GRAND RAPIDS — The Right Place Inc.’s new venture capital fund plans to target investments toward an area of the economy where capital historically has flowed the least: startups and businesses owned by racial and ethnic minorities.
With the New Community Transformation Fund, the nonprofit economic development organization aims to raise $15 million to $20 million in capital over the next year from individual and institutional investors — corporations and family offices, primarily — to support entrepreneurs from disadvantaged groups. The venture capital fund aims to become fully operational by 2021.
Investments of at least $250,000 will go to Series A rounds for scalable businesses that are approaching their next stage and need growth capital. The fund will target companies involved in advanced manufacturing, food processing and agribusiness, life sciences and medical devices, and information technology.
The idea for the new venture capital fund took root in 2019 as The Right Place prepared a new strategic plan for the next three years. As part of the planning process, the organization noted the need to do more to support economic inclusion became a consistent theme in conversations with more than 100 community and business leaders across the region, according to The Right Place President and CEO Birgit Klohs.
“We can all agree that West Michigan has been extraordinarily successful over the last 10 or 12 years and beyond in our economy … but it certainly is not distributed evenly among all of our populations,” Klohs said. “One of the biggest barriers to entrepreneurship is always funding, always money. It doesn’t matter what (kind of) entrepreneur you are, but it is particularly difficult for communities of color. It’s very, very hard.
“We talked about a fund that will take those barriers down, that will in fact help us become a more diverse and inclusive economy in West Michigan.”
The venture capital fund would operate separately from The Right Place and require founders and portfolio companies receiving investments to locate and operate in West Michigan.
As well, the fund will make investments in minority entrepreneurs buying family-owned companies whose owners are exiting the business, thereby ensuring the firms remain locally owned, Klohs said. She noted that 60 percent of the manufacturing companies based in West Michigan are family owned.
“How do we keep some of that ownership local as companies transition? We believe that there is an opportunity to keep those locally owned by having a fund like this to invest,” Klohs said. “Having them owned by minority ownership, we are getting a much more diverse supply chain that way, (and) faster.”
Bank of America and the Consumers Energy Foundation each provided $200,000 in startup capital to design and develop the venture capital fund. Their contributions will cover costs such as crafting the legal structure and operational systems for the fund; establishing a management team, advisers and a board of directors; and securing local and national portfolio growth partners.
Partners will also need to decide the minimum investment required from investors in the venture capital fund.
By partnering with The Right Place and Bank of America to support the formation of the fund, “we can support people, neighborhoods, our community, our state, our economy for generations to come,” said Garrick Rochow, executive vice president of operations for Consumers Energy and a member of The Right Place board’s executive committee.
“Together we will create a stronger future and a more inclusive community,” Rochow said.
Klohs likens the fund’s formation to the establishment 24 years ago of the Van Andel Research Institute that today anchors the Medical Mile, a life sciences, health care, and bio-medical research hub that employs thousands of people.
“Back then nobody could envision what that would mean, and yet today it has transformed the business community in West Michigan,” she said. “We have a whole new industry along health care, life sciences and medical devices. The way I look at the start of this fund is the same thing.
“Everything needs a catalyst. This fund will be a catalyst for diversifying our economy by investing in entrepreneurship. So 20 years from now, I hope somebody will sit up here and say, ‘Here’s how many companies we created and changed the trajectory of West Michigan, how we look at ourselves, and how successful we are.’”
In looking to raise $15 million to $25 million, Klohs has had indications of interest from two large local employers and “quiet conversations” with others “who are excited” and are “giving us the thumbs up that this is needed,” she said.
The leader of the Urban League of West Michigan considers a venture capital fund that actively scouts for investments in companies owned by people of color as “a long time coming.”
In his work, the Rev. Joseph Jones sees entrepreneurs “every day” who need growth capital to scale their business but are unable to secure financing.
“The fact that it is here is critically important because it, I believe, hasn’t necessarily been available in our community in our Grand Rapids,” said Jones, president and CEO of the Urban League of West Michigan and a Grand Rapids city commissioner. “It’s always required intentionality.”
The issue of economic inclusion and diversity in venture capital has been rising nationally over the last few years amid heightened awareness of the need to grow access to capital and investments in startups and businesses owned by women and racial and ethnic minorities.
Research shows that only a fraction of the venture capital invested annually in America goes to companies owned by ethnic and racial minorities.
“By investing in companies owned by people of color, we will work together to correct those disparities,” said Skot Welch, the founder of Grand Rapids-based Global Bridgebuilders that focuses on cultural transformation and inclusion. “Talk is good; action’s better.”
Welch will serve as a general partner in the venture capital fund, taking on the role of “ambassador” and the “voice and the face to the fund,” he said.
‘The pendulum is swinging’
In 2018, less than 1 percent of the nearly $130.9 billion in venture capital invested in the U.S. went to startups held by African Americans, said Kwame Anku, chairman and CEO of Sacramento, Calif.-based Black Star Fund who’s a consultant to the New Community Transition Fund. Women-owned companies received just 2.2 percent of all venture capital.
The New Community Transformation Fund is part of a national movement to reverse those kinds of disparities, he said.
Anku noted the formation of three venture capital funds in the U.S. last year that focus on diversity: Harlem Capital that in December closed on $40.3 million in fundraising, San Francisco-based Plexo Capital that raised $42.5 million, and San Francisco-based Precursor Ventures that netted $31.5 million in a fundraising round that closed last May.
In mid 2018, the $100 million New York-based New Voices Fund launched to support ventures by women of color.
“Tens of millions, and soon to be hundreds of millions of dollars in capital, will be in these funds and then deployed to the entrepreneurs. Those companies will start to grow, we’ll see successes, we’ll see exits, and those numbers are going to shift dramatically,” Anku said. “We are dealing with that issue, we are dealing with that reality in the marketplace. But the reality is that behind the scenes, the pendulum is swinging in a very positive way, and we see the New Community Transformation Fund as being one of the leaders and pioneers in this space.”
Breaking down barriers
In Michigan, companies led by a CEO from an underrepresented group accounted for 13.7 percent of the $385 million in venture capital invested in the state in 2018, the most recent year for which data are available. That compared to just 2.8 percent in 2015 that went to underrepresented groups, according to the Michigan Venture Capital Association’s 2019 research report issued last spring.
The MVCA report noted that 18 of the 140 VC-backed companies operating in Michigan in 2018 were led by a racial minority, an increase of 125 percent from five years earlier when the association first began tracking diversity data.
Anku attributes racial, ethnic and gender disparities in venture capital investing to “a historical systemic issue” and the history of exclusion in the U.S. that combined in an industry where players tend to have long built familiarity and professional networks with people like themselves. Oftentimes in an industry largely dominated by white males, venture capital investors look at a prospective deal brought to their attention by their peers.
“If you’re in Silicon Valley and you have mostly white males that for the last 30 years have a community, have relationships — no racism or exclusion in that equation, just literally the relationships — you’re going to have that disparity there,” Anku said. “That’s why we are here and, I think, we’re going to be an example. We are here to break down those barriers and to make those relationships happen, and in an ideal world, see the transformation we want to see.”
In West Michigan, Jones at the Urban League views the relative lack of venture capital that has flowed to firms owned by people of color as “the historic homogeneous nature of the culture here in Grand Rapids.”
West Michigan investors historically have not had ties to minority communities, he said.
“Like many cities and communities throughout the country, there’s a level of comfort that you have working with people that look like you,” Jones said. “If you’re not intentional about trying to engage in developing a relationship in different communities, you’re going to get what you get, and that’s been the case for our beloved city.
“This speaks to intentionality and it speaks to really the aspirational impact of wanting to be something different, and really wanting to be a city that embraces inclusion and equity and sees it for the value that it really brings. Because the more that we can really do to be a city that is seen as equitable and inclusive and has opportunity for more people, the better it is for all involved.”
That change can attract to West Michigan more business and industry, more entrepreneurs and venture capital, and more coveted young talent “that has energy and ideas,” Jones said.
How many companies the venture fund ultimately backs is hard to say right now, Klohs said.
Once the venture capital fund begins operating and investing, Welch expects to see steady a deal flow.
“I think where we might be surprised is not in the lack of deal flow but really the abundance of opportunity,” Welch said. “We just want to make sure … our systems and how we vet the deals are in such a way where we can get some good exits happening and some strong exits.”
If successful exits occur, partners in the New Community Transformation Fund expect it to lead to larger, successor funds in the future.
“We’re very optimistic and hopeful that we will be able to have successor funds off of the success of the first one,” Anku said.