A new, more democratic approach to fundraising is putting wind in the sails of new impact fund managers.
‘Community-led investing rounds’ have the potential to enable true ‘impact alpha,’ with new solutions to old problems.
Startups have leveraged community rounds, an updated term for regulated crowdfunding, to turn customers and early adopters into investors.
New, emerging and diverse fund managers are using the method to overcome barriers like the lack of an investment track record and the absence of operating capital to get the fund off the ground.
While Reg-CF cannot be used to raise money for an actual fund, it can be a fresh source of capital for the management company to fund operations or serve as the general partner for impact funds.
A breakthrough in the ability of new impact fund managers to raise capital could mean more funding for unique solutions for challenges such as persistent racial wealth inequality. For institutional capital to be deployed at scale in the impact space, a supply of new and diverse impact risk-adjusted opportunities is needed to allow institutions to create a diversified portfolio of impact investment-driven outcomes.
Community rounds
Community rounds are gaining traction at platforms like Wefunder and Republic, which allow stakeholders like customers and suppliers to become investors in startup companies.
Already, fund managers have tapped non-accredited investors for capital through community rounds. Most notably, perhaps, Arlan Hamilton’s Backstage Capital last year raised the maximum amount of $5 million on Republic to enable investments in people of color, women and LGBTQ+ founders.
Investment management firms like Earnest Capital (now Calm Capital) and Chisos have raised funds to provide flexible capital for startups and entrepreneurs that may not be a good fit for traditional venture capital.
My firm, New Majority Capital, is raising a round on Wefunder, to provide financing, education, and support to help create more women and small business owners of color.
And we’ve added a twist. Donor-advised fund investors on the ImpactAssets platform can now bring catalytic capital to our community round. RSF Social Finance, for example, is leading our round.
Building a fund
New impact fund managers focussed on true impact alpha generation often have a tough time getting off the ground. They face three main barriers:
Track record. Most traditional impact investors and fund-of-funds want to see some track record either with the same idea or from previous related work. A previous track record, however, is sometimes irrelevant when trying to come up with innovative solutions to problems that persist.
Existing new track records often take some time to be demonstrated as well. Very often a new perspective needs to be taken to design impact solutions from first principles and with a systemic approach to solving the problem, where no previous track record exists.
While catalytic capital is becoming more available and is a much needed solution, catalytic capital investors, especially ones backed by foundations, want to see more traction as well. This capital stack is probably more suited once the idea is further developed.
Operating/startup expenses. To start testing out a hypothesis and build something that resembles a scalable process and track record, new impact fund managers need capital to test out their new ideas, conduct experiments to learn from and support pivots until successful scalable traction is reached.
General partner commitment. Very often, institutional LPs need a GP commitment from the impact fund managers to align interests. With both startup expenses and GP commitments, there is no angel or venture network that can be accessed to fund the management company to seed and de-risk the idea.
Not all new emerging managers entering the impact space have the wherewithal to come up with a meaningful GP commitment so they can raise a large enough fund to generate management fees to meet their expenses.
Community rounds
Community-driven investing is a promising way forward. Most people, regardless of whether they consider themselves impact or angel investors, want to support good ideas that are good for society, and are willing to be stakeholders to champion solutions to problems that they care about, whether it is racial and gender wealth inequality or any of the other Sustainable Development Goals.
Among the benefits of community-led investing:
1. Community-driven investing offers a way to elevate the best ideas, such as democratically sourced ideas that could potentially start locally but be scaled up.
2. By making investing accessible to non-accredited investors, by crowd-sourcing those investors, more people, including millennials can engage in this process. Typically, most investors backing such ideas have been accredited.
3. Community-led investing can inspire a new generation of fund managers to tap into their network and community of stakeholders to creatively contribute to the solutions and provide a way for any individual to have an impact.
The investors can be true stakeholders by engaging with the impact firm/fund aligned with their causes. For example, a fund that helps close the racial wealth gap can have investors who recommend Black, Indigenous and other entrepreneurs of color that they know to receive funding from the fund.
Early stakeholders will have a multiplier effect since they bring their own individual network of potential investors to the table by endorsing an early idea, thereby creating good momentum for ideas to surface and get executed.
4. Community-led funding can cover the early de-risking period of a new fund to generate traction and to serve as a GP commitment. The risk-adjusted return expectations can reflect the risk and the upside.
Solutions like community-driven investing are a much needed and exciting path forward for ‘impact alpha’ fund managers to wade into unchartered waters to drive more impact with support from a broader set of stakeholders.
Havell Rodrigues is founding partner at New Majority Capital Management.
