Innovating for Social Equity: How Private Market Investors Affect Change

Caroline Grossman:
Hi, everyone. Thank you so much for joining us this evening, and welcome to tonight's event, "Innovating for Social Equity, How Private Market Investors Affect Change," hosted by the Rustandy Center for Social Sector Innovation and the Polsky Center for Entrepreneurship and Innovation.

I'm Caroline Grossman, Executive Director of the Rustandy Center and an adjunct Assistant Professor of Strategy at Chicago Booth.

For those of you who are interacting with the Rustandy Center for the first time, we are the social impact hub at the University of Chicago Booth School of Business for people committed to tackling complex social and environmental problems. We're an important part of the university's social impact ecosystem, and we promote innovation, advanced research, and develop the people and practices that can accelerate social change.

For those of you who aren't familiar with the Polsky Center, it advances university entrepreneurship and research commercialization innovation activities through the creation of new ventures and partnerships. The Polsky Center also ignites a spirit of innovation and fosters connections across the city, university, region and world to enable more ideas that have a meaningful impact on society. We're very thankful to the Polsky Center for being such a strong partner and for helping to bring tonight's event to life.

This year has made the deep disparities that plague our country even more apparent. Those who work within public, private and philanthropic sectors have been forced to think beyond traditional approaches for addressing the multilayered crises of economic devastation, a global pandemic, and systemic racism. As an organization focused on tackling these challenges with a cross-sector approach, the Rustandy Center has also been looking inward and reflecting on what it will really take to achieve meaningful change. We kept coming back to a grounding question. With billions spent by the public, private and philanthropic sectors, why do profound disparities persist? We set out to examine this question through our Innovating for Social Equity event series.

Our first panel last month looked at the role of philanthropy in addressing social inequity, and tonight's conversation will focus on the role of private market investors and entrepreneurs, and driving change. Historically, women and black indigenous people of color have struggled to raise funds from private investors, both as fund managers and entrepreneurs. According to recent data from Living Cities and the Kauffman Foundation, at least 70%, 77%, excuse me, of venture capital is invested in white men, but only 1% of venture-backed founders are black. Additionally, fewer than 1.3% of the 69 trillion in global assets under the four major asset classes, mutual funds, hedge funds, real estate and private equity, are managed by white women and people of color. And only 1% of total assets are managed by black people. Clearly, there is more work to be done.

To continue this conversation, I'm going to hand it over to our moderator, Priya Parrish. Priya is perfectly situated to facilitate tonight's discussion. Currently serving as an impact investor in residence here at the Rustandy Center, is an adjunct Assistant Professor of Strategy at Chicago Booth, and is Managing Partner, Private Equity at Impact Engine. Priya, over to you.

Priya Parrish:
Great, thanks, Caroline, and thanks, everyone, for coming. Very important topic here we have today. So I'm excited to kick it off.

As Caroline mentioned, our conversation today is really going to focus on various approaches that we can actually increase investment in black and brown and female founders by asking important questions like, why do diverse managers actually hold such a small portion of investment capital across virtually every asset class? What steps are actually required if we're going to build a capital system expansive enough to actually include and benefit all Americans? What innovations hold promise at the company level for greater impact, access and opportunity, and what role are corporations playing in this? And is discrete social impact focus necessary? Or is focus on supporting diverse entrepreneurs and fund managers sufficient to create change in these ways that we're hoping to do?

So we've convened a really impressive panel here to discuss private market investors and entrepreneurs in particular, and how they might utilize innovative strategies as a means for working towards social equity. I think in the chat box, you will see a link to the Eventbrite page, which has everyone's full bios, very impressive bios.

But at a high level, Mike Asem is a partner at M25; Brittany Henry is an Investment Associate at Impact America Fund; Rob Gertner is our esteemed professor here at Booth and the Rustandy Center. And together, they provide very different perspectives based on their firms and the roles they play in this field. But we'll try to dig into questions like, does the seduction of market return actually reduce the power of impact investing? And what kind of return should someone expect if they're truly trying' to have an impact? What steps are required again to build a financial system to support this kind of work, and much more.

So I'll also say that we have a really great group of attendees and participants that signed up. I think all of you also have great ideas and questions. And so we're going to keep some time at the end for everyone to just submit them and engage in the dialogue. So the Q and A function is open within Zoom. Please input questions throughout the program and we'll try to get to as many as we can. So with that, I think we would like to turn it over to welcome our four panelists to turn on their video and unmute.

So I'm actually going to start with just a little of a setting the table here in terms of what is impact investing? And I think in its simplest form, any investor is really trying to achieve certain objectives. Not just returns, but also certain risk, certain liquidity, taxes maybe, certain timeframe to their investments they're making. And what an impactor investor is, is essentially an investor who, similarly, has certain objectives and needs in all of those areas, but also has a specific or broad social or environmental outcome they are investing to help produce. So there's a thesis around that outcome they're trying to effect and a belief that with those dollars that's going to happen and why.

Now, I think there's a long history to this field, but I think to simplify it for this conversation, at Impact Engine, we really ground ourselves in what we call the Five P Framework, which helps an investor understand where in a business model and how can an investor actually create a particular kind of impact that they're targeting? So those five Ps include people which has to do with either the people who own the firm or the people that the firm employs very strategically and intentionally, and the type of positive benefit they can get through those structures. Place-based impact investing, which has to do with the actual operations and location of the business, be it in an emerging economy or in an opportunity zone, or in a rural area. Product-based impact investing, which has to do with the company's core product or service that they create and sell, and that the particular outcomes that that product produces for the users and consumers of it.

There's process-based impact investing, which many kind of think about as ESG investing, which has to do with a business's practices and how they run their operations, and all the different dimensions of their business, from their supply chain to their workforce. And finally, paradigm-based impact investing, which is really when you disrupt an entire way a business or an industry operates and serves certain groups and customers. The best example of that that we've been engaged in, in impact investing at Impact Engine more recently is employee ownership models. So we can create impact literally by making owners out of employees. And if other people copy that, we can create a paradigm-shifting impact there.

At Impact Engine, we really focus on product-based impact investing. These other aspects do play a role. And I would say that in some of our best investments there's intersections between all of these, when you get really mission-driven entrepreneurs who are building their companies, thinking about all the levers they have. But our core criteria is product-based impact investing that creates better outcomes, as well as greater access to education, economic empowerment, health, and environmental sustainability. And I'm really looking forward to hearing from everyone else here. We all have different approaches. And I hope you guys get a lot out of it.

So let's turn over first to our two investors. Brittany, if you could kick us off by introducing yourself and tell us a little bit about Impact America's investment thesis. And I will also just say congratulations on raising your second fund.

Brittany Henry:
Thanks, Priya, I appreciate that. Hello, everyone, Brittany Henry, actually the graduate of Booth in the Class of 2017. So at Impact America Fund, I think if we were to use your words, we focus on the people and kind of that paradigm shift as well. So we're really investing in low to moderate, we're investing in products or services that are serving low to moderate income communities of color here in the U.S. And really it's about providing products and services that will allow those communities to engage in the economy on their own terms. So it's about economic agency and economic empowerment. So that's the type of investments we make. We're impact investors, but are venture capital. And we're investing from the seed round into Series A as well.

Priya Parrish:
Great, great, thank you. And, Mike, if you could share a little bit more about M25 and your thesis as well, that'd be great.

Mike Asem:
Absolutely, thanks for having me and it's great to be here, so thanks. I'm a partner at M25, based in Chicago. We are VC focused on pre-seed and seed stage investments exclusively in the Midwest United States. As I mentioned, we're based in Chicago, but we're invested in about 25 other cities across the region. According to CB Insights, we're the only firm that can claim multiple states at which we are the most active investor.

Started in 2015, and our thesis was somewhat simple, in that we believe that when you can build a company anywhere, and a strong portion of venture dollars and an increasing portion of venture dollars were going into Midwest headquartered tech companies, the region deserved and needed a seed, pre-seed focused firm, boots on the ground to invest in founders, and help them get access to the broader venture capital market.

Beyond that, simply being an arbitrage opportunity, I think it's important to mention that we also saw the region based on its large economy, but desperate nature, simply put, you know the Bay area has a lot more density than the Midwest. However, if we can create virtual density through things like our summits and midweststartups.com and other initiatives that we carry on as a firm, then we can not only lift the region as a whole, but be a centering point and a conduit for the region as well.

Priya Parrish:
Great, thanks, Mike, and thanks for being here.

Rob is the economist on the panel. Would love to start by hearing your thoughts on whether the lack of access to capital for these underrepresented groups, is this a market failure? And if it's a market failure, really, how do we think about other market vehicles like private equity and venture capital being effective in solving for this?

Robert Gertner:
Sure, thanks, Priya. It's great to be here and to talk about this very important set of issues.

The simple answer, is it a market failure, I think is yes. It clearly is, when you listen to the statistics that Caroline gave at the beginning of which there are many, many more, all of which point in the very same direction, those sorts of outcomes for access to capital, black minority-owned businesses, access to venture capital sort of across the board. And just looking at investment in these needy communities, it's clear that those outcomes represent a failure of our system.

Now, market failure is kind of a funny term. Economists sometimes use it to refer to things that markets just aren't able to do. So externalities, for example. So we need government involvement instead because markets fail. And sometimes markets fail because markets aren't actually delivering on what markets should deliver. And I think this is sort of a complex combination of the two, I think. Knowing, saying it's a market failure is easy. Figuring out the exact causes and, more importantly, solutions to the market failure, I think is much more challenging. And I'm sure we'll talk a fair amount about it going forward.

You talked about venture and private equity as being sort of solutions to this. I think yes and no. I think just for access exists across the entire range of different types of investors and investment products, but I think, fundamentally, a lot of these problems are not just and maybe not especially venture capital and private equity. I think small entrepreneurs of color have real trouble accessing any kind of investment. They lack the wealth to be able to get bank loans to start a business. So they start businesses at much smaller scale. Their access to markets is much, it's very disadvantaged. So I think sort of you have to get to the fancy stuff like venture capital and private equity. It starts at sort of very simple access to capital where there are enormous challenges. And I think so, which may be sort of a bigger part of the problem than venture and private equity.

Priya Parrish:
Yeah, no, that's a really good point. I think we see similar gaps even in small business loans. And at the same time, people can build great livelihoods and employ a lot of people and create wealth in many of those businesses. Although the stakes are higher in venture and private equity, the reward is higher, so the wealth generation potential, it's an added, perpetuating this inequity in an integrator way.

Now, Mike, you wrote a piece earlier this year titled, "Racism Won't Die in 2020." Obviously, the impact of racial inequity in the U.S. permeates every aspect of society. But why do you think venture capital is actually dominated by white men? And how can a black venture partner combat racism in your professional life? What have you experienced?

Mike Asem:
Yeah, thanks, Priya. I mean, I think there's a lot in that question and I'll try to answer as much of it as I can and as concisely as I can.

You know, I think if you look at the roots of venture capital and just how it's established and how decisions are made, how LP decisions are made in the funds, how people are hired, how investments are made, right, there's a lot of subjectivity and there's a lot of the precursors to help an Old Boys' Club remain an Old Boys' Club, right? And I feel like I can say that without claiming that that was the intention, by the way venture capital's been set up and structured. I'm not trying' to make a claim that that's what people have intended. But that's how it's structurally set up.

If you look at how I'm making a decision into investing in a company, I've got almost no data, like real data about a company at the time I'm looking to make a seed stage investment, but I'm trying to get from 100-plus potential investments to one, and the bottom five oftentimes I am beholden to implicit bias myself, right? And when I say that, I don't just mean implicit bias against, but I mean implicit bias for. I think implicit bias against is something we're all familiar with.

I mentioned some of it in my article that you mentioned where, as a general partner in a venture capital firm, I'll go and, well, before COVID, I would go and speak at events, and oftentimes be asked in the networking if I was a student or basically what I was doing' there. And in the same way my father, who's been a longtime faculty member and administrator, and one time dean at a Big 10 school, I remember all growing up, he would always be asked by people on the street or somewhere like, hey, what do you do? And they would assume that he was a student at Purdue or a grad student or a janitor or a custodian. And he just never would tell them, which was always an interesting thing to me and maybe guided some of my approach as well.

Going back to what I said about implicit bias against, implicit bias for, I think, in the case of me making investment decision as a human being, which is what we're talking about, we're talking' about teams when we're investing at seed. I'm beholden not only to my implicit bias against, but also realizing that I have implicit bias for people that I'm culturally aligned with, right? And I think when you get to venture capital and how decisions are made on hires, on promotions, the joke is you don't know if you're good at venture for at least 10 years, right? So as individuals don't have track record for a long time, plus there haven't been black people, there's not a long history of decades of black or people of color or diverse individuals in venture track record and all these things, you're left to subjectivity which, left unchecked, can lead to a lot of homogeny, right?

So I think those things also combined with some of the misaligned incentives on how you do bring diverse hires into venture capital have led to where we're at. And what I'll say about that is we've talked about diversity theater in the industry for a long time where a firm feels, oh, I need to make a diverse hire. They make a diverse hire in an area that's actually not impactful at all to the business, doesn't actually, on the point of ROI investments, doesn't actually give that person the ability to get track record to get attribution, which are core things to further yourself in venture. And it just kind of leads to turning over of non-real impact within the same.

Priya Parrish:
Yeah, no, that's totally true. And it's not just like the Old Boys' Club. It's the Old White Boys' Club. (laughs) That it's kind of interesting, like a lot of the studies have shown to entrepreneurs, black and brown and female entrepreneurs have a hard time getting capital for all the reasons you cited. But also, they don't have a network of people who will chip in this early money of these angel investors, and these friends and family. And raising a venture fund, I've done it, you guys have done it, it's the same thing. Early on, you don't have the track record, if you don't have friends and family who chip in to back a first-time fund when there's no track record, it's really hard to get started, so it just, it keeps perpetuating. So that club needs to change. (laughs) And slowly we are, with firms like ours, right?

So Brittany, would love to hear more about your thesis, which suggests that investing in people of color is not just a moral imperative, but it's actually a tremendous financial opportunity. We agree it's untapped talent and we'd love to hear more about, how do you see, explain more about the alpha you see and why you think it's actually an advantage to your investment strategy to back diverse founders?

Brittany Henry:
Yeah, I do want to make a point of clarification. So we're not investing specifically in diverse founders. We're investing in products and services that are serving diverse communities. And that's specifically low to moderate communities of color here in the U.S.

Well, if that's the case, and we're investing in the best and the brightest that serve those communities, our portfolio over-indexes on people from those communities. And that's because their lived experience and their skill set allows them to create products and services, and solve challenges specific to that community. So when we think about, investing in diverse founders is very important. It's just a little different than what we set out to do. But again, because of their level of expertise, 80% of our portfolio companies are people of color, and 70% are specifically black founders.

And where we see the financial, the tremendous financial opportunity is, to the point earlier, venture capital is made up of a lot of white males. And so we feel like there's financial opportunity there because we're able to recognize that these opportunities and these markets are undervalued by white men, to be quite frank, but we recognize that there's value here.

A specific example of that is one of the companies that we've invested in is a hair care company that focuses on like actually selling, it's an e-commerce platform called Mayvenn. And one of their core products is selling weave extensions. So if you guys haven't noticed, I'm an African-American woman. (laughs) Hair within our community is extremely important. And so our team understands that this is a trillion-dollar market. When we talk about products,

when we talk about hair services, black women over index on spending within this category, and that's a tremendous financial opportunity. And our portfolio company has been able to be successful in selling into this market, but it has, and being able to provide a technology solution to it. So that's one of the examples of what we mean by investing in founders that have great ideas and where tremendous financial opportunity exists within communities that have been overlooked and underserved.

Priya Parrish:
Yeah, that makes total sense. And that's kind of back to the original framework. In many ways, it's a product-based impact. It's the product itself that's serving those communities and creating the impact for those people.

Brittany Henry:
Exactly.

Priya Parrish:
We do the same thing and we're similar to you, 70% of our portfolio company CEOs are women and people of color, but we're not looking for those founders explicitly; it happens. So that's a great example of Mayvenn.

Brittany Henry:
Yeah, they're the best to serve those communities because they have that leader experience. Sorry for cutting you off.

Priya Parrish:
No, you're good, and you're right. They see the opportunity. They see where other companies aren't serving these markets 'cause they don't understand it. Yeah, and that's a great example. And looking at place-based investing,

Rob, you recently wrote a case study looking at U.S. Bank's investment in the Pullman neighborhood of Chicago. Can you share a little bit about the lessons that can be learned from Pullman and how financial institutions can play a role in supporting these communities?

Robert Gertner:
Sure, so Priya and I teach the Impact Investing course here, and there's been a massive increase in the number of case studies available for folks teaching classes like that. And interestingly, it was really non on place-based impact investing and community development impact investing. So we were fortunate that we built a relationship with U.S. Bank and CNI, which stands for Chicago Neighborhoods Initiative that we're involved in starting about 10 years ago, a little more than 10 years ago. Sort of a massive redevelopment in the Pullman neighborhood, which is a mostly African-American community on the South Side of Chicago. For those of you who know, it's a very important historical neighborhood because of the Pullman Company, labor unrest, black labor union creation. So it's a very important neighborhood with a very, but one that had declined substantially.

There was a 180-acre industrial site in the neighborhood that was initially owned by Ryerson Steel. And CNI and U.S. Bank actually managed, complicated story that's not worth going into, to purchase that for community development. And through a process that I'll tell you where it is today.

So today it has a Walmart. It was the first Walmart in the city of Chicago. Very much a food desert. And although Walmart had some pluses and minuses, they were able to bring Walmart for inexpensive, fresh produce among other things to the neighborhood. It has Method Factory. It has Whole Foods and now just opened an Amazon distribution center. It's got an enormous state-of-the-art community center. There is now a food court in the neighborhood, a gym, et cetera, et cetera.

So it has really been an anchor to really significant community development. And so some of the lessons, to get to the point, is this development worked because of really a number of things. One, it's a big project, and they were thinking big and it was done in a way that really had the opportunity to catalyze economic activity in the neighborhood, and really change the neighborhood. Second, it was built around really a very deep level of community engagement from day one. People always talk a little bit about involving the community and they'll have a meeting or two. This one really brought community members onto the Board, really deeply into the decision-making process. And in fact, there was a real shift from doing a lot of affordable housing as part of the project to a much greater focus on jobs, largely driven by the people in the community.

And insistence of companies that came in, hiring people from the community and providing the infrastructure and support to help make that happen, right. So and then probably really important part of this is a great deal of financial sophistication to bring to bear all of the very complicated sort of tax incentives that exist at the federal government, state, and city local levels to bring sort of subsidies to the project. And then the ability with the financial institutions like U.S. Bank to also bring market-based investors to the project.

So sort of lessons are it's not easy, especially when thinking big's important but thinking big is hard. But it really is sort of, we think, a great example of what can be done with place-based investment, where there's some level of government philanthropic subsidies to catalyze the project, but a great deal of opportunity for market-based investors and bringing incremental capital to these communities.

Priya Parrish:
Right, yeah. And it's a great example too, as you mentioned, like all the different pieces of this that were required, including policy and the financial institutions, and the community. And also with that comes a really solid understanding of what's really needed. That same approach may not work in another community somewhere else. It's very specific to Pullman.

Robert Gertner:
Yeah, I think that's one, I mean one of the challenges is that Pullman had a number of assets that are quite unique, including 180-acre site to develop, but other things as well. And so that's always the challenge, right? These are not, it's not like we have a sample of 10,000 and we can do good statistical analysis. This is a sample of one, and we have to try to draw the best conclusions we possibly can from that experience.

Priya Parrish:
Yeah, no, that's great. All right. And, Mike, this question of whether impact investing, is it a category, is it an asset class, is it a label? We could have a whole session on that. But you guys don't explicitly call yourselves an impact investor, but clearly you've taken steps to improve diversity in your sourcing and portfolio construction. It may not be exactly what Brittany's describing, for example, in terms of who those companies serve. But for what you're doing, I'm curious, without using the label, how are you holding your firm accountable? Or who's holding you accountable? And what do you think the outcomes will actually be? Do you think you're going to actually create positive outcomes for these communities without deliberately saying that's what we're doing.

Mike Asem:
Yeah, I really appreciate that question. We're not an impact investing firm. We are the vulture ROI-seeking-only capitalists which we are described. We do not, as you said, we have never made investing in diverse founders or any sort of impact part of our mandate. That said, our team is extremely diverse by nature. Some folks may have not met my partner Victor, who is a white male. But as far as our full-time investment team, he is the only white male on our team, with the exception of we rotate through an associate annually typically, honestly, through Booth actually. But the rest of our team is myself, Abhinaya, who's an Indian woman; Katie, who's a white woman; and Leandro, who's a Hispanic male. And while that's great to say, I do think it positions us well to be more naturally instinctive in the way we're making investment decisions.

But I also wrote earlier this year something called the "Diversity Inclusion Anti-Racism Ownership Framework for Venture Capital,” and the keyword there is ownership. And to try to sum it up, it starts it's a three-step process that spells out the acronym OWN, which is observe and reflect.

Basically for each firm, my position is that they should start by asking themselves real questions like, do I want to do this because it's a marketing thing or because I want to drive impact? Just candid between the partners, like what is really happening here. Do you want to be reactive versus proactive? Do we want to do what we think is like checking a box irresponsible, or do we want to do something that's like leading in our category and in our industry?

And once you come to a place of, you've contemplated and you have some authentic things to say, the W is weigh, weigh out your options, gather what's unique to you, understand what's feasible. Right, I mean, it doesn't make sense to say you're going to do a million things if you can only do one. And particularly for venture capital, what's your LP situation, right? For example, if you're a partner with amazing track record and everyone's trying to be in your fund versus if you're an emerging manager that has no real track record that you're still trying to make your name. If your LPs are openly supportive of this, or even do you care? (laughs) Do you care about what your LPs think?

And the N is navigate. And what that means is mapping the solutions against the problems that you care the most about in a way that's authentic to you. And I use the word authenticity because I firmly believe that if it's not truly authentic then it won't, there's no staying power. You'll get a year down the road and the things that you committed to doing seem like way harder and way less worth it. And the indirect ROI that you believe could happen is like less attractive, right?

So we put our, and this has been published on my blog if anyone's interested in checking it out. But we put our team through that process and we came out with five things we were going to do. First was start with accountability and reporting. So we're still in the process of building out exactly how I want to go best about understanding key metrics like even just top of funnel. Like who are we talking to, who we are taking meetings with, and holding ourselves accountable and reporting that publicly. Another example is we want to be a conduit into venture capital.

Now, I mentioned we do an annual, we work with the PVC Lab here at Booth. Usually we take people on for a full year. And that program feels a lot like an annual rotation. And we feel like we can add to that by committing to adding a diverse individual into our firm annually, starting next year.

We, through research done by Kapor Center, we learned that one of the best one of the clearly best ways to help companies, so in our case, portfolio companies increase their culture and diversity, is to increase employee referral bonuses for diverse candidates. And so we are looking and experimenting in ways that we can subsidize the cost of the net increase of those employee referral bonuses.

Like I mentioned, we hold a summit in Chicago. It's now the largest gathering of VCs in the region twice a year. And so we are going to partner with Black VC and Latinx VC to showcase founders of color on the front end of that event as well as a way to help be a conduit for creating access for VCs looking' to increase their deal flow, and also founders who are looking for access to venture capitalists.

And then finally, we want to be known for being approachable as individuals and not just as a firm. And we just made it clear that it's an expectation on our senior investment team that everyone holds these values that we hold, Victor and I, around prioritizing diversity. And we just make it clear like what it is that we're already doing in our personal lives and make an accessible way for people to reach out to us in that thread. So that's what we're doing. That's what we're holding ourselves accountable to.

I will say that I'm extremely proud of our team in that we've always been extremely objective from day one. And if you look at our current fund of which we've made, as of today, made 15 investments from eight of them are in founders, companies founded by black, Latinx and/or female founders. Again, we are not, we've never had a mandate for diversity, but the results have shown that we're clearly outpunching the market in our ability as the most active investor in the region as well to deploy capital and diverse entrepreneurs.

Priya Parrish:
Yeah, that's really helpful. I have one final question. And so this is a good time for folks to start putting their own questions in the Q and A, so that we're ready to go with them.

I think that's awesome what you're doing, Mike. And my question for you, Brittany, is if everyone did that, let's say all the venture funds did that, would it be enough? Is there a need for funds like yours and impact funds like us and others who are saying we actually want to back those companies whose products are serving those communities. Is that what's really needed to create the effect? Or if we just back more black and Latinx and female founders, will we get that effect? And part of that is, so why are you an impact fund versus just being another venture fund doing what you're doing the way Mike is doing it and calling it a fund, and this is your strategy.

Brittany Henry:
Yeah, I think that's a great question. This is, I'm going to take a moment to think about that.

I think that I look at that as every fund, even if every fund took the intentional approaches

that Mike's fund takes, they're going to, they are going to be able to meet specific challenges, right? But I think that in order for us to be thoughtful about supporting these types of entrepreneurs at scale then there still has to be an intentionality and a space for impact-specific funds. I think that it should just, there'll be enough funds focus on that, and he's going to be able to invest in those diverse founders. You and I are going to still be able to invest in products and services that are hitting this specific need. But I think overall the problems and the challenges that impact investors or that venture capitalists overall are attempting to solve, there's room across the board for everyone to utilize in their own skill sets and experiences to tackle those problems.

I think if we look at this as a, overall in terms of the societal issues that we have and narrow it down to how do we support entrepreneurs of color, it requires structural change. And so that means everyone has a place in making sure that that occurs. I also like to add that when we think about venture capital and private equity, or just like private investing, many of the black and brown entrepreneurs aren't creating companies that fit within the confines of what a venture capital or a private equity firm can support.

So again, venture capital is about using technology to scale, being able to do that quickly in a large market, right? But if we think about wealth inequality overall there, it requires other funding structures or other sources of capital beyond what a VC or a PE farm can be able to provide. So I also, if we're thinking about supporting entrepreneurs of color at scale, I don't want us to narrow it down and just focus on those who are utilizing tech in a way that fits within the definition of where venture capital investors or private equity investors can provide support.

Priya Parrish:
Yeah, no, no, absolutely. I think if I can draw on what everyone said here is that it's an important market failure that needs to be addressed, venture capital.

Brittany Henry:
Exactly.

Priya Parrish:
But it's narrow, right? And I think it's important, part of it is because, again, there's higher rewards, so the knock-on effects of creating wealth through it both for the founders, as well as the investors, and who are those people creating, getting the wealth and then who do they fund, and it goes on and on, is really, really important.

But you know, Brittany or your point, it's like also, I mean you could pretty much look at any stable and high-paying profession in industry, and we see this same inequity gap. And so in many ways, funding these companies, whether they're run by, regardless of who the founder is, if that product is actually creating better access to education for black and brown communities who don't get it, that is going to help close that gap in the medical field and the law profession, like all these other things. So it's all very, it's an important part of the puzzle, but it alone won't solve it.

And I think also we all, I think, we need to be humble that investors alone surely won't solve this. We need public policy, we need philanthropists, we need government, we kind of need it all 'cause it's a really big, complicated intersectional problem here.

So thank you for fielding all my questions. I'm going to hand it over to Will Colegrove who's going to moderate some of the questions in the Q and A. We'll get through as many as we can. Please keep asking more. I think some of us, I'll try to type in answers to for those that we don't get to live here. So thank you all.

Will Colegrove:
Great, thanks Priya, and thank you all for being here. So we have some great questions in the chat, and I'll try to sort of synthesize a few that have been asking some similar questions. Brittany, you touched on sort of the inherent narrowness that is venture capital, right? That there are only certain businesses that are sort of venture scale and sufficient for venture investing. And the question from the audience is, for students who want to make the biggest dent possible to address the market failures we've talked about, sort of lack of access to capital, what type of investing would you direct them to? We know venture is attractive, but it's a tiny slice of the pie in terms of AUM and in terms of the number of businesses that are a right fit for it.

Brittany Henry:
Yeah, that's a great question, I love it. And as a former student at Booth trying to figure it out myself, I can definitely empathize with them as they figure it out. I think it's a very individual decision and it really just depends on being, taking a step back and being thoughtful about what skill sets and connections and level of expertise you have in terms of how you can help move forward this particular issue, and how you can help companies overcome specific challenges or make investments that are supporting, being supportive of the communities that I care about or that we care about, right? And I think that that is a really individual decision.

And for example, you could come from a policy background or understand, have some experience in government. And there's a way in which you can utilize that to invest in GovTech or to come at it from a policy angle and be thoughtful about making investments into companies that allow our democracy to function better, right. There is opportunity for later-stage companies in which you're being thoughtful about. As people transition out of companies, how do we transition ownership into communities that, to help increase black and brown owners of organizations. So if you're coming from a PE background, then there's ways in which you can create an investment thesis and being able to provide support at the PE level. So it's really about utilizing your specific skill sets.

I think it's about ecosystem building. And there isn't one specific way to accomplish this or to support entrepreneurs at scale. It takes everyone. So if this is a career that you're interested in, where can you add the most value? And that's about creating your own thesis and connecting with companies that are aligned to that thesis, and being able to invest your time in that particular way.

Will Colegrove:
Priya, Mike, anything you want to add to that?

Priya Parrish:
Go get 'em.

Mike Asem:
Yeah, I think, (laughs) Brittany makes some good points. I think it's tough, it's challenging, especially if you're trying to enter into venture capital, and I might not be entering from a position of a check-writing authority or something where you can tangibly make decisions on day one.

That said, I think that I've also written a piece called, "There's No Debate, Good People Aren't Good Enough." And what I'm calling out is that oftentimes throughout history, people have the opportunity to choose to lean into justice or lean into self-preservation and indifference. And I think that wherever you're going post-graduation, the decision to intentionally lean into being a champion for something that matters in your organization and your culture, and just how decisions are made I think is paramount. And it sounds, it's like abstract and nebulous perhaps, but it is super-meaningful, especially in something like venture capital when decisions are made oftentimes more subjectively than you might imagine, especially at the earliest stages of fundraising.

Will Colegrove:
Great, thank you. And Brittany, you mentioned sort of policy and sort of regulatory element of this, and Priya, you mentioned as well sort of the role that public policy plays. Rob also touched on some of the sort of tax elements that allowed for a development like Pullman to move forward. I'm curious if folks have any specific examples of effective policy interventions that promote more impact investing, whether in venture private equity or in any other asset classes.

Mike Asem:
I mean, I would point to opportunity zones. I think opportunity zones have been good. And I think that's probably the best example I would point to, myself.

Robert Gertner:
Yeah, I mean, I think opportunity zones have been big. I'm not sure they are very effective for the amount of tax subsidy dollars, 'cause a lot of the money seems to go to non-incremental projects and not necessarily in the neediest neighborhoods. I mean, I think another example is gift financing, which is another example of creating tax incentives, but one which also has its downside and not always directed in the best possible ways, but really is designed to create short-run tax benefits that are designed to offset the future incremental taxes from the increased economic activity in a neighborhood. And to the extent those things are implemented fairly, they can be a pretty powerful and important incentive on, again, place-based impact investing. I think it's much more of a challenge around sort of venture, what are the private equity or banking?

Another important example is the Community Reinvestment Act, which actually has had, which sort of is very old but requires banks to invest in all the communities within their geographical footprint. And most of what, the way that ends up occurring is that banks end up being investors in things like, in organizations like CDFIs that are making investments in the community or investing in some of these small entrepreneurs and small-scale real estate development in these needy communities. And those sort of subsidized sources of funds are a really important source of policy-driven, although one might argue that they should be doing this without the policy requirements. But policy-driven and a real source of capital for these neighborhoods.

Priya Parrish:
I'll add just one more policy piece that I think is important of this. I touched on in my opening comments about employee ownership, paradigm-based investing. So the Employee Stock Ownership Plan and the ESOPs, which were, by law, kind of created the tax benefits that since the '70s of being exempt from federal taxes. And so companies that convert to ESOPs or companies that start like that, they're obviously getting a certain tax benefit. Of course, they have to be cash flow positive, so it's very ill-fitted for most early-stage ventures, but potentially an exit.

And so being able to maintain that policy as well as expand it to employee ownership trust, which provide other benefits, but not the tax incentive or cooperatives or stewardship trust, purpose-driven trust, all of these things can actually, I think, can be tremendously powerful for the social inequity question that we're talking about because of the employees again, which ultimately, you can make a founder rich and you can make a venture capitalist rich, but how are we going to make the workers rich? And so I think that's an important thing that I hope picks up steam, both from policymakers as well as investors and companies, and teams.

Brittany Henry:
Yeah, I would also add, and it took me awhile to think of this one, but the crowdfunding piece within the Jobs Act, and that allowing, we, at one of our portfolio companies is actually a company called SMBX, which allows small businesses to create bonds and allows the community to make investments into those small businesses as a result. And so that's really around utilizing technology that will allow people to make small dollar investments to be able to support a specific initiative or a small business within the community. So that's another one that we're seeing a lot of traction in and it also helps fill the gap for early-stage investments within PE and VC, where as, where founders of color have trouble raising those family and friends rounds using that as a vehicle as well.

Will Colegrove:
Great, really interesting. Another question in the chat is sort of a question about impact measurement. We've talked a little bit, Priya opened, I know, talking about the Five Ps Framework, and Mike, you talked about some of the ways you're holding your firm accountable, but obviously it's one thing to sort of market yourself as an impact fund or to market yourself as finding more diverse opportunities or having a more diverse portfolio. But how does a firm sort of actually hold itself accountable? What are best practices? And I'd love if folks can talk, too, about sort of how you think about holding yourself accountable and how you think about your conversations with your LPs. Are they asking questions about your impact measurement practices or how important is that for the LP/GP relationship?

Brittany Henry:
Yeah, I think that that's really important. And one of the things that we're thoughtful about, we  like to consider ourselves having a really high impact bar. And so when we are thinking about collecting information and having conversations, and supporting our companies through portfolio like in management, when we talk about their goals and we talk about their financial revenue targets for the upcoming year, we're also being thoughtful about their impact metrics and saying, how many people are you attempting to serve within this model? How are you being effective and thinking about the end users to your product, how does that flow into product roadmap, the services you provide, et cetera? So that's something that we're thoughtful about.

And we look at it more so on a company-by-company basis. 'Cause as those companies grow, we're not looking, we recognize that each company has its own kind of, the way in which they're evaluating their impact. And our LPs are very aware of our thesis. And when we're reporting out to them and having conversations, it's about the finances, but it's also about the impact that those particular companies are having as well. So that goes right alongside with our standard business metrics.

Priya Parrish:
Yeah, I mean, at Impact Engine, there are a few things that we do. The first thing is anyone we invest into, they have to sign an impact commitment agreement that basically solidifies the fact that they are managing their business to create the outcomes that we're investing for, and that they agree to measure, on a regular basis, in collaboration with us. With that, we promise to our investors that we report our impact metrics that are three to five KPIs that validate and quantify the impacts coming out of the impact thesis that we went into and disclosed going into the investment. And we report that right alongside financial metrics every single quarter in black and white, numerical, no stories, no quotes, no fancy marketing brochures. It's about the numbers. And then the third thing we do is that not just the impact thesis but, increasingly, we are focused on helping our portfolio companies run their businesses better. All of it, not just their product or service, but we think about ESG metrics and think about how are you managing your supply chain and your carbon footprint? And how are you taking care of your employees? All of these things really, really matter to us in addition to that core thesis that's driven by product-based impact. So those are some of the things we're doing.

It's all very much grounded in transparency, both to the people we're investing in, as well as the people's money that we feel a great deal of stewardship and fiduciary duty to achieve not just those financial returns, but impact returns as well. I think that's one of the coolest parts about impact investing in private markets. You know, exits take a long time. Like if you're lucky, a few years, but like it can be many years. But that return on impact from what those companies are doing, day one, when they're selling that product, you're getting' that right away. So I think that's just something that, that's why it's important for firms like us to show it, 'cause that is part of why people invest in.

Will Colegrove:
Rob, anything that you want to add from the academic perspective?

Robert Gertner:
No, I think, not much. I think Priya and Brittany gave a good summary. I think one of the things I think is notable is that Mike's fund could be an impact fund, right? And there is an extent to which there's labeling, I think, right? The key, one of the key distinctions is that relationship with the portfolio companies and the LPs, which is that you're going to hold yourself accountable and hold the companies in your portfolio accountable for that impact. And I think, therefore, it becomes really essential that it be part of what the fund does.

Will Colegrove:
Wonderful. Well, thank you all. We could obviously have this conversation for a lot longer than the hour we were allotted. But I want to thank everyone so much for being here. And I want to turn it over to our Executive Director, Caroline Grossman, for the last word tonight.

Caroline Grossman:
Thanks so much, Will, and thank you, Priya and panelists for such a meaningful discussion, and to all of you for being here and for your thoughtful questions. I really appreciate it.

Before leaving today, I want to share information on some upcoming ways for you to get involved with Social Impact at Booth. All of the events I'm about to mention are on the Rustandy Center's website, so you don't need to scramble and take notes, but nonetheless, wanted to get them on your radar.

The third event in the Innovating For Social Equity series is coming up in February. If you enjoyed tonight's event, we hope you can make the next one. It will focus on what corporations are doing to innovate in the social sector space. And it will be moderated by Brian Fabes, the Rustandy Center's new Civic Impact Executive in residence and Managing Director of the Corporate Coalition.

Something else I'd love to get on your radar for those of you who know people who might be interested in Booth. So if you're a student, people in your network. If you work in the sector, anyone who might be thinking about an MBA, we have a fantastic program called Civic Scholars. It is for emerging nonprofit and government leaders dedicated to a career in social impact. And we would love you to encourage them to learn more and apply. This program offers tuition awards up to 100% to MBA students who work in a designated 501(c) nonprofit or for the government. And you can nominate an emerging leader as well via the link provided here. All of this is also on the Rustandy Center and on Booth's website.

 If you're interested in learning more about the work of Impact Engine, M25, or Impact America Fund, we encourage you to visit their websites or follow them on social media. Lastly, we'd love to get your feedback on today's event. We put together a short survey. When you exit the webinar, you'll see a pop-up in your browser with the survey link, and we'd greatly appreciate it if you took a few short, short minutes to complete it.

Thank you, and we hope to connect with you soon.