Published in Finance

New diversity-focused VC fund seeks $5M locally before making national pitch

BY Sunday, August 02, 2020 05:00pm

GRAND RAPIDS — A new venture capital fund to invest in businesses owned by racial and ethnic minorities looks to secure financial backing locally before reaching out nationally for investors.

Organizers of the Grand Rapids-based New Community Transformation Fund LP want to secure an initial $5 million commitment from local investors before approaching prospective investors across the country. That would give the venture capital fund momentum and the credence that’s needed to make the case to prospective investors elsewhere.

Skot Welch, managing partner of the New Community Transformation Fund COURTESY PHOTO

“We have to do something significant as a community to let the nation know that we’re serious,” said Skot Welch, managing partner of the New Community Transformation Fund. “We have to vote with our dollars as a community, and if we don’t, it’s another exercise in theory.”

In a move to do more to support economic inclusion, The Right Place Inc. last year initiated the formation of the New Community Transformation Fund to invest in businesses owned by people of color. That’s been an area where venture capital historically has flowed the least.

The new venture capital fund aims to raise up to $25 million. Founders in January announced the formation of the fund with the backing of $200,000 each from Bank of America and the Consumers Energy Foundation to pay startup costs such as legal work.

Organizers formally established the fund in May as its own entity and have since made nearly 20 presentations to prospective investors locally that led to the first $2 million in commitments. Grand Rapids-based Mercantile Bank Corp. and Spectrum Health Ventures, the corporate venture capital arm of Spectrum Health, each committed $1 million.

“We’ve had a very, very positive reception,” Welch said. “We’re on our way.”

Spectrum Health Ventures was the first to commit. When presenting to Spectrum Health, “we didn’t have to do hardly any convincing,” Welch said.

“With them coming on board, that set the wheels in motion,” he said.

Making investments in “partnerships that enhance equity and strengthen our community is consistent with our mission to improve health, inspire hope and save lives,” said Spectrum Health President and CEO Tina Freese Decker.

‘On target’

For Mercantile Bank, the New Community Transformation Fund “has the potential to be a needle mover for the advancement of racial diversity for business ownership in West Michigan,” CEO Robert Kaminski told MiBiz.

Mercantile Bank views the investment as a way to back an initiative that furthers economic diversity and inclusion in West Michigan. The bank invested in the venture capital fund “very enthusiastically,” Kaminski said.

“It feels like it was a really solid opportunity. We’re all looking for opportunities to increase the diversity of the business ownership in our community,” Kaminski said. “We believe that this is as good of a plan as we’ve seen to be able to expand minority business ownership in West Michigan.”

Two more local investors could close on commitments soon, and “we have other asks that are outstanding that are in various stages of decision making,” said Birgit Klohs, president and CEO at The Right Place.

The fund has met timeline goals for organizing and fundraising, Klohs said. Organizers hope to secure $5 million in commitments from local investors by early fall, “and then we’re going to go national,” said Klohs, who serves on the venture capital fund’s board of directors.

“We are on target,” she said.

Addressing needs

The concept for the new venture capital fund took root in 2019 as The Right Place crafted a new strategic plan. During the planning process, the need to do more to support economic inclusion became a common theme in conversations with more than 100 community and business leaders across the region, Klohs said previously.

Only a small portion of the venture capital invested in the U.S. goes to businesses started by ethnic and racial minorities.

Of the 144 companies in Michigan backed by venture capital as of 2019, just 13 percent are led by a CEO who is a racial minority, according to the annual research report by the Michigan Venture Capital Association.

Only $109.2 million of the $2.1 billion invested in Michigan in 2019 went to a startup led by a CEO who was a racial minority. The MVCA’s 2020 research report noted that over the last five years, the number of startups in Michigan led by racial minorities increased 138 percent, although “statewide funding data indicates that companies led by underrepresented groups are systemically underfunded.”

The need for greater minority inclusion in venture capital has been growing in the venture capital industry. The National Venture Capital Association in June launched a new nonprofit organization whose mission includes “advancing a more diverse, equitable, and inclusive ecosystem.”

In the spotlight

The issue has been elevated further by the events of this spring and summer, with the protests and movement triggered by the killing of George Floyd by a Minneapolis, Minn. police officer. The events led to commitments by large banks and several corporations in the U.S. to put large sums toward addressing racial economic disparities.

The New Community Transformation Fund may reach out to those initiatives after securing enough backing locally to expand fundraising nationally, Klohs said. She cites corporations such as Bank of America, PNC Bank, Google, Apple Inc., PayPal Holdings Inc., and Comcast Corp. that have “stood up hundreds of millions of dollars of investable funds into the communities of color in the United States.”

“We need to get this fund in front of some of those. You can’t do that if the local community hasn’t really committed,” Klohs said. “We need to seriously show that West Michigan is as committed to this as we think they need to be and then we can go and ask people who are not local to be part of the fund.

“Raising money for a fund that’s headquartered in Grand Rapids and getting no local money or little is not going to work.”

Driving awareness

The greater awareness today of economic and racial disparities and the protest movement of the last few months that came on top of the COVID-19 pandemic have “only given lift and even greater visibility to what we’re doing,” Welch said.

“It’s so ubiquitous now. It’s everywhere. You cannot avoid the need and the necessity for communities to take this very seriously,” he said. “It’s really helped us a bit because it really frames everything we do. There’s not much to explain in presentations now as to the need.”

The New Community Transformation Fund intends to make investments of at least $250,000 in 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 venture capital fund will require founders and companies receiving investments to locate and operate in West Michigan.

The fund also will make investments in minority entrepreneurs buying family-owned companies whose owners are exiting the business, thereby ensuring the firms remain locally owned. 

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