanding of how investing and the impact ecosystem work,” he says. “They can bring innovative ideas and focus to this question.”
Students have to grapple with the same measurement and management issues facing the larger industry. IEN’s Student Corporate Engagement Challenge requires students to pitch a business and impact case for publicly-traded companies. This year’s winners were a Hampton University team proposal for Intel on managing human rights in its supply chains and a University of Southern California proposal for better safety at Waste Management Inc.
The victors this year of the $10,000 prize in The Kellogg-Morgan Stanley Sustainable Investing Challenge was a team from the University of Utah’s David Eccles School of Business, with a proposal to help protect the Great Salt Lake.
Breaking barriers
The student-led funds are a far cry from the Monopoly-style money and “greed is good” computer simulations that dominated student stock-picking clubs in prior decades. The funds also have an ethos far different from the brass knuckles and clubbiness that permeate traditional Silicon Valley.
Back at Kellogg, Tania O’Connor, the school’s senior program manager for social impact and sustainability, says the student-led fund seeks “to break down the barriers that underrepresented founders have to capital.”
Its other goal: teaching students “to avoid the heuristics,” similar to cognitive biases, that often cloud traditional VC decisions about investing.
Piggyback co-founder Ishmael El-Amin, a 2003 graduate of Princeton in electrical engineering, personally attended all of Towns’ class.
“I was just soaking everything in,” El-Amin says of the class. “You’re able to have the conversations when the mic turns off, and it was just a great chance to pick the brains of these individuals that are going into VC, as well as some of the speakers who are VC partners and from family funds.”
“You wouldn’t get this type of access just trying to knock on their door and jump in their inbox.”
(A previous version of this story referred incorrectly to Wharton’s involvement in Turner MIINT. The school’s involvement is through the ESG Initiative at the Wharton School, which the Wharton Social Impact Initiative joined in July 2022.)
