Julianne Zimmerman | July 23, 2018

I remember when summer used to be a sleepy season of out-of-office notices, when conversations turned to beach reading and extended getaways.  I’m not convinced that we should count it as progress that summer has become just another busy season.  But this past month I have been pleasantly surprised that social equity investing has emerged as a hot topic nearly everywhere I look.

That’s an overdue and welcome development, which I enthusiastically applaud.

And the operative question is whether all that conversation will translate into action, in the form of meaningful and transformative flows of capital.
 

Rethinking the status quo

Nearly 18 months after the World Economic Forum concluded that financial inequality was the number one risk to global economic security, two reports from PitchBook (How Venture Capital Is Hurting the Economy) and Cambridge Associates (Social Equity Investing: Righting Institutional Wrongs) depart significantly from the prevailing theme of impact investing as an enhancement of conventional investment practices, and position it instead as a remedy to structural ills.

The Pitchbook article echoes an earlier pair of postings (Sex and Startups, and Zebras Fix What Unicorns Break) we have discussed elsewhere, riffing on University of California academics Martin Kenney and John Zysman:

“Arguably, these firms are destroying economic value. This new dynamic has social consequences, and in particular, a drive toward disruption without social benefit. Indeed, in some cases, they may be destroying social value while also devaluing labor and work in the enterprise.” The wealth associated with the startup boom hasn’t been widely shared outside Silicon Valley and its backers—mainly institutional funds and wealthy accredited investors. Moreover, the rigor and transparency of the public markets would shed light on shady business models and practices, and ensure the common good is being served. …From a societal standpoint, and in the context of ongoing concerns about wealth and income inequality and corporate overreach, this is problematic. What are the positive externalities of a bunch of tech bros barreling down the sidewalk on electric scooters? Or of all the dead ICOs?”

Cambridge Associates offers a few directional suggestions for taking action:

“Given the complexity of racial equity, impact investors can find quite a few approaches to address the opportunity. Our view is that strategies focused on racial equity can be bifurcated into two areas. The first is increasing capital access & allocation, which seeks to increase capital flows to communities of color and address the historic and continued capital gap for those communities. The second is improving business lines & practices, which seeks to ensure that existing businesses, products/services, and policies are positively supporting communities of color. In practice, these themes are likely to overlap … Impact investors, via early-stage venture capital investments, can also encourage both investment managers and company leadership to entrench these practices of equity and inclusion into the fabric of the company from the earliest stage, with a goal to drive lasting change as the company moves toward a public offering.”
 

… and not pulling any punches

Not to be left out, Inc. and Forbes also weighed in.

Writing in Inc. (Women-Led Startups Aren’t Getting Funded, And There’s A Very Simple Reason Why), Sheila Herrling offers a combination indictment and pep talk:

“Investors need to stop blaming the lack of diversity in their portfolios on a “pipeline problem.”…Remember that old saying, “if you can’t beat ’em, join ’em”? When the benefits of diversifying entrepreneurship continue to be under-recognized, under-leveraged and under-seized, it may well be time for a strategy of “if you can’t join ’em, beat ‘em.”

Over at Forbes (How to Make Real Systems Change: A Case Study), Nell Derrick Debevoise offers an even more pointed commentary, summarizing a panel discussion from the 2018 Social Innovation Summit:

“The lack of diversity among the entrepreneurs who receive investment funding is a big problem that’s rightly getting a lot of attention these days. By not funding entrepreneurs who are representative of the population, we miss out on valuable solutions to problems that affect the population as well as important economic growth. To the tune of $300 billion in lost income and 9 million jobs not created, according to the Center for Global Policy Solutions…The calls to increase the number of female, black and Latinx investors are valid and should be heeded. But there’s a larger conversation to be had about how we’re allocating investment money. Venture capital funds invested $71.9 billion in 2017 to companies solving problems felt by the people investing that money, in other words, Ivy League-educated straight white men living in the metro SF, NY, and Boston areas. Only 15% of venture-backed businesses address our collective existential challenges, like food, health, financial services...Women and minority entrepreneurs are more likely to solve problems that matter to large portions of society, giving them large and growing markets to serve as well as the sense of purpose that has been shown to enhance likelihood of survival. Indeed, inadequate markets and lack of motivation are cited as the top causes for startup failure. In our majority-minority nation, where women control 70-80% of purchasing decisions, it’s a no-brainer that founders of color and female founders will build the products and brands that win.”
 

Show me the money

No longer the month for brides, June was all about major players positioning their impact investing endeavors.  Goldman Sachs’ Stephanie Cohen announced (Closing the gender investing gap) the $500M Launch with GS program.  JP Morgan Chase reiterated (The tech sector needs to do more for female founders of color. What will it take?) social equity efforts under its $150M Small Business Forward program.  At Morgan Stanley, Carla Harris convened the Senior Multicultural Leaders Conference, and kicked off a podcast, Access and Oppportunity: Connecting Capital and Communities.  MetLife proclaimed that its social impact investments had crossed $50M.  CNBC contributor Elizabeth MacBride featured Jean Case (A new multi-billion dollar investment revolution is being led by this woman) as the face of a strategy segment reported at $139.9B in 2017.

With these and other discussions top of mind, it’s no surprise that endowment trustees and advisors are taking note.  Intentional Endowments Network announced the formation of a new Racial Justice, Diversity, Equity, and Inclusion working group.  Social impact investing has been a ubiquitous theme at summer investor gatherings, and promises to figure prominently at autumn events as well.


We’ve only just begun

All this discussion is healthy and necessary.  As Shawn Rochester points out (The Black Tax: The Cost of Being Black in America), structural inequities are monumental (see also this book discussion).

In response to these and other daunting societal and economic ills, Veris CEO Patricia Farrar-Rivas (Racial Parity in America: Making Progress, But Still A Long Way to Go) urges all of us to think bigger about equity, capital, and shifting economic power:

“We have so many urgent and entrenched social and environmental issues to solve, while climate change is breathing down our neck. They not only include racial equality and equity, but also gender equality and equity, workplace and domestic violence, mass incarceration, gun violence, access to both primary and secondary education, plastics in ocean, lead in our homes and schools, access to healthcare, to name just a few. All of these issues are important, and we cannot solve any of them on their own. We can’t take a siloed approach. We must raise them all with the same level of intention. They are all symptoms of economic systems built on flawed constructs of race, gender, class and entitlement. So, I am also very encouraged to see more impact investing funds founded and managed by women and people of color. Today, the diversity of those who currently control and influence capital allocations simply don’t reflect the full breadth of our gender or racial demographics. The key to solving our multitude of issues is democratizing the flow of capital. Changing whose hands are on the levers may be just what we need to benefit people and planet.”
 

We’re all in.

For our part, Reinventure Capital is working to invest in a better, saner, more equitable future.  We believe that future depends both on shattering the persistent asymmetry in access to capital for overlooked and undervalued founders, and also on reprioritizing investment capital to fuel profitable growth of problem-solving, value-creating enterprises.

To that end, we are focused on deploying equity and debt capital in expansion stage (breakeven or so) companies led by people of color and women, across the US.  It’s a big departure from the status quo, and we believe that backing undervalued founders to grow profitable enterprises is an important way to contribute to changing our system for the better.

We’re building on Ed’s pioneering track record in this space, backing companies that did well by all of their stakeholders — founders, employees, communities, customers, and yes, investors.  Not only did his former portfolio meet or exceed all of its impact objectives, but it returned 32% IRR.  So we know from experience that it is indeed possible to practice impact investing as a discipline to both remedy systemic ills and deliver economic benefits.

And we know we are not in this alone.  There are many other approaches as well, and we believe that there is plenty of opportunity for many different strategies to be successful.
 

How are you participating in advancing the field this summer? 

What change are you seeking, what opportunities are you seeing, where are you taking action to effect transformative system change?  How might we join forces for good?

Please share!

While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record provides direct evidence that it is indeed possible to consistently invest for both financial returns and social value creation.  If you are an accredited investor and would like to learn more about investments that can promote systems change by supporting high-value companies led by women and/or people of color, please contact us to start that conversation.

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