ELLEVEST INSIGHTS

When you hear “venture capital,” a certain movie probably plays in your mind: tech bros developing code in a garage or dorm room in Silicon Valley or New York, funding their idea through oversubscribed venture rounds, reaching unicorn status, and eventually achieving an “exit” like an IPO — making themselves, venture capitalists, and bankers rich in the process.

Well, that narrative didn’t come from nowhere; for too long, VC has been the domain of men, technology, coastal cities, and investment banking. It’s no wonder the needle hasn’t moved toward closing the gender venture gap, where women receive just 2% of VC dollars — less than 1% for women of color.

But that isn’t the only path to success — for start-ups, or for those who would invest in them. There are other viable VC business models. And we can expand access to funding for underrepresented founders.

One of the key components of impact investing at Ellevest Private Wealth is how we source, vet and integrate impact-focused alternative investments for our clients — and one of these investments is in a firm that uses a different type of business model to invest in early-stage, revenue-generating companies that get overlooked by “traditional” VC firms.

Here's how it works.

The strategy: Revenue-based funding

In VC today, “exits” are the primary way most investors make money: either their shares become sellable in an IPO, or they get paid a cut of the company’s purchase price in a sale. In short, exits are often the only way for VCs to “win.” But an exit isn’t the only way for a business to win, and there are scores of companies worth funding that just aren’t built that way.

Revenue-based financing (RBF) is a different way to invest in revenue-generating companies. Rather than taking equity, the investor provides capital — and instead of repaying with a fixed interest rate, the company commits to sharing a small, set percentage of its revenues over time with the investor.

For investors, RBF has some key differentiators over traditional VC investing:

• Earning a return doesn’t depend on whether or not the company has a big exit, like an IPO or acquisition.
• That means success isn’t an all-or-nothing outcome; there are way more possibilities than a company either growing large enough for an IPO or going bankrupt.
• Investors can start to receive distributions as early as one year after they originally invested — as opposed to a typical ten-year hold for venture fund investing.^*

And of course, a lot of founders like the sound of RBF, too. They don’t need to give up equity or control of the company they ideated and created, and they can focus on building their company without feeling pressured to pursue an exit.

So it goes without saying that this business model, with benefits for both founders and investors, attracts a wide diversity of entrepreneurs. A firm that Ellevest works with (let’s call them, for this article’s purposes, “the RBF firm”) takes the impact of RBF even further by providing capital specifically to diverse and impact-focused companies and founders. (They also offer advisory services to help these companies grow faster and boost revenue. And, of course, as revenues grow, so do investor returns.)

When evaluating potential companies, they focus on three pillars:

1. Invest in founders historically excluded from early stage funding and venture capital. This includes women, people of color, first-time entrepreneurs, immigrants, military veterans, and others who build businesses outside networks of socioeconomic privilege.
2. Invest in companies that support a more just and equal world. This includes companies that have embedded goals around social good into their business model, like those that advance environmentalism, share revenue with non-profits, support education-related causes, or target underserved communities.
3. Invest in founders and companies outside major metropolitan areas or start-up hubs. There are a lot of founders who don’t live on one of the US coasts, and their communities need their services. The firm also supports or leads entrepreneurial support programs and holds open office hours with local partners in cities across the country.

The result: Underrepresented founders get the funding they need

Since it launched in 2016, the RBF firm has invested in more than 130 companies (and generated returns for investors, with a competitive historical blended IRR of more than 20%). Rather than hunt unicorns, they invest in a wide range of companies they think have the potential to grow to $10 to $20 million in annual revenue across industries, including SaaS, tech-enabled services, and e-commerce. This, in turn, allows them to secure high-quality deal flow and helps make it more likely that they’ll continue to perform well, even during turbulent times.

Among the companies they’ve invested in:

• Zoobean, a game-changer for communities with literacy needs. It helps educators, librarians, and families read more by creating, promoting, participating in, and gaining insights from reading challenges.
• Adelante Shoes, which was founded to support economic development in Latin America. It sells high-quality, custom-made shoes created by Guatemalan artisans who are paid enough to live well in their communities.
• Everlasting Love, an integrated ecommerce fulfillment and services company focused on serving brands owned by Black people, women, LGBTQIA+ people, and other underrepresented founders.

Notably, more than 60% of the firm’s investments since 2016 have been into companies led by a woman or person of color.

Changing the world, one start-up at a time

By funding those who’ve successfully built businesses but don’t fit the traditional VC model, RBF helps more companies serve the communities who need them the most. Just think about how much the world could benefit from even more of it. We’re honored to offer our Private Wealth clients the opportunity to earn venture returns while helping companies with diverse founders grow and succeed.

This is just one example of the kinds of impact alternatives you might find in an Ellevest Private Wealth client portfolio. Talk with your Ellevest financial advisor today to learn more about how your investments can create change for good.

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