a16z Podcast - a16z Podcast: Investing in Communities

Episode Date: June 22, 2015

Investing to make a return both financial AND societal isn't new, but the opportunities to reach and build businesses in communities that have been underserved by tech are larger than ever. One example is the business opportunity presented by hairstylist platform Mayvenn, which a16z recently backed. In this segment of the a16z Podcast, Kesha Cash (founder and general partner of the Impact America Fund, also an investor in Mayvenn) discusses how she puts her fund’s money to work in markets that target underserved Americans. Cash is joined by a16z’s Tawny Holguin (who leads our seed and early scouting efforts) to breakdown the intricacies -- and opportunities -- of so-called “impact investing.” Do core business principles change at all? But then how does impact get measured? And what happens when you connect more communities to tech?

Welcome to the A16C podcast. I'm Tanya Lgeen, and today we have with us, Kisha Cash, who's the founding partner of Impact America Fund. Welcome. Thank you, Tommy. So I think today we wanted to talk about a few things. We wanted to talk about the early stage investing landscape, how that's changed. Obviously, the costs of starting a company are so much lower. So that means there are more companies emerging very early. There's a lot of wealth now that's being circulated and in the investing space in venture capital, there's a lot of interest, a lot of people who are maybe new to tech, don't know much about technology, but they're interested in kind of getting into this. So you're seeing a lot of new angels and a lot of people flooding angel list, forming

syndicates. So, you know, how do you interpret that, especially taking a focus with Impact America fund on looking at the early stage companies, ideally with a social impact. Tell us more about what that means to you. Yeah, we actually, you know, our investment thesis, we're investing sort of pre or post-seed stage pre- Series A and then participating in Series A and going forward. And because of our mission, you know, we're investing in underserved companies that impact underserved communities in America, the types of companies and opportunities that are particularly interesting to us are oftentimes very unfamiliar to those folks who you're, you're talking about that have money to invest, their new angels, etc. So we spend quite a bit of time

educating individuals on what this means in terms of investing in companies to impact underserved communities in America. And interesting enough, there recently, J.P. Morgan and the Global Impact Investment Network, Jen, released their annual survey of impact investors. So the survey says they interviewed or surveyed 146 impact investors around the globe. and these impact investors account for about $60 billion of assets under management. $10 billion was invested last year. And these are larger investors, foundations, pension funds, et cetera. And I read through some of the report.

I need to read the rest of the report. But something that stuck out at me was that over 91% of that capital was invested into later stage companies. So there's a clear gap of seed capital, venture capital, early stage capital that's available for new innovations and impact investing. So everyone talks about, you know, there's sort of a lack of capital on the risky side and people are trying to convince, you know, the foundations and others to play in that area.

So for us, you know, we are, you know, we think that there's capital out there and there may be capital out there that's unfamiliar with opportunities that are several above and beyond kind of traditional tech plays. Right, right. So, Keisha, can you just help us understand what is impact investing?

there are a lot of different terms and meanings for impact investing depending on where you sit on the spectrum. I will give you kind of the global impact investment network definition of impact investing that I tend to follow and many others do. But it really, you know, if you're an impact investor, you are investing in a company or an organization to generate not only financial returns, but also social environmental and environmental returns. So that means, actually a lot of different things to a lot of different people. And there's a spectrum of how to invest that capital. Some folks are okay with below market rate returns. Others are shooting for, like our fund, Impact America Fund, we're shooting for market rate or above returns. And then there's

a spectrum of people in the middle. And then from an impact standpoint, you know, there are groups of people and individuals who are die hard and care about the environment. And they want to invest all their money into environmental issues that are others that are concerned about the food system and food justice. There are others who are concerned about education. And so within the sort of larger context of impact investing, there are these sub-sort of cultures or sub-networks of people who are particularly interested in different social or environmental issues. Gotcha. I find it fascinating to think about striking the balance between, you know, and you mentioned you're more on the side of the scale where you're focused on, you know, financial

returns as much as, you know, the social impact, right? So how do you measure these things? And how is social impact measured when you're serving investment opportunities? There's an organization called Gears, and they are an impact measurement organization. It's a nonprofit. And we are Impact America Fund as a geared certified fund. Our portfolio companies will complete an annual survey each year based on certain metrics that are relevant to that company. And it basically says, here's a baseline of where you're at from an impact standpoint. There are other organizations that are working on, you know, different ways of measurement internally for ourselves, because we care about the impact of underserved low and moderate income communities in America, we're creating

our own benchmarks and metrics internally to say, hey, look, what's important to us is job creation. What's important to us is that your value chain, whether those are your employees, your suppliers, your end users, that there's some value there. There's impact there. there's an organization transform finance and they, you know, tend to be a bit more progressive where they are, you know, you got to look at this. We want to make sure that there's more value input that's being input than we're extracting. And so you have various ways of thinking about impact measurement and the valuation of that impact. Gotcha. You mentioned underserved communities. Help us understand in your mind and in what you're looking at. What are these underserved communities

that you're targeting? Yeah, we are, you know, I guess, take A step back, I grew up low income. I grew up low income. Fortunately, I grew up low income in Orange County, California. So while, you know, my family, we used food stamps at the grocery store. We were on Section 8 housing. I had the benefit of a great public education. My father, who my, you know, he's in South Carolina. My mother left my father and brought us from South Carolina, a very low income area to Orange County, California. My father doesn't read or write. And so for me, being first generation college student, having the benefit. of a great public education, going on to work, you know, Wall Street and in various other activities, I recognize because of how I grew up as a low-income individual, the opportunities that exist really in low-income communities. And so for us, the way that we define sort of underserved communities are markets with untapped potential. These aren't markets that are, you know, these are markets where there is high potential in these markets. The human beings, in those markets are assets and they're doing great work. And they need a little bit more support

in terms of, you know, technology solutions, in terms of business infrastructure, in terms of creative ways to think about how to better manage their businesses or how to better manage, you know, if you're a teacher, your data in schools. And so for us, it's, you know, looking at underserved communities, particularly interested in low and moderate income communities, believing that there are inefficiencies, looking at ways to cut those inefficiencies to generate more income and more outcomes for that community. So what do you think the role of impact investing should be for the kind of traditional venture capital community? How, you know, do you have a greater message and how do you think about working with larger firms, you know, like ours or others in the

community, educating them on the space and introducing them to the kind of companies that are leveraging technology in a way that's serving, you know, underutilized or untapped markets and underserved communities like you're mentioning. Yeah, we are truly, we stand, you know, one foot on one side and one foot on the other in terms of impact the way that we think about our investments in the way a traditional venture capitalist would think about their investments. We believe that there are a billion dollar market opportunities in underserved communities. There are people that are making, you know, plenty of money on underserved communities,

whether it's financial services, whether it's health and wellness, whether it's education. And unfortunately, in our opinions, these markets, there are plenty of also market failures where low-income people tend to spend more on basic essentials. And yet the quality of those basic essentials and basic needs is poor. And so we believe, you know, by working with traditional technologists and traditional technology investors, we have a lot to learn and believe that there are tools that can enable and essentially undercut these traditional markets that have. of taking advantage for many years of vulnerable populations who haven't had options otherwise. So they are stuck paying high fees. They're essentially being penalized for being poor or penalized for not having a lot of money. And when you don't have a lot of money, you typically don't have a lot of time.

And so you're late and your fees are high when you're late. And I saw my mother go through this when I was younger. And it's just not fair. And so we wonder why there's no upward mobility in communities. The extra income that they have, they're spending on ridiculous amounts of fees and prices of services and products that are poor. quality and aren't actually helping them advance. How do you dispel, and I don't know if this is a disbelief, that impact investing comes across as charity? You know, how do you make that differentiation

and what lesson can we learn from that? Yeah, no, it's, you know, it's interesting because we are even as an impact investment fund and we have investors in our fund, you know, we're, you know, had thought carefully about how we present our fund and that we want to generate returns for our investors and we also believe in impact, right? And most folks are still of the notion that you have to choose one or the other. And because impact is not new, it's been around for many years,

but because it's sort of a new mainstream concept, it's still people tend to feel like it's something less than what, you know, a traditional venture firm would invest in or traditional market would have an appetite for. So for us, it's less, you know, about, I think the best way for us or our approach to dispel in the myth is to prove it out.

There are folks that are impact investors who are okay with below market rate returns. We think that there hasn't yet been a really, I guess, interesting approach to investing in underserved communities in America. And typically, the people who have been investing in those communities don't look like the people in those communities. So I think with the structure of our team and who I am being from the community, that we have a unique positioning where we can identify real opportunities. in the community that, again, people, we aren't making up a new business model.

People are spending money on these businesses already. And for us, it's identifying the inefficiencies, identifying the cost savings, identifying where people within the value chain can get more value out of their participation in these economies. And for us, we think if we can create a win-win for the community and investors, then everyone walks away happy. So you said impact investing is not new. So who has done it and how has it worked in the past? Yeah, great question. And so just thinking about over 100 years ago when I think about Madam C.J. Walker and as a businesswoman and an African-American business woman, the type of business she built and why she built that business. And she was, you know, the creator of hair products and manufactured her own hair line, hair care products. And the interesting thing about her model is she built a national network of agents of women who she trained, who trained other women.

You know, we applaud her for becoming one of the first female millionaires in this country. But really, when you look at the core of that business model, it was about empowering women. And the majority of those women, in her case, were African-American women. And so you look at the context of her providing a product to an underserved market who, you know, has a complex, a hair texture. And, you know, some days it's straight, some days it's curly, and figuring out a product that work for that market. but in addition to simply selling a product that worked, she created this national network to empower other women to make money off of selling that product. And so when you think about, you know, if Madam C.J. Walker was an entrepreneur today,

starting her business, for us, that would be an impact investment given that she's empowering these women. She's created this national network. She's providing them an opportunity to generate income. So I know that in your portfolio there's actually a company that now is catering towards women, female stylists in the African-American community, it seems to be a natural kind of progression from the story that you just mentioned. Tell us more about that company. Yeah, Maven is an e-commerce platform and led by a brilliant founder, Deshaun, and a co-founder who's just as brilliant. But essentially what the company does is hairstylists, at least in

African-American communities in particular for many years have been free sales reps in their communities. And the majority of African-American hairstylists, they don't inventory, they don't hold or manage inventory, right? And most of them I'd say probably can't afford to do that or may not, you know, just have the understanding of how to do that. And so what's happened for many, many years in the community is that me as a hairstylist, if you're my, you know, client, Tani, and you want, you know, hair extensions, and I will install those hair extensions for you. Prior to that appointment, I'll recommend you to buy your hair extensions either at the Corny Beauty Supply Store or you'd make a decision about where to buy those extensions.

But nine times out of ten, I'm going to recommend a corner beauty supply store. The problem with that is that the majority of those corner beauty supply stores aren't owned by the majority of the people in that community. And the stylist, being a free sales rep, doesn't make a commission off a referral. her clients to that corner beauty supply store. So what Maven is doing is disrupting a piece of this supply chain really by building his own supply chain, the company's supply chain. And now instead of me as a stylist recommending my client to the corner beauty supply store

or in some cases, in many cases, you know, my client and me as a hairstylist, we are located in areas where there's not a corner beauty supply store, right? And so then I have to drive it. I have to drive an hour or two hours to get what I need in order to then get the service that I need for my hairstylist. So Maven saying, hey, look, we're going to leverage technology. We're not inventing, you know, the next rocket to go to the moon. But we're going to leverage technology to say, hey, hairstylist, now you have an online portal on Maven and send your clients there. And for every product that they buy on Maven through your web, through your portal, you get a commission check.

and the part that I love the most about this model, right? It's a big market opportunity, black women over index and hair spending. We've heard the stats. I think a lot of folks are talking about in the mainstream, but what I enjoy most about this model and why we invested in this company sort of pre-series A is because the founder views the hairstylist as an asset. And he knows that that hairstylist is a key driver to the revenue growth of the business model.

And so for a hairstylist who on average in America makes $24,000 a year and oftentimes are working additional jobs to support their family, receiving an additional $100, $200, $300 check each week is significant. It's significant. Yeah. And the costs of maintaining, purchasing inventory up front, you're alleviating all of that, right? So they don't have to worry about where are they going to get money, where are they going to store all this inventory, introducing them to technology. It feels like there's some really broad sweeping network effects by just implementing this e-commerce platform for this entire community.

How do you guys think about what comes next and how, you know, this is just the beginning and how, what are the network effects from there? Yeah, no, that's a great observation in that really, you know, Maven is meeting the stylist where they're at. And in sort of impact investing land, there's, you know, some folks have some great ideals about how communities will advance and uplift our approach to impact investing. And while we're, you know, greatly, deeply appreciate the Maven model is that he's meeting that stylist where they're at.

And once he is loyal to that stylus and, you know, that stylist doesn't have to do anything else other than what they're doing and what they love doing. Stylers are artisans. They've been artisans, right? And so they have a skill. They have a talent. And so to the extent that he can help that individual, further their skill and their talent

and make more money doing it and maybe not take that second job or work less or whatever the situation is he creates a loyal customer base and then that loyal customer base I think the sky is the limit in regards to

then distributing other products and services that will benefit the community. Tani we had an early discussion about Maven and Andresen led the series A round. Why, you know, for you, this is a company that you understand mission and you appreciate impact, but you all are a serious traditional technology investor. Did you all consider, you know, the impact piece or why did Andreessen lead this round?

Well, I think that's really interesting. So with my particular focus being on early stage, you know, we invest across all sectors, all stages. So we're still investing at the seed stage, but we have to be very careful where we do invest. So a big part of my effort is finding untapped areas, not relying on the traditional, expected companies to come to us for those fundraising opportunities, but instead kind of being more proactive and seeking out new spaces. This is a perfect example.

When you and I first met, the companies that we talked about that you had already discovered and invested in, there were great opportunities for us to, like, leverage the support system, the operational infrastructure that we have here as a firm, introduce them to the more traditional route and show them ways that we can be of value, not with the expectation necessarily that we are definitely going to invest or looking for an investment. But as it turned out, Douchon is a very, very compelling founder. And his mission and his connection to the concept that he's really building a business around,

I think is what has compelled us all and is really inspiring and empowering. And we do see that huge market potential. And on top of that, has a serious impact on an underserved community. And I think we do think about the network effects and what this could possibly mean for, you know, introducing technology, leveraging technology in these spaces, you know, software eating the world. This is just part of that. This is just the beginning of that. So there's a meme.

around mission-driven founders versus mercenaries. And what does that mean to you? And why is that an important debate? Yeah, I've heard the debate. I've heard the two terms sort of tossed around. You know, it's for us, honestly, the companies that we currently have currently invested in under sort of the old umbrella I worked on, worked under the companies we invested in. Then none of the companies, to be honest, self-identified as mission. driven investors. So for our mission driven entrepreneurs. And so for us, you know, we are sort of

putting that label on the types of companies we invest in as mission driven entrepreneurs, but they did not come to us saying, hey, look, I'm an invention driven entrepreneur. I'm seeking impact capital. While we were able to find them as we sought them out, right? They're not in our impact investment networks. They're not at the impact investing conferences. The entrepreneurs that we've invested in understood a pain point based on their own experiences, and we're building great, solid companies around that pain point. And it happened to overlap with our thesis that there are large market opportunities in underserved communities. So while I understand there's a debate out there, and I understand the debate of an entrepreneur going out seeking purely financial returns

or a mission-driven entrepreneur who wants to do good by the world, I don't know what you call the types of entrepreneurs we invest in. For lack of better words, we call them mission-driven. But these are solid business savvy entrepreneurs that can stand up against any other entrepreneur, traditional or not, who care deeply about generating a social or environmental return as well as a financial return. So it's, you know, hopefully, you know, my hope and my prayer is that this becomes a mainstream phenomenon, that it's not okay to just build a business for business sake, but there's a purpose and a real true purpose for that business to exist beyond generating purely financial returns. Yeah, that doing good can be good business, right, dispelling.

that myth. In Silicon Valley, we tend to see companies emerge that are trying to solve problems that we face as people in Silicon Valley. So how do you, in terms of seeing impact investing really manifesting, what does that start to look like? I kind of start to envision it as seeing more companies that are catering to people outside of this space. So when you envision this you know, manifesting, becoming the norm, the mainstream. How does that look to you? Yeah, there are a few different sort of visions of what that looks like. So, A, when, you know, I've said before,

investors talk about investing and best in class. And I was like, oh, that's really tough to do when the full class isn't there, right? And so when we get outside of what a traditional entrepreneur looks like or outside of what a traditional entrepreneur has access to and you begin to reach diverse communities. And diversity can mean a whole host of things, right? It could mean I live in a region, you know, like a rural white region as well as, you know,

an urban inner city that's majority black. So when we get outside of kind of that traditional framework, I think we start to see new and creative innovations. And what we've seen, the work that I did with my previous, I worked with a family office and sort of a radical progressive angel investor Josh Malman. And our initial investment thesis was we're going to invest in entrepreneurs of color. And we want to invest in mission-driven entrepreneurs of color.

He invest capital. He managed capital for a very high-no-worth individual, a female that remains anonymous. But that was our thesis. How do we get more capital in the hands of entrepreneurs of color? And so after doing that for three years, what emerged as really the thesis for Impact America Fund, the dedicated fund that I now manage, was that investing in diverse entrepreneurs is important. But the theme that emerged out of that for me was nine times out of ten, if I met an entrepreneur of color, they were addressing a pain point in an underserved community and that, unfortunately, still in America,

low-income communities look like, you know, they're majority black and brown people. So I think it's fair to say as well as you know what you know, right? And if you're unfamiliar with a market and our job is to bring more familiarly to markets that you may not know about. If you're a white man and you grew up in Silicon Valley, I don't expect you to know what's going on in, you know, necessarily in Detroit or what that community actually needs. I think what we do expect as this new economy emerges, that people are willing to work together. And so what we'll see when this works and that people begin to create solutions for real true pain points and what people need, we're going to hopefully see a radical change in the way that, Black and brown folks fare on the health indices, the way that black and brown folks fare in education, the way that black and brown folks fare in income and the racial wealth

gap. And so for us, this is much bigger than finding the next home run. We want to prove this out because if we can prove this out, there's more capital that will be injected towards these needs. So yeah, I want to create the next goal rush to underserved communities. If we do that and stay true to the mission of impacting these communities, we're going to see a radical different, hopefully, way of being for underserved communities in providing a real clear trajectory or clearer path to upward mobility. Well, I just want to thank you so much, Keisha, for joining us for our podcast today. And it's great talking to you again. Thank you, Tani. It's wonderful to be here.