When it comes to businesses with high growth potential that need working capital, equity funding can provide much-needed operating cash without the rigid demands of a loan. But while venture capitalists talk about finding “unicorns,” for most businesses it’s the funding itself that is the real mythical beast.

According to data compiled by Fundable, only 0.05% of startup businesses are funded by venture capital (VC), with less than 3,700 businesses receiving funding each year. Of those funded, only 2.7% are founded solely by women and only 1% have Black founders.

There are geographical barriers as well. The top five metros for venture capital – San Francisco, New York City, San Jose, Boston ,and Los Angeles – account for more than two-thirds (67.5%) of venture capital investment.

Image Courtesy of Bronze Valley

While more venture capital firms are committing to greater inclusivity, there is a small subset of social impact-driven investors that have been committed to underrepresented founders since the beginning and can serve as a model for expanding access to this crucial type of funding.

While venture capitalists talk about finding “unicorns,” for most businesses it’s the funding itself that is the real mythical beast.

Community Development Financial Institutions (CDFIs)** are federally certified financing entities created to boost economic equity and close the wealth gap by providing access to capital for people who face barriers and biases at traditional financial institutions. Of the more than 1,400 CDFIs nationwide, only 1% focus specifically on venture capture.

Image Courtesy of Bronze Valley

While most CDFIs focus on lending, CDFI venture funds make equity investments and provide significant guidance to portfolio companies, just like a traditional VC firm. CDFI venture funds might also offer “equity-like” loans with features like revenue-based repayment, debt with royalites or convertible debt that combine flexible repayment based on the company’s financial performance. Both forms of capital provide the underlying business with funds needed to build up operations and grow without a large debt burden or urgent repayment requirements.

While traditional VC firms often focus solely on maximizing returns, CDFI venture funds aim to deliver competitive returns while also generating positive social impact. These funds invest in underrepresented founders and companies that create quality jobs in low-income areas, proving that financial success and social responsibility can go hand-in-hand. Despite making up a small portion of both the CDFI and VC industries, these mission-driven investors have a catalytic impact on the companies that receive their funding, providing capital, connections, expertise, and a crucial “vote of confidence” as an early institutional investor.

Some examples of CDFI venture firms leading the way:

Bronze Valley, a Black-led nonprofit venture capital firm founded in Birmingham, Alabama, works to empower diverse and female founders hailing from non-traditional tech hubs across the United States. Since its founding in 2018, the firm has invested $4.25 million in 33 companies. 91% of founders represented are people of color and 55% are female. Bronze Valley also partners with gener8tor, another mission-focused VC firm on several accelerator programs for underrepresented founders, including one focused on students affiliated with Historically Black Colleges and Universities (HBCUs).

Since 1994, CEI Ventures, a for-profit VC firm owned by Coastal Enterprises Inc., a Maine-based CDFI, has raised over $71 million across 6 funds and invested in 73 businesses located in rural areas and smaller cities around the United States. In their most recent fund, 46% of the companies are founded or co-founded by women. All portfolio companies receive extensive advising on aligning their employment practices with Good Jobs metrics including a living wage, basic benefits, and opportunities for training, advancement and wealth building.

Image Courtesy of generat8or

The over $52 million in equity funds managed by the Kentucky Highland Investment Corporation were created to bring venture capital combined with business management and financial expertise to start-ups in Appalachia, a place distinctly not on most VC Firms’ maps. Kentucky Highland’s development venture capital investing model involves a high level of active participation with management of the businesses including operational assistance, active board participation, and mentoring.

The Community Development Venture Capital Alliance (CDVCA) hosts a network for funds engaged in community development/economic development through venture capital, as well as managing its own investment vehicle, the Central Fund, which focuses on creating substantial job opportunities for people who have low-incomes (less than 80% of area median) prior to taking the job.

Image Coutesy of Community Development Venture Capital Alliance

Equity and equity-like investment is an area of great opportunity for the Community Development Finance sector. Access to patient, flexible equity financing remains an area of unmet need for entrepreneurs of color, women and other underrepresented demographics – making it in perfect alignment with the existing mission of the CDFI field. Not every CDFI has the capacity to manage to pure venture-style equity investment, particularly with its higher risk profile and active management demands. However, equity-like loans can provide a key stepping stone for entrepreneurs and financial institutions alike. Meanwhile, firms like the ones profiled above provide a roadmap for how social impact driven venture capital can work for communities and investors.

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**Funds that apply for and receive CDFI certification must be a financing entity with a primary mission of promoting community development that places at least 60% of its financing in projects/businesses located in a low-income community or is either owned by/serves a priority population including, African Americans, Hispanics, Native Americans/Alaskan/Hawaiians, Pacific Islanders, Filipinos, Vietnamese or Persons with Disabilities.