Greetings, Agents of Impact!
Featured: Impact Voices
When founders of color prosper, so will entrepreneurship in the post-COVID economy. Investors and advocates are increasing their focus on Black and Brown-owned businesses, which even before COVID struggled to access capital and have since been disproportionately hard-hit. Solving capital access gaps for founders of color can accelerate job growth and help close racial wealth gaps while adding billions of dollars to the U.S. economy, per research from the Association for Enterprise Opportunity, Citigroup and others. Small businesses, hit hardest by the shutdowns, have emerged as a leverage point for a robust recovery and inclusive post-COVID growth. “We are already doing dramatic things for the airlines and the biggest companies. We should be trying to do everything we can for the small businesses that can comprise the majority of employers,” former presidential candidate Andrew Yang told Victor Hwang of Right to Start, the economic justice campaign centered on small businesses. The rejuvenation of small businesses is going to take dramatic measures from elected officials and allocators of capital.
- $100 million for Black businesses. CapEQ’s Tynesia Boyea-Robinson launched Path to 15|55 to get capital and policy working for Black business owners. Now the collaborative has commitments of $100 million to reimagine how Black businesses are supported from family foundations, intermediaries and other philanthropic initiatives. “Business ownership and entrepreneurship are some of the best tools we have to grow the wealth of Black communities,” Boyea-Robinson writes in a follow-up post on ImpactAlpha. Read all about it.
- Three ways Congress can act. As Congress crafts the next round of stimulus, it should help states strengthen private financing of new businesses and expand access to capital across America, Allie Burns and Rustin Finkler of Village Capital write on ImpactAlpha. Among the proposals: Reclassify “small business” based on revenues rather than employees. Expand the definition of “accredited investor,” so more Americans can invest in new companies. And incentivize private capital investments in overlooked places. Sen. Amy Klobuchar’s New Business Preservation Act would allocate $2 billion in federal funds to allow states to match venture capital investments one-to-one. Keep reading, “Three acts of Congress that can revive entrepreneurship in America.”
- Scaling capital for more entrepreneurs. “It starts at the top of the funnel,” Marla Blow of Mastercard Center for Inclusive Growth said in an Aspen Institute panel. Endowments and pension funds, she says, have an opportunity to change the incentive structure and return expectations of financial intermediaries to lower the cost of capital down the value chain for small businesses. Separately, a $1.7 million grant from the Kauffman Foundation to Living Cities will help stand up a vehicle for investments in fund managers of color to invest in entrepreneurs of color. The funding will test “new ways to deliver capital to the Black and Brown entrepreneurs who need it,” says Living Cities’ Demetric Duckett, a guest on Agents of Impact Call No. 22, “Rooting out racism as a systemic risk.”
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Dealflow: Follow the Money
Impact Engine steps into private equity with $31 million growth fund. Early-stage fundraising is difficult. Finding mission-aligned growth capital can be just as hard. Most of the few impact-oriented private equity funds have come from private equity giants like KKR, Bain and TPG. Chicago-based Impact Engine is aiming to expand the supply of growth-stage impact capital by investing in new managers of impact private equity funds. The women-led impact investor has raised $31 million from Surdna Foundation, William Harris Investors and the Libra Foundation to back first-time fund managers. Candide Group facilitated. San Francisco-based Lumos Capital, which invests in companies supporting workforce development, is Impact Engine’s first fund investment.
- Mission preservation. The growth-stage capital gap jeopardizes the future impact of today’s mission-driven businesses, says Impact Engine’s Priya Parrish. “Early on in a company’s life, baking the impact vision and thesis into the business model is easy.” When a company grows to hundreds of employees, multiple products, multiple headquarters, and a complex supply chain, tensions start to arise between scaling profits and scaling impact, she adds. “Having mission-aligned investors when a company reaches $100 million or $500 million in revenue is really important.”
- Cherry picking. Impact Engine will invest in firms wholly focused on impact, not those with impact funds on the side. “We are really trying to cherry-pick fund managers that we think will be leaders in buyout and growth-equity impact investing in five or 10 years when it’s a much bigger asset class,” Parrish said. The fund will invest 60% of its capital in five impact private equity and buyout funds. The other 40% will be used for direct investments in impact companies with revenues above $10 million. The fund’s first direct deal is sustainable packaging venture Footprint.
- Venture funds. Impact Engine, which started as an impact accelerator, has raised two early-stage venture funds focused on education, health and workforce development.
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Pay-for-success funds in San Francisco and Colorado raise $10 million for nonprofits. The two funds aim to streamline pay-for-success financing (sometimes called “social impact bonds”) and make it easier for nonprofits to raise impact capital to run and expand their programs. Impact investing advisor NPX structured the place-based funds to be payors once the programs achieve their intended impact. The $4.5 million Bay Area Donor Impact Fund, backed by 23 individuals, will support three nonprofits. More than a dozen philanthropic organizations, including the Colorado Health, Denver and Gates Family foundations pledged $5.6 million to the Colorado Donor Impact Fund to back four nonprofits. Both funds focus on organizations addressing local pandemic impacts and economic mobility in underserved communities.
- Outcomes-based finance. Here’s how it works: Nonprofits raise capital from impact investors, who get repaid from the donor impact funds when impact outcomes are achieved. In the Bay Area, the nonprofits slated for funding include 10,000 Degrees, to help low-income community college students transfer to four-year programs and pay down student debt; Mission Asset Fund, to boost financial inclusion in Hispanic and Latinx communities; and Rivet School, to enroll low-income adult learners in online degree programs. In Colorado, funding will support: ActivateIT’s training and placement of low-income adults into high-paying tech jobs; Bridge House’s homelessness-to-housing and work program; CrossPurpose’s job placement of entry-level low-income workers; and LaMedichi Savings Clubs’ financial health and inclusion support for Hispanic and Latinx immigrants.
- Career impact bonds. Social impact bond architect Social Finance launched a pay-for-success fund to invest in workforce training programs that employ income share agreements for their learners (see, “Blue Meridian, Schmidt Futures back ‘career impact bonds’ via Social Finance’s UP Fund“).
Signals: Ahead of the Curve
More corporations are channeling capital to Black-owned financial institutions. Netflix’s $10 million ‘transformational deposit” in HOPE Credit Union has inspired 124 others, including J2Global and Chipotle, to follow suit. That has generated $25 million that the Black-owned community development financial institution is using to support lending to small businesses across the South (see, “Netflix to move $100 million in cash deposits to lenders in Black communities”). As corporations look for ways to fulfill racial-justice pledges they made in response to this summer’s protests, HOPE’s Bill Bynum suggests they support community lenders and Black-owned financial institutions. Goldman Sachs, for example, extended an $85 million credit facility to HOPE, along with grant capital. HOPE is the only financial institution in the Mississippi Delta town of Itta Bena, where the total deposit base is roughly $1.2 million. “Just five fully-insured deposits of $250,000 would exceed the total available deposits in communities like Itta Bena, importing life-changing capital into a place where institutional barriers continue to impede the ability of Black residents to build wealth,” Bynum writes in a guest post on ImpactAlpha. Closing racial equality gaps more broadly would add $5 trillion in GDP over the next 5 years, according to a Citi analysis.
- Corporate agenda. CEO members of The Business Roundtable set a 2025 goal to provide $600 million in capital and deposits to Black- and Latino-led Minority Depository Institutions (MDIs) as part of the group’s agenda on racial equity released last week.
- SOCAP conversations. Bynum and Vista Equity Partners’ Robert Smith will chat by a virtual fireplace at 9:15 PT today. Smith is pushing the “The 2% Solution” to urge companies to channel 2% of their net income to empower minority communities. Netflix’s Aaron Mitchell and Goldman Sachs’ Margaret Anadu will join Bynum at 10:30 PT to explore how companies are using their balance sheets for racial equity. See what else is happening at SOCAP today – and all week – with ImpactAlpha’s handy guide.
- Keep reading, “How corporations can make good on their racial equity pledges,” by Bill Bynum on ImpactAlpha.
Agents of Impact: Follow the Talent
Ford Foundation appoints Samantha Power, former U.S. Ambassador to the United Nations, to its board of trustees… Apollo Global Management signs onto the IFC’s operating principles for impact management for its Apollo Impact platform (see, “Operating principles’ help investors hold asset managers accountable for impact“)… Two Sigma Impact joins the Impact Capital Managers network… Prime Coalition is hiring a project manager of ‘first-of-a-kind’ climate infrastructure deployment… Acumen is looking for a business development manager in San Francisco.
Thank you for reading.
–Oct. 20, 2020