Impact investment funds, which try to generate social and environmental benefits alongside financial returns, are a dime a dozen. But one outcome that has yet to materialize is leveling the playing field for minority and underrepresented entrepreneurs seeking to raise capital.
According to Transparent Collective, a nonprofit supporting minority business founders, Black entrepreneurs make up just 1 percent of all startup founders who receive venture funding. The figure is even lower for Latina women.
Part of the problem, says Nasir Qadree, is a lack of diversity among the funders themselves. A report from Bella Research Group and the Knight Foundation found that “firms owned by women and minorities manage just 1.3 percent of assets in the $69 trillion asset management industry.” According to BLCK VC, just 3 percent of venture capitalists are Black.
Qadree is the founder and managing partner of a newly-formed investment fund, Zeal Capital Partners, that hopes to buck those trends. The Washington, D.C.-based firm will invest in early-stage startups building solutions in financial technology and the future of work—the latter of which includes services that offer alternative postsecondary education pathways, reduce financial barriers to learning, leverage data for academic success, and provide reskilling opportunities for adult learners.
Today, Zeal announced the first close of its fund at $22.3 million. It is still fundraising, aiming to reach $50 million in early 2021. The firm will invest anywhere from $250,000 to $2 million in pre-seed to Series A deals.
Beyond being another impact fund, Zeal fashions itself as an “Inclusive Investing Fund.” (It even trademarked that term.) What that means, says Qadree, is “leading with inclusion, starting with the founders themselves,” and baking in diversity across racial, geographical and educational backgrounds into its investment decision-making approach.
Most investment teams are stacked with MBAs from elite universities—and there are some on Zeal’s too. (Qadree, who went to Hampton University, a HBCU in Virginia, does not have an MBA but cut his teeth at Goldman Sachs early in his career.) Many focus their investments on the coasts (mostly San Francisco and New York); Zeal believes there are just as many promising opportunities elsewhere.
“We believe this is a market-backed strategy that allows us to widen our lens and give more founders a fair swing at the plate when it comes to access to capital and mentorship,” says Qadree. “Our bet is that these companies will outperform because of their diversity.”
That’s not just a wild bet. Research from the Kauffman Fellows Research Center found that while diverse founding teams have difficulty fundraising, when they do, they raise more capital than their all-white peers. And when companies with diverse founders are sold or go public, they return more capital than those led by white executives.
“Will we pass on an all-white team from San Francisco with an innovative model to expand access to educational pathways? No,” says Qadree. But that company has to show a commitment to diversity—both across its customer base and internally. His colleagues like Rachel Williams, who previously led diversity, equity and inclusion (DEI) efforts at StubHub and Yelp, “can help that all-white Silicon Valley team rethink their recruitment and retention strategy,” he notes.
One of the anchor investors in Zeal’s fund is PayPal, which pledged $530 million in June to support Black and minority-led businesses. Last week, the financial services company announced it would invest $50 million across Zeal and seven other Black and Latinx-led venture capital funds.
“Zeal Capital stood out to PayPal because of our shared belief that access to financial services creates opportunity,” said Mario Ruiz, who led PayPal’s investment in Zeal’s new fund, in a statement. “PayPal made a commitment to fight racial economic inequality, and venture capital funding is a key component of that.”
Other investors in the fund include Rethink Education, an education-technology investment firm, Southern New Hampshire University Endowment and The Alfred P. Sloan Foundation.
According to Crunchbase, Black and Latinx founders received less than 3 percent of all venture capital raised in the U.S. so far in 2020.
A Marathon Calling
Prior to launching Zeal Capital, Qadree helped lead social-impact investments at AT&T. There, he directed millions in philanthropic capital to dozens of education startups and social-impact investment groups, including Camelback Ventures and Village Capital, where he previously led its education strategy.
That experience “gave me a good sense of what it takes to build diverse pipelines for entrepreneurs attempting to solve critical problems when it comes to connecting education to employment,” says Qadree. Still, he acknowledges that “when it comes to sourcing and investing in talent, we could be doing a better job.”
A first-generation college student, Qadree describes his calling to support education as a lifelong marathon—quite literally. He has committed to running 51 marathons (one in every state and in Washington D.C.) to raise $1 million in scholarships for others aspiring to be the first in their family to attend college. He’s completed 18 races so far.
Still, a two- or four-year college program may not be the right path for every learner, says Qadree. Non-traditional education providers that offer short-term skills-based training, and which leverage new financing models like income-share agreements, show promise, he adds. So do programs that offer alternative credentials, like badges, that better showcase one’s competencies than diplomas and degrees.
Zeal has already made its first investment—in Esusu, a fintech company. The next two deals, according to Qadree, will support a startup helping organizations with internal DEI efforts, and another that works with tech companies to recruit diverse graduates from coding bootcamps.