Eric Collins of Impact X Capital joins Nick to discuss The Changing “Search Image” of Founders, Lack of Diversity = Missed Opportunity, and COVID Effects on the BLM Movement in Europe. In this episode, we cover:
- Walk us through your background and path to VC
- What’s the thesis at Impact X?
- As a black CEO and fund manager, in what ways do you think your experience fundraising was different than your white, male peers at other firms?
- How do you approach sourcing?
- What’s unique about the way you’ve built your network vs. other firms?
- Less than 1% of venture funding goes to black-led and we’ve heard the tired line that “not enough companies are founded by underrepresented founders and black founders”… Are you concerned that you’ll have fewer deals or less pipeline?
- What’s the right number of deals per year where you feel like you’re seeing a sufficient amount?
- I’ve heard about the “deep analysis” you do and how that creates the edge. Can you describe what this entails?
- Do the issues run deeper in the LP community than even the GP community?
- Are the return expectations different for your LPs vs. a non-Impact fund?
- A lot of the impact you are creating is long-term in nature. What are the leading indicators of success for your fund?
- How do you set objectives and measures to know if you’re winning/exceeding the plan?
- In response to the pandemic, the gov’t created a number of programs to help fast-growth companies. What was the impact on your underrepresented pipeline and portfolio?
- Black Lives Matter has been the center of attention here in the states. What’s the status of the movement in the UK and how has it impacted your efforts at Impact X?
- Successful organizations always take a sounding of their environment then decide as to how to invest in a way that is looking at some areas of inefficiency.
- In 2018, the Impact X team looked in Europe for the places where people were not getting investment, the sectors, and the entrepreneurs running those organizations. They looked at investment portfolios of other European VCs, particularly in the UK, and noticed that certain groups were underrepresented. The underrepresented people were black people, brown people, and women of various races. That’s where Impact X saw an opportunity.
- When other people say they would love to invest in underrepresented entrepreneurs, but they can’t find the talent. It is suggested to those organizations that their search images are incorrect.
- Impact X’s believes that going forward, we are going to see more and more opportunities that are being created and more and more disruptive, and industry and sector defining plays, coming from places where other people don’t look.
- The conversation about there being a dearth of places to place capital is a myth. It is coming from a very non-creative space, and it just is not true.
- If you look at the Kauffman Fellows Research Center, and you look at their study that looks at 250,000 founders and 20,000 companies. Indeed, diverse founding teams exited a 30% premium, over non-diverse teams. And that indeed, they tend to raise more money, especially in the later rounds than non-diverse teams.
- Similar studies have been done by McKinsey and other sorts of places, not one study, it’s multiple times that this has been shown that there is a benefit and a premium investment in diverse teams.
- The one thing that changes the search image is who’s doing the searching. We’ve changed the search image, we should change the eyes that are looking at the opportunities externally
- In the UK, the Black Lives Matter movement and Covid caused a change in the way that they talk about race, and particularly race in terms of equity allocation.
- Those sorts of conversations, then begin to get something which is very important, and that specificity around the problem, which is then necessary for specificity around the answer
Transcribed with AI
Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is The Full Ratchet.
Nick Moran 0:18
Eric Collins joins us today from London. Eric is CEO and founding member of impact X Capital Partners impact X is a double bottom line venture capital firm founded to support underrepresented entrepreneurs across Europe. Prior to impact X, Eric founded a consultancy firm was Chief Revenue and distribution officer for SwiftKey and was CEO of touch surgery. Eric, welcome to the show.
Eric Collins 0:42
Thank you, Nick. It’s great being here. Thanks for having me.
Nick Moran 0:45
Of course. Now this is our pleasure. Tell us a bit about your background in your in your path to venture.
Eric Collins 0:51
I don’t know if mine is the normal story, but it is started in the American South because I was born at the campus hospital of Tuskegee, historically black college and university. And but my formative years were spent in Greensboro, North Carolina where I grew up in the comfortable shadow of yet another historically black college, a university called North Carolina a&t State University. And that’s somewhat in the US consciousness because of the 1960s Student NonViolent citizen movement to integrate eating establishments like Greensboro, Woolworths. And so that started there. So I grew up in a space where there was quite a bit of race that was on the table, much of the time, my upbringing then led to university and then that was followed immediately by law school. And then over this, that period, I spent a lot of time not participating in venture capital, but studying venture capital, especially among African Americans, and in the United States, from, you know, the first introduction of African Americans straight through to the present day. And I became a serial entrepreneur partially by chance, and spent time on both sides of the Atlantic. And then sort of more recently, as you stated back in 2018, I got into I started my own venture capital company.
Nick Moran 2:08
Eric, I’m not detecting any hints of accent.
Eric Collins 2:11
Oh, Southern accent or British southern? Well, I
Nick Moran 2:14
was I was thinking Southern, right? Because that’s where you were raised?
Eric Collins 2:19
Neither, no, I can I you know, if it gets late enough, then you might start to hear something happen, you might hear the term tard, as opposed to tired. That happens, you’ll understand what just occurred? Very
Nick Moran 2:31
good, very good. Well, tell us a bit about the the thesis at impact x.
Eric Collins 2:36
So our thesis and we’re the first in Europe to do this are, what we’re doing is what many other organizations have done through the years. And we think very successful organizations always take a take a sounding of their environment, and then make a decision as to how to invest in a way that is looking at some areas of inefficiency. And those inefficiencies produce valuations that are a bit more friendly for the investor, as well as the opportunity for more significant upside on the back end. So we back in 2018, looked around and said, If we’re in Europe, where are the places where people are not getting investment, what are the sectors, and who are the people who are entrepreneurs who are running those sorts of who are in those sort of sectors who are running organizations and doing sort of all kinds of innovative things. And that’s where we’re going to put our money. So we look then at the investment portfolios of other European VCs, particularly in the UK, and noted that there were a group, there were certain groups that were underrepresented, and the underrepresented people were black people, brown people and women of various races. And we said, so that’s the place where we should actually go, we know that there are large populations across Europe, say 1% in Sweden, and Denmark and Germany, 3% in the UK, and 8%. In. In France, if we’re just looking at black people, if you’re looking at women, of course, there’s 51%, almost all those countries that are women. And so there’s a large pool of opportunity. And because very little investment money goes into those organizations in the UK, that number last year was 0.5%. So one half of 1% There is a lot of upside potential and to be able to find the best companies and particularly if you’re focused on categories that are nice investable categories, like digital technology, health, education, lifestyle in media and entertainment, you have an opportunity to not only follow trends around investing, but then also look at the inefficiencies that are associated with current investment patterns of some of our colleagues in the venture space. We also said that this is important for us to look because you know more and more our LPS that we talk to are interested in more than just return on capital, although that’s the primary concern. They’re also interested in a second bottom line so we were actually in double bottom line venture capital fund and we are focused is our secondary priority to make sure that we’re doing job creation. So again, focusing on underrepresented entrepreneurs, we look at the C suite, we look at the founder, we look at the boards, we also then look at p&l responsible positions in organizations. And then we also look at the technical leadership as well as decision makers. And we want to see the organizations that are built that have large and at least proportionate numbers of people in those roles, and then look for that to continue to maintain as those organizations grow. And that’s our secondary criteria for return. And then we also as a byproduct of that, look at embed, look at taxable income, which is created by the creation of jobs. So I think in a nutshell, that’s really impact X, our thesis, our approach and our double bottom line. Very
Nick Moran 5:53
good. Yeah, I’d love to talk more about the founder side and kind of what you look for, but just first off, maybe touch on, you know, the LP side of things a bit. So, you know, as a, as a black CEO and fund manager, in what ways do you think that your experience fundraising was different than, you know, your white male peers at other firms?
Eric Collins 6:18
You know, I think in some ways, it’s no different, right? And then I think, in some ways, it’s fundamentally as if we are in two parallel, but very, very different universes as we’re raising money. So for me, Look, I’m a first time venture capitalist, I am a person who has returned a great deal of capital, I guess I’ve had now for exits of organizations to public companies on both sides of the Atlantic. So I’m able to return capital to to investors. But as a person who’s really focused on just the funding side of the equation, the operation of the management portfolio, I haven’t done that before. So for me, I’m coming into a situation where I have to have a conversation about, Well, you haven’t done this? Are you able to do it? And what’s the proof that you can actually do that from a different seat? Of course, I talk about my portfolio approach, being able to take what obviously is a working approach to operating companies. And if I then can apply that across a portfolio, there are many more companies that get to benefit from my decades of experience. In other words, I’m old. The other thing that I made very clear, Nick, was that I was not going to be doing this alone. And so I put around me, a very unmatched group, if you ask me. So I have been my first, my first experience with venture capital, on the financial side was actually when I was back in Boston, Massachusetts, after law school. And after having been a strategy for him for a number of years, I actually started spun out a technology company, a digital company that was based on some of the technology that had been built within this strategy consulting firm. And I went to an organization that was focused on investing in women and minorities who were in technical or technical founders, not technical founders, but technical organizations, because I was not a technical founder. That company was called axon. And it was run by two partners with spun out of a bigger fund, an 800 million pound dollar fund, that was a impact investor, investing funds for the state of California and Austin State of Connecticut. And they had started their own fund to actually just look a smaller fund to look just at women and people of color. And that organization gave me my first term sheet. From in that organization, there was a partner named Paula groves, Paula groves is probably sort of the only person like her in the world, she is probably the only black woman to have ever been a general partner in three venture capital companies, and to have had assets under management of about a billion pap cumulative, about a billion dollars. Sao Paulo coming on board. You know, it’s a no brainer that Paul has actually invested funds and has actually returned capital and done this in a traditional venture model. So bring her on board was important. When I looked at the population of, of companies that were seeking to invest in with underrepresented entrepreneurs, we had a lot of them that were technical founders, but a number of them that were not technical founders. And one of the things we decided also was that we were going to maintain a very lean organization. And that lean organization meant that we were going to have to actually leverage ourselves and our time and resources as effectively as possible. So we felt that having a technical person not only to help our portfolio companies and our pipeline companies, and then to evaluate and help diligence, but then also to help us to build the systems that we could actually industrialize our intake and our evaluation process, particularly at the pipeline stage, but it’s absolutely necessary. So we I went out and found a person who had actually been A founding CTO at a FinTech company here called neighbor. And that FinTech company had raised about 150 million from Goldman in both loan book, as well as an equity. There not too many people like as he Britton who are out there in the world, but we were able to recruit him and say, come on board, and to be our CTO and President as well as one of our principals. So part of the investment team, and then the third person on our team, the fourth person on our team is the bomba Jayla, another interesting person, because she had an up in the investment portfolio for Mitsui. Number two, he has 100 billion Japanese bank and has 100 billion that is the value of the organization, and that she was investing about 200 million in a Mia. And so she had good connections throughout Europe. And she also had fantastic connections in Africa and some other sort of regions. And it’s interesting, because her background is investment banking. She had also been at Goldman, and she had been a strategy consultant. But you know, very, very young, very dynamic, very plugged in. And so she helped us with deal flow, and our legitimacy to as a new fund to entrepreneur, the entrepreneurial pool and the innovator pool in Europe. And then we have one other person who handles our media and entertainment deals. So and that person is came out of Harvard Business School and was a Credit Suisse First Boston before going to HBO, and then going into Bertelsmann and Fox, and then DreamWorks and other places. So we put together a team that’s like, no, let’s, you know, a good team. There are many other good teams out there who are fund managers, but I was able to put together one was made up mainly of women, and everyone in that team is black, to be able to make sure that they can not only source deals, but then manage those deals in that portfolio going forward.
Nick Moran 11:45
Awesome. Yeah. Tell us more about your approach to sourcing, you know, how are you finding these early stage deals throughout Europe?
Eric Collins 11:52
So are one of the things that we sometimes hear Nick from other people is they it’s like, where do you get underrepresented, we’d love to invest in underrepresented entrepreneurs, but we just can’t find the talent. And I would say to those organizations, that your search images are incorrect. When I’m looking for the next Netflix, I think, of course, that there’s going to be some black woman in Portugal, who is going to be the person who’s coming up with that idea. I think many people feel as though that’s that’s not really what’s going to happen. If they look at how Netflix got started, it wasn’t started by a black woman from Portugal, it was started, you know, in Silicon Valley, and sort of has some traditional elements that are associated with it. But our belief is that going forward, we’re going to see more and more opportunities that are being created and more and more disruptive, and industry and sector defining plays, coming from places where other people don’t look. And that’s what we have been doing our entire careers is finding those sourcing those sorts of people. So we’ve got decades of experience and decades of deep extend of deep relationships. And sometimes they’re through serial entrepreneurs, often there through partnerships, we certainly use some of the traditional methods, Nick. So, you know, we’ll go to the universities and colleges, we certainly work with all the incubators and accelerators. We are, you know, exhaustive, and our use of the press and the like in order to make sure we get our names out in English press and others, you know, local language, whether it be French, German, Italian, etc. And we are very, very focused on that. So we also then do one last thing that some firms find useful. And as part of what I mentioned, when I said about having our CTO in residence on board, we actually went to decrease the necessity for network effect in order for people to be able to access us and for us to be able to access deals. So we have on our website at WWW dot impact X capital, comm a tab for entrepreneurs, which is an intake form, that intake form is very useful for us because instead of going to a meeting something, having someone introduce you, and then sort of taking notes during the meeting, and then inputting that into your CRM system, what we do is that we have the companies to actually introduce themselves to us our criteria laid out in the question forms that are in the intake speak pace, or the intake form, and then those sort of blank spaces, we then utilize that in order to do our own analysis of where we’re getting our deal flow, how many actually satisfy our criteria? Where do we have gaps in terms of our sourcing? Where are we finding that there’s a flood of opportunity? And where do we find that there’s a dearth of opportunity. So we use that not only to identify great companies, but we also then use it to help us to refine our targeting processes. And that has been invaluable in a world where you are investing in technology companies to not have tech as the basis of making yourselves more efficient. And I mentioned before that one of the pieces of the efficiency is to it allows us therefore to remain relatively small and nimble, which is that lean organization, this also helps us to this is also some of the underpinnings of lean organization for us. What
Nick Moran 15:00
is your your stage? In sec? If you have sector preference, you know, what are the preferences or the focus there. And what sort of check sizes is your kind of comfort zone.
Eric Collins 15:12
You know, I love people who are able to identify talent in the raw, you know, just raw raw talent. That’s not my experience. And that is not the place I’m not I’m not very good at Crystal Ball gazing and even apply all of the, you know, the trends to say that this is going to be the way that that organ, this organization is going to be the winner, this is going to be the team. We’re very much focused on execution. And we’re very financially driven in terms of valuation models. If you were to look at our if you were to look at our investment memos, or investment memos, and we’re usually investing at seed extension, and the Series A, we will do some seed, we are generally doing sort of 20 to 30 page investment memos with 10 tab, valuation analysis, because we believe that that helps us to make better decisions about the economic needs of organizations and the capital requirements as these organizations scale because we plan to be around with these organizations for a bit. We like to write checks up to 5 million, and what we like to do is to start relatively small, and then continue to grow as milestones are hit. So we do a lot of investing at the end starting offset 100,000 And then growing from there.
Nick Moran 16:33
Yeah, and what percentage, I guess, of your companies, or maybe it’s too early yet, I don’t know. But what percentage kind of get to that, that full investment check amount out of the sort of the companies that you engage with,
Eric Collins 16:47
I would say we’re too early for that we have been investing capital. So we closed our first fund in May of 2019. So we’re still very much in the early stage of putting up deploying capital, although, you know, in, you know, fingers crossed, we actually are involved in our first exit, which is a pretty nice return on capital in a relatively short period of time, a fantastic inshore tech company, here in the UK, that’s focused on the expat market. I didn’t know this, Nick. But when you go for move from one country to another, you don’t actually bring along your driving record. And it’s your driving record, which determines what is going to be your premium rate on your insurance. And without that driving record, you always are OPT, you always will end up at the highest rate for your premiums. And that’s as if you were like a first time driver as a, as a young teenage man, you know, you will have a very, very high rate of your premium rate. This is a AI solution that actually helps in to helps both creates a marketplace where individuals were looking for insurance. And then insurance companies were able to find each other. And we’re able to give a infer a insurance, an insurance risk profile, by using AI to actually then scrape information about the driver. And that then helps to have inform a decision. And quite frankly, we found that to be not only exciting to us, but to other investors, who then in this next funding in this next funding round had been able to give us a 5x return. So that is the kind of thing that we’re seeing here in the UK and in Europe, and we find it very, very exciting. And we’re able to get into some of those deals with the approach that we use in terms of sector focus, as well as our approach to actually placing money
Nick Moran 18:48
makes a lot of sense. I mean, it’s it’s like the better version of the credit score, but in this case applied to driving record. Congrats on the the early exit. That’s a That’s a quick returner. Good one that’s
Eric Collins 19:01
good for IRR. You can use that as we fundraise, right? That’s
Nick Moran 19:05
right. That’s right. Hey, you gotta take whatever wins you have right for the absolute snapshot in time. Eric, you know, less than 1% of venture funding goes to black lead in businesses. And we’ve heard the sort of the tire line that not enough companies are founded by underrepresented founders and black founders. Are you concerned that you’re gonna have less pipeline and lower, you know, fewer amount of total deals to to vet and because of that that’s going to, you know, adversely impact returns?
Eric Collins 19:39
No, not at all I should I should be very definitive about this question. I believe that this conversation about there being a dearth of places to place capital is a myth. And I believe that this is coming from a very non creative space. The funny thing to me is that we are in industry, Nick, your reporting about this, we have this podcast and you’re talking to all of these individuals who are out there trying to find organizations that are thinking differently than everybody else, and are trying to do things differently than anybody else that are interrupting sort of incumbent and hegemonic systems that have existed for a long time, whether it be in housing, whether it be in healthcare, whether it be an education, you know, whether it be in government and governance, whatever it is. And the and the, and the idea is that there is a intractable problem called finding talent. And that is just not true. With impact X, when we came into this market, and, you know, came in with no reputation as an organization, you know, we were able to find, since May of 2000, but I’ll put it back in January of 2019, we’ve been able to source almost 1000 companies that satisfy some of our criteria. Now, please, let’s be clear, not all of those companies are investable companies, many of them need a different product, many of them would do better with a loan or trade finance, many of them are too early in the you know, the precede stage. And so therefore, don’t work with our investment criteria, stage focus. But there are dozens and hundreds of those that actually are there and are have the opportunity because and they come with fantastic entrepreneurs with fantastic serial track records, they come with fantastic innovative ideas, they come with the right sorts of presentation and right materials, they might not come with the right network, ie they couldn’t get a firm introduction into some of the big names in Europe with the United States. But they do come with a hunger to actually innovate. And so my sense is that people have a network problem. And the network problem is their own network problem, and that they need to solve that in order to get to the underlying issue of why they are unable to identify effective, effective investment opportunities in the underrepresented space. And we believe that that again, and personally, I believe that that is a, you know, an excuse, I believe that it’s actually untrue, that there are not enough companies, we expect to be able to source the same amount of companies on an annual basis, at least, you know, 800 to 1000 companies a year. Well,
Nick Moran 22:19
apart, a part of it is also the geographic lens, right? If you’re investing across all of Europe, we’re not just talking about the UK are many investors that are in the valley that only invest within 90 miles of your office, you know, they maybe they have sufficient density, right. But total number of companies formed, you know, it’s, it’s gonna be it’s gonna have some restrictions. So you
Eric Collins 22:46
make a good point. I mean, again, I think it’s a question of search image, the reason why they stay in the valley is because they have observed some success from staying in the valley. Right? And that that has that has proven because you have, and I’m sure many people who would be listening to me say this would say, there is there is proof that if you invest in, you know, Seattle, you’ll end up with an Amazon, you’ll end up with a Starbucks, you’ll end up with a Adobe, you’ll end up with a Microsoft. And so why should we do things differently. And if you invest with white men, you will end up with an Adobe, you might have with a Starbucks, you’ll end up with a Microsoft and your work end up with an Amazon. And you know, quite frankly, that’s fine. And that’s sort of true, but we know that the studies show so if you look at the Kauffman, the Kauffman fellows Research Center, and you look at their study, which studied I believe, a 20 year period, which if I got this right, and please forgive me if I did in 2001 to 2018, and looks at 250,000 founders and 20,000 companies that indeed diverse founding teams actually exited a 30% premium, over non diverse teams. And that indeed, they actually tend to raise more money, especially in the later rounds than non diverse teams. So there’s some methodology, which I think exist in terms of people’s pattern recognition, and what they’re then targeting, that says that we’re going to get great results. And they’re going to say, benchmark got great results, Sequoia got great results. And if you look at some things which are in common about all those organizations, there’s not too much under representation at the table the decision making. So that’s what we should imitate and emulate, including in Europe, and particularly in the UK that we should actually be having those same sorts people around the table making those same sorts of decisions about those same sorts of companies. And we beg to differ and feels though evidence actually shows and this same studies have been done by McKinsey and other sort of places, not one study, it’s multiple times that this has actually been shown that there is actually benefit and a premium investment. And I say to not only the venture capital firms who don’t seem to be questioning that strategy themselves, or maybe some are, maybe some actually are at this point saying because of whatever blacklight As Matt or maybe they are seeing performance of other portfolio, some of the fantastic portfolios like base 10, or flexible capital or illumine, or, you know, equal ventures, they might be saying, Oh, look, there’s something that that group, those groups know, and they’re investing differently than we are, maybe we should invest that way. But then also, you’re not hearing from LPS that are in those funds, whether they be public monies, or whether they be endowments that they’re saying, we want to see something different in terms of your in terms of your portfolios, and sort of who’s around the table making decisions. And until those things are changed, I think we ended up at impact X, having still that market inefficiency, which gives us a great hunting ground to find some great companies with great valuations and achieve some great exits, which we think then delivers on our fiduciary responsibility as a much better way than some other venture capitalists.
Nick Moran 25:54
Yeah, I mean, your point about how the the profile of the founders, it changes over time, right, a really insightful sort of experienced fund manager on the West Coast, I was talking to the other day, and he made the point to me that, you know, when Airbnb got funded, and Uber got funded, and box, right, and some of these, these other tech companies, you got Aaron Levie, Brian Chesky, Travis Kalanick, those guys at the time they got funded did not look like the profile that most VCs were looking for, based on historical, there were different. Now, they all happen to be white males in this case, but the profile in the background and the way that they were building their startups is just different than, you know, the tried and true what had been done previously. And so it doesn’t mean that there’s, I think the lesson I take away from that is that there isn’t one profile that’s going to sustain, you know, forever. And they’re, it’s, they’re constantly going to evolve. And if you’re not evolving and looking for sort of the right fundamental ingredients, and you’re just looking at the optics, it’s a good way to lose a lot of LP capital.
Eric Collins 27:10
You know, Nick, I think you and I are in violent agreement, I would say that the thing that is continuing to advantage, that advantage, impact x in terms of our deal flow and pipeline creation, is that there is truly systemic issues in the world, which cause people not to view as credible at this point, entrepreneurship that is coming out of other sorts of communities that with which they’re not familiar, that there is no reason to build networks that are a bit bigger and broader than had been comfortable even a quarter ago, a year ago, a decade ago. And that’s going to continue to advantage us in terms of being able to find the right sorts of deals. So I do think that you are correct. That is those search images are continuing to change. I think one thing that changes the search images is who’s doing the searching. And one thing I’m not necessarily finding at these firms is that we’ve changed the search image, we shouldn’t change the eyes that are looking at the opportunities externally. So those eyes continue to look the same. I’m not hearing across the UK, I’m not hearing across the Europe, and I’m not hearing across the United States that we suddenly have a lot more women and a lot more people of color, particularly black and Hispanic Latinx in these organizations that are in decision making capacities, and actually can allocate mud capital two organizations. And until that changes, I think we still end up in not the ideal situation, we can actually view all opportunities through an equal lens, we end up still, for whatever reason, still opting into areas where we’re actually not seeing a whole series of opportunities not being able to benefit from a whole different set of experiences, and sort of views of markets and opportunities and access that will I think limit returns for some organizations. But again, I do believe that that is something that needs to happen from the top and the bottom, the top meaning from the general partners themselves. And then I think also from the LP should be saying something about this, and they should feel as though it’s an important conversation to have, and that that VC should be able to answer and fund managers to be able to answer to the asset allocators as to what they’re doing.
Nick Moran 29:26
Really good point. And, you know, I do feel like the lack of funding that goes to diverse founders is well documented in the issues that the lack of funding that goes to diverse managers you know, it’s talked about but it’s it’s not as well documented. You mentioned flexo capital before I was talking to low Tony actually earlier today about this very issue and what he’s trying to do to disrupt it, and I wouldn’t suggest that you Eric should should bite the hand that Fiji here, but you know, you think these issues run even deeper in the UK Keep LP community than they do, you know, in the GP?
Eric Collins 30:05
Do they run deeper? We’d have to ask some of those people. I’ve never been so fortunate to be an asset allocator. So I’m not I mean, I’m an LP and certain funds, but you know, that’s Eric small amount of money going into, but you are another fund. But you
Nick Moran 30:18
are you you have had the experience of raising from LPS right. And I don’t know how diverse that group is, right? I know, the primary institution that allocates the most capital in the Chicago area, for instance, has a notable leader who’s black. And outside of that, if I’m being 100% honest, there are very few other diverse institutional LPS that I’ve spoken with personally. Now, I’m not the expert on this, and I haven’t spoken with everyone. But it’s a it’s it’s a homogenous group, largely speaking.
Eric Collins 30:56
That seems to be the case. I can let me can I tell you a little bit about our personal my personal journey into with investors and conversations with LPS please, very, very early became clear to me, Nick, that we were going to be faced facing a headwind if not a buzzsaw called a joint track record when your emerging fund manager and because you know whether or not I have returned capital to a number of shareholders who are very tight, who are who are categorized at various types of stakeholders, whether or not my general other general partner Paula has returned, institutional investors to institutional investors returned capital to them. When we get together, all of a sudden, we’re new. And that’s, that’s fine, we get that. And then when you start a new thesis that no one else is used, and that is underrepresented entrepreneurs in Europe. You know, you’ve taken another degree of I call it the standard deviation problem, right? If the standard is that you are a certain type of VC with a certain type of a thesis, and approaching the market in a certain sort of a way, every time you move away from that it’s another sort of an opportunity for a institutional investor to say, no, that’s too risky. Or we’ll follow you. And we’ll come come back to see us I was actually talking to someone the other day, and they said, Well, we follow fund managers for up to 15 years before we make an initial investment. And I said, that’s, that is interesting. So that’s, that was my response. That’s interesting, because like I was, I just had never heard that before. In any case, what I find what what we found when we were coming into this buzzsaw, or at least these headwinds of you have to have a joint track record is, well, let’s take that off the table, we can’t take off that we are going to be investing in underrepresented entrepreneurs, because we really believe that there is an opportunity there that exists and that hasn’t been fully explored and is not overrun with other fund managers trying to get at that particular that particular body, we do believe there’s opportunity that’s coming from it, we can’t get rid of that we are of color. That’s not that’s not gonna change that one of us. As a woman, we can’t change all that even if we went to Harvard Law School and Harvard Business School in Princeton, undergrad, and Stanford, some of those that does, that’s not a standard deviation that’s sort of right there in sort of the the reals, the center of what people would expect to see from a venture capitalist. Those other things take us away from that. And there are reasons for people to say no, we then also made a very affirmative decision that the first funding that we were going to close was from people who actually believed in our thesis, and we didn’t have to have an argument about it. And that people who believe that there would be excellence in innovation that’s coming out of these sorts, communities, and these sorts of communities of underrepresented entrepreneurs could actually return capital in relatively fast fashion. So we actually have and you can look on our website, you can see that our founding members were original investors, all of them are black. They’re from their diverse insofar as they’re from the West Coast of the United States, the East Coast of the United States. They’re from the UK, and they’re from France, but they’re all black. And they all share that in common as a belief that underrepresented is actually an investment category. We then utilize the money that we actually raised from them to actually prove out the thesis that we could do whatever we are, you’ve spoken to. And I’ve given myself a shameless plug about our return on capital, with this organization, Marshmallow. So we’ve actually been able to prove some of those sorts of things we’ve proved pipeline, we’ve proved the opportunity for return, we’ve proven that we can actually get into oversubscribed deals, we’ve proven that we can actually have board seats, we’ve proven all the things that you need to prove as a first time fund manager and then we can stay together and not kill each other so that we can actually work together for the long term. And that we can establish all the foundational documents and other sorts of things in the reporting, which is necessary and keeping LPS happy. So now we’re in a position where we actually have a bit of a track record that we can go out to, but is it time to go to the institutional investors? I really don’t think it’s time to go to the endowment of any of my alma mater, either Harvard or Princeton. I just don’t believe that they are going to say the thing that we’re going to do is money behind you impact actually, you’ve invested millions, we’ve got billions to invest. So we’re going to need to wait and see sort of how you progress. So why waste the time? Instead, we can go to other kinds of institutional investors, corporations have shown themselves to be quite interesting funder of funds have shown themselves to be quite interested, organizations like sovereign wealth funds have shown themselves to be quite interested. And even some, some smaller universities, endowments have shown themselves to be quite interested. So go to sort of an army of the willing and able those who have shown themselves to be interested in emerging managers, those who are willing to and have a proven track record, let’s talk to them about what we want to do, and then go in that direction. I don’t believe that, if you sort of I believe that that’s the most efficient way to actually raise capital, and then over time to build the record and to build sort of momentum to then be able to raise from different populations. So the question of have I had a poor reception from some of the from some of the pension funds has CalPERS and casters that they turned me down? I haven’t approached them? Will we approach them? I think there will be a time when it makes sense for us to approach them. Is that time at this next one that we’re closing the 100 million pound fund? I’m not sure. But we will certainly look at it. And we will have some conversations with people who help us to think about these things, whether it be placement agents, or some of our founding members to see whether or not we think it’s time to then move on to another set of targets.
Nick Moran 36:28
Eric, are the return expectations different for your LPs, you know, versus sort of their investments in a non Impact Fund? No,
Eric Collins 36:37
they are actually the same. And then I would say they’re higher, because they do expect impact, and they expect it to be measurable. So they want to see that there’s actually job creation, they want to see the job creation sustained over various quarters, and actually increased, and they want to see that that actually is part of the that’s part of how these organizations think about themselves. So no, we have no, we are expected to give venture type returns, they are not patient capital, they’re impatient people.
Nick Moran 37:04
You know, it can take a long time for these these businesses to develop and grow. You know, and to see the the impact of the job creation from these companies. I mean, that can take many years, or are there leading indicators that you’re looking for that kind of show that, you know, you’re exceeding plan meeting plan, you know, the system is working?
Eric Collins 37:27
Oh, absolutely. So if we start off, so you started with a base case, and that base case, we always have a side letter with each one of our invest in our invested organizations. And in that side letter, we lay out these are the quarterly reports that we’d like to see in our quarterly reports are the same as everyone else’s, in terms of the financial performance and pipeline, and that sort of thing for revenue purposes. But then we also have, and then we’d like to know by by function, and by gender, and by race, who is in these various positions, and which are leadership positions, we break them down to leadership positions, p&l oriented positions, and issue and, and roles that are associated with technology. And we then track over time, how those were actually developing, and are the percentage of staying consistent, or, you know, you have a sudden spurt of growth. And now all of a sudden, you have 55% women, as opposed to the 50%, where you started off, where you have 70% women as opposed to the, you know, the 50% that you haven’t you started off and what’s causing that to happen. And then what are we going to do in order to make sure that that remains, on course, to actually look a bit more proportionate to the population, those are the types of things that we do. So you can get in, you know, companies are very good. And investors are very good at forcing people to measure things. And so we just do measurements, and we take a base case, and then look at the deviation from there. And in time, we look at the sort of cumulative value of we look at the cumulative value of the salaries that are associated with the growth in the organization, and then translate that into a taxable income number. Also, one of the reasons we do that is because, you know, we’re the sort of an organization wants to say that all the things that we’re doing are lined up very nicely with a whole set of public and private stakeholders. And indeed, this is the kind of fund that should be encouraged.
Nick Moran 39:24
Again, yeah, just to transition a bit here, Eric, the Black Lives Matter movement, you know, it’s been the center of attention here in the States. I’d be curious to hear you know, your thoughts on the movement in the UK as well and maybe how it’s been impacting your efforts at impact X.
Eric Collins 39:43
If you were to if you were to take the Black Lives movement and Black Lives Matter movement, and then you were to take and put it next to COVID. I think it’s the two things together, which have really sort of influenced activity here in the UK and influenced the activity of impact. decks. So Black Lives Matter is Black Lives Matter has certainly had its very tangible impacts here in Europe, that what we, you know, everyone witnessed that, um, state sanctioned murder of, you know, a citizen George Floyd murder. And then we’ve seen several that have happened after that, and various in various towns and cities in the United States. And there has been as sort of an energizing around this question of, and sort of, for me not only the question of sort of what’s happening that causes this to be something that can actually occur and actually be filmed, and you know, people to do this with impunity. But then it also raises the conversation about sort of some language that is actually used and the things that are causing the impunity. So the language of systemic racism, micro aggressions there all sorts of things which have now come into the common discourse, and they’re understood, as you know, as viscerally in Europe as they are in the United States. And there have been marches, and there have been calls for action. And there have been investigations, and there’s been an acceleration and a focus on black. In the UK, one of the things that is actually done is caused a change in the way that we talk about race, and particularly race in terms of equity allocation, there’s a term in the UK called BAME, it’d be a m e, black and minority ethnic, I believe that’s what it stands for. And what it means is, anyone who’s not white, is falls into that category. And when thinking about and this is where it comes back to COVID, when we were talking about COVID, and when COVID hit, you know, remember, COVID hit before Black Lives Matter, actually accelerated because of the George Floyd murder. We were talking about sort of what needs to be done in terms of populations, and what are the impacts and populations in this Boehm category was being used, which then masks the fact that there were very disproportionate impacts on black communities, you know, fast forward, Black Lives Matter happens. And it’s no longer a conversation about BAME, suddenly, is no longer interesting if you’re not white, but you are from Southeast Asia, if you’re not white, and you’re from East Asia, if you’re not white, and you’re from, you know, wherever the if you’re from Latin America, those sorts of conversations, then begin to get something which I think is very important, and that specificity around the problem, which is then necessary for specificity around the answer. And for us organization, like impact X when we are looking at COVID. And we’re looking at the entire economy can close of, of the world. And you know, people can’t travel, the things that we think about people can’t get out of their houses, the things that we think about and take for granted as part of the lubricant for making business work and for capital to be able to move efficiently and effectively in and out of these fast growth companies. When all that is sort of stopped and makes you say that anything can happen if it’s considered a crisis, if it’s considered a matter of survival, anything can happen. And so all of a sudden, it emboldened an organization like impact X to say, look, the funding of black entrepreneurs, the funding of women entrepreneurs is at a crisis level, like COVID, these organizations are dying at a rate, they’re not being germinated and stimulated at a rate that they should be. That is a crisis, and crises behavior are required, instead of incremental thought leadership, listening sessions, you know, sort of a panel being put together in order to study something. All of that is well and good. But this is a crisis. And when we have a crisis, governments, companies, private companies, and private citizens do things. And so, you know, we started to treat this as a crisis. And we’re expecting differences and different sorts of responses and not satisfied with, well, we’ll think about it for a bit, we’re going to do a study, and in two years, that study will come out. And then from there, we’ll have some sort of legislative or other action, which is going to be oriented. That’s been an interesting result of Black Lives Matter. And I think Black Lives Matter combined with COVID has really been the reason for that. Does that help, Nick?
Nick Moran 44:10
It’s great. It’s great, great insight. And it’s good to hear the perspective from well, I guess an expat who’s in a different country amidst all this. I mean, it’s, you know, it’s been a challenging it’s been a challenging time challenging situation. And it’s really it’s brought a lot of much needed conversation and just the situation to light you know, I think it’s, it’s, it’s challenged a lot of us to think more deeply about who we are as people and what we support and what we’re about. You
Eric Collins 44:45
remind me of when you said that in remote flashed into my mind, something that I haven’t thought about since university, and that which is college in the United States, but here in the UK colleges, sort of like high school, and so then University is what we would consider college Alexis de Tocqueville wrote Democracy in America, you know, an expat from France who came to America observed it for a bit and was able to then make very insightful commentary about what’s happening in American vote and sort of the ethos and sort of the feelings of America at the time of the American Revolution. Anyone who’s seen, you know, anyone who’s seen Hamilton might, like me has made me be obsessed with some of this sort of historical stuff. But what I would say is that being here, and as you mentioned, me as an expat, does give a certain type of view of the world having been raised on the East Coast, and sort of in the venture community of the East Coast, I really don’t even know the West Coast of the United States that well, even though I ran a company in Seattle, I just don’t know the west coast in the same way. So you would know the West Coast. And then being here in the UK, I know somewhat of the UK. But and looking back over the Atlantic, it gives another sort of a view and it gives me sort of a certain type of deep understanding, and yet a removed ability to hopefully be able to do some analysis, which hopefully for the LPs and impact X is also helpful on from a business perspective, not just sociological math from an economic perspective. So right, that’s partially, that’s what we’re focused on.
Nick Moran 46:14
It is, yeah, it’s a it’s a fresh perspective, it’s a it’s a valuable one to get. Eric, what do you know, you need to get better at
Eric Collins 46:21
what do I need to get better at, I need to get better at. I kept saying that I can’t help you yet. And managing that discussion as constructive know, if you listen to our pipeline, and lots of inbound without being qualified by any other VC, or somebody who knows about VC, we actually get a lot of people in who are looking for advice and feedback. And those individuals have to get, you know, sometimes very hard to know, and others know, which is the progressive know, saying that in time, we might be able to do something, but right now is not the time. So being able to do that, and the demand and you know, where we have a demand for services, and everyone is looking for someone because you know, it’s not like the other venture capital firms are meeting them and giving them term sheets. So you know, they think of us as being the first place to come as well as place of last resort and have to say no to them time and time again, but to do it constructively, so that we then give them a pathway so that we don’t crush their dreams and help them to sort of get to a next step. That’s what I’m going to have to get better at.
Nick Moran 47:24
And then finally hear Eric, what’s the best way for listeners to connect with you and follow along with impact x.
Eric Collins 47:30
So go to our website, www dot compat x capital.com. And if you are an entrepreneur, go down to the bottom of that front page and look at the at the intake form. It says for entrepreneurs, it’s an intake form at that link, and send us what your company has, we want to hear from you. And if you want to do something else with us, you can always if you go straight to the team page, and you look at Eric Collins, you can send me an email that says what you’d like to do, and we can talk about it, especially if you’re interested in investing capital and underrepresented entrepreneurs in Europe. We’re interested in talking to you.
Nick Moran 48:00
Well, Eric, thank you so much for spending the time today. I’ve heard very good things about you both from UK investors and investors focused here in the States. And just so happy we had a chance to connect and in do the interview today. Nick, it
Eric Collins 48:15
has been fantastic because I’ve heard great things about you also, and in fact, was introduced by one of my one of my co investors here in in Europe and everything she said was correct. Good talking to you. Awesome.
Nick Moran 48:26
Well, it was our pleasure. Thanks so much, Eric. Take care.
Eric Collins 48:29
Take care, man. Bye bye.
Nick Moran 48:35
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently. Thanks for joining us.