Photo by RODNAE Productions from Pexels.

 

“The system is broken and there needs to be a set of new rules.”

—Benjamin Vann, CEO of Impact Ventures, Dallas

 

Earlier this year, NPQ featured an article that reviewed a report by the nonprofit Transform Finance on grassroots community engaged investment—impact investing that builds community power while raising capital for BIPOC-owned businesses. Vann, quoted above, is a member of a team participating in a Fund Building Cohort that has been organized by the Boston Impact Initiative (BII). BII, one of the funds profiled in that report, aims to use the cohort to help make funds like itself far more common throughout the country.

Since 2017, BII has helped finance 30 local businesses in greater Boston, the majority of which are BIPOC-owned. As founder Deborah Frieze has put it, the aim of BII has been to “take an integrated capital or a blended finance strategy and deploy every tool in the capital toolbox to help close the racial wealth divide in my community.”

Now BII is actively seeking to spread the model well beyond Boston. Teams in the cohort stem from a dozen places. Nine are city-based: Atlanta, Baltimore, Chattanooga, Dallas, Indianapolis, New York City, Philadelphia, Seattle, and Minneapolis-St. Paul. Three more are regionally based: one in the state of New York, one focused on both Philadelphia and Brooklyn, and one in the state of New Mexico.

Launched in the spring of 2020, the cohort was originally envisioned as taking place through a series of in-person meetings. Instead, due to COVID-19, the meetings took place virtually. But the cohort has carried on, and cohort members will “graduate” this month, with many graduates launching their own funds this fall.

Each fund is unique. There are many reasons for variation: In some communities, capital is plentiful and BIPOC business capacity is in short supply; in other places, the reverse is the case. The nature of the funds also depends on the composition of the teams themselves and their specific capabilities. To provide a sense of the range of the efforts, three community-based efforts are profiled below. 

Indianapolis Nonprofit Takes an Impact Investing Turn

Pambana Uishi is a cofounder of an Indianapolis nonprofit known as Kheprw, a youth leadership, development, and community empowerment organization. Uishi explains that the nonprofit was founded in 2003 by Uishi, her husband, and a grandmother whose grandson would come to Indianapolis every summer. Uishi wanted to provide young African American males “with a community place where they can learn about social entrepreneurship, public speaking, and have a safe place to grow and develop.”

Over time, the organization developed social enterprise businesses. “The first one, when it started, was a thrift store,” Uishi explains. The store “sold everything from bedspreads to clothes” and generated over $100,000 in annual revenue. A second social enterprise, launched about five years ago, designs websites and assists with social media and video content; it has become the group’s “flagship” social enterprise.

The idea of developing a capital fund, Uishi says, came in response to the 2016 presidential election. “There was a lot of angst in the community around this,” Uishi recalls. Uishi heard a talk after the election about economic democracy, and that led to thinking about the need for structural economic change.

What was Uishi’s experience with capital finance? Not a lot. “I feel like I’m a fish out of water,” she concedes, “but I’m accepting of the challenge and looking forward to it.”

A key part of taking on that challenge has been finding partners with financial expertise. Kheprw has partnered with Nicholas Johnson to manage the fund. Johnson has worked in senior roles with two community development financial institutions (CDFIs). The fund is paired with a business accelerator/incubator that Kheprw manages, and which has attracted 37 entrepreneurs of color so far.

Kheprw aims to raise $5 million in capital by year end and $20 million by the end of 2023. This fall, it hopes to make 40 loans of up to $25,000 per entrepreneur and is looking at how to partner with other entities if they need more capital. The fund also intends to make real estate loans, where bigger deals would be possible because real estate loans are typically collateralized and thus are “secured” loans, unlike most business lending. Longer term, the nonprofit aims to provide BIPOC entrepreneurs with a mix of financing, involving grants, equity, and loans.

Uishi notes the fund seeks to go beyond the resources it provides directly to remove “the barriers that we can move.” This requires redefining risk from being a reason to say no to instead saying, “OK, here are the things you need to work on in order for us to provide you with the financial capital you need.”

Uishi adds, “We are not just looking at giving a loan; we are developing a relationship.” Some of these partnerships, she adds, “may last a lifetime.”

Retooling Venture Tools to Inform Impact Investing Strategy in Dallas

Impact Ventures in Dallas operates a startup accelerator and is developing an integrated capital fund “with a mission to invest in all forms of genius,” as Vann, the group’s CEO, puts it. “And what we mean by that is we exist to remove social and economic barriers from women and BIPOC communities to build intergenerational wealth through entrepreneurship and access to capital.” To achieve this mission, the nonprofit offers an “intensive 10-week accelerator program” that gives BIPOC-led businesses “access to coaching, curriculum, capital, connections, and community.”

Vann began his career in corporate finance. He cites a book by the late Reginald F. Lewis, who was the first Black American to own a billion-dollar company, called Why Should White Guys Have All the Fun? as inspiring his work. Vann notes that, “I didn’t meet my first Black VC [venture capitalist] or investor until I moved to Texas, which is crazy, because Texas is such a conservative place.” Over the years, Vann worked in corporate finance with Fidelity, then led Fidelity Charitable and various other organizations, as well as being a “serial entrepreneur” on the side, before founding Impact Ventures.

To date, Vann notes, “64 companies have gone through our accelerator program.” They have raised collectively $3.2 million, supporting an estimated 100 jobs. He adds that combined the firms have received “3,500 hours of mentorship, advising, and support since the beginning of 2020” from a network of about 90 mentors.

The new fund, Vann explains, aims to address a common challenge with business incubator and accelerator programs that “entrepreneurs of color are often over-mentored and under-capitalized.” As in Indianapolis, Vann aims to raise $20 million, which he hopes to invest “over the next 10 years in women- and BIPOC-owned business.” This would support up to $2 million in investments to an estimated 12 to15 businesses a year. Graduates of the accelerator will provide one stream of clients, although businesses outside the accelerator could also seek investment.

Where will the $20 million come from? Banks and foundations are likely to be leading funders, but small investors can also participate. Vann hopes to set the minimum investment level as low as $1,000 and expects many Black church congregants may invest.

In terms of how the fund will place investments, Vann envisions a mix of debt and equity. On the debt side, this will include lines of credit. The fund will also employ a range of quasi-equity tools where payment is tied to profits, such as royalties and SAFEs (Simple Agreement for Future Equity). As Vann explains, these are “patient equity products that allow entrepreneurs…to have more runway to prove out their concept.” The fund aims to provide $50,000 and $250,000 on the debt side and between $100,000 and $500,000 on the equity side. Effectively, this means investing at a later stage than the fund in Indianapolis. Borrowers would have to have two years in business, two years of tax returns, and “at least $75,000–100,000 in revenue.”

In its investment criteria, Vann says, the fund seeks to not only support jobs, but also expand opportunities for employee ownership and participation in governance and support firms with a commitment to local sourcing (i.e., buying from other local businesses), as well as ensuring that the firm meets standard economic performance indicators. Vann notes that one key idea behind the fund is that “instead of us asking ways to mitigate risk, we ask for ways to promote and enhance impact.” To date, Vann says, Impact Ventures has launched a $1 million pilot fund and made six investments, including two in which employees own at least part of the firm through an employee stock ownership plan (ESOP). 

An Integrated Capital Fund in the Twin Cities

Elaine Rasmussen is founder and CEO of Social Impact Strategies Group (SISG), based in St. Paul, Minnesota. Rasmussen herself spent several years working for Native Americans in Philanthropy, where she gained an appreciation both for philanthropy’s capacity—and for its limits.

“The sector of philanthropy is set up to be responsive versus proactive,” Rasmussen noted. “It is convenient for the people who have wealth and class privilege, but it is not actually beneficial for the people who it is supposed to serve.”

In 2016, this led Rasmussen to form SISG, a for-profit company, with a social focus (it is a certified B corporation) that provides consulting around operationalizing social impact and racial equity. Part of being a B corporation is a commitment to “give back”—that is, donate a share of profits to charitable causes. This motivated SISG to develop a fund to make its giving more effective. Rasmussen says that with BIPOC businesses in the Twin Cities, “There wasn’t a lot in between $10,000 and $200,000 to get flexible patient capital. The only way that you could get that money was through credit cards or traditional bank loans, which we know Black and Brown folks are disproportionately turned away, for all the obvious reasons.”

In describing the Twin Cities fund’s vision, Rasmussen emphasized the need for an integrated approach. As Rasmussen put it, “So, there is debt, there is equity, or there is grant. This money needs to be symbiotic and work together.”

A key question that needs to be addressed in the design process, Rasmussen adds, is, “How do we leverage capital in a way that white men have been leveraging capital?”

Rasmussen observes that, “There is a switch that happens when talking to Black and Brown folks, particularly Black women. That conversation is: ‘Oh, we have loans to give you.’ However, when it comes to a white millennial person in tech, it is, ‘We want to give you this suite of money.’ That is largely not what happens with Black and Brown women.”

As Rasmussen explains, “The whole thing around capital for Black and Brown women, the first and only form of capital offered is debt.”

To implement this vision, Rasmussen says there will be two organizations. One will be “a private equity firm that will be privately held and a charitable loan fund that will be a nonprofit.” She adds that, “The goal is to provide flexible patient capital for entrepreneurs needing less than $100,000”—in other words, working with larger firms than in Indianapolis, but smaller firms than in Dallas.

One key difference is that this fund is designed as a revolving fund, rather than raising all the money up front. For phase one, the fundraising target is $1.5 million, about half of which has been raised. In the first phase, about half of the money will be in grant and the other half in low-interest debt payments. Socially minded investors are asked to provide capital to the fund and to accept an interest rate between zero and four percent—a standard range in the impact investing world.

Ultimately, Rasmussen wants the fund to co-design key performance indicators (KPIs) with borrowers. That way, if the business is “on track with their KPIs, as a fund manager I can anticipate what kind of capital they are going to need and when they are going to need it. So now I can create a schedule of capital. I know by this time I need X dollars of grant capital equity, by this time I need X amount of dollars of debt capital, and at this point I need X amount of dollars of equity raise.” 

Building Collective Cohesion: The Role of the Cohort

As noted above, Uishi, Vann, and Rasmussen are all part of a cohort involving 12 communities. Rasmussen notes that “having a place where we are all trying to bend and reimagine and remold a system, a finance system that was not set up to do what we are trying to do, is wonderful.” Uishi concurs that the conversations and camaraderie of the group for her and Johnson are “really, really valuable.” Vann made a similar observation, albeit a little more colorfully, noting that, “We are the people going against the grain. It is refreshing to know that I am not the only shit-starter out there.”

On the cohort’s value, Rasmussen adds that, “One of the ways I talk about this is there are the master’s tools, which is the current finance sector. I am of the belief that we can use the master’s tools to do what we’re trying to do within limits…where we can bend and break the master’s tools to be able to move the work where we are trying to move it.” The cohort, she notes, brings together compatriots “who are all trying to bend our brains to see where the loopholes are in our current system, and take advantage of that.”

One unusual aspect of the cohort was that a group of funders provided a first tranche of $350,000 to the cohort, who had to decide among themselves how to distribute the money granted. Uishi and Vann gave the so-called “participatory grant” fund positive reviews, but Rasmussen, who helped to facilitate the group process, said she had “mixed feelings” about it. Philanthropy, she added, “was doing what philanthropy does and making a demand that their money be used in a particular way.” (Frieze says the process was designed to empower the cohort to decide who got funded, rather than putting BII in that gatekeeper role, which was the original funder suggestion). Ultimately, the group decided to split half the money equally among cohort members, with the other half spent on common legal and narrative support. Rasmussen said it was a “beautiful” experience to go through, but she added that building trust among people who only knew each other online was challenging.

What Comes Next

The group’s final virtual gathering will take place later this month. Of course, the hard work of fund development and ecosystem building has only begun. As is often true with field-building cohorts, the network itself may be the most critical end-product.

Uishi remarks that, “I feel like what we’re doing and what the cohort is doing and what people around the world are doing is now shifting the paradigm, and obviously it hasn’t shifted enough, away from making money and hoarding it.… I feel a lot of people are participating in trying to move that paradigm shift. We can live in abundance. We can all live well. We can all do better.”