Impact Investing: Past, Present, and Future

With Margot Kane,
Chief Investment Officer, Spring Point Partners
This week on Swimming with Allocators, Earnest and Alexa welcome Margot Kane, Chief Investment Officer at Spring Point Partners. During the episode, Margot discusses the evolution and misconceptions of impact investing, emphasizing the importance of aligning investments with social and environmental goals. She addresses the political climate's impact on the field and shares Spring Point Partners' strategy to improving economic justice. The conversation also covers where Margot sees the greatest investment opportunities and what industries she is steering clear of including student debt, cyber security, and cryptocurrency. Also, Dave Thornton, Co-Founder and CEO of Vested talks about Vested’s products for tech employees to purchase their stock options and LPs to invest in an index of top tech startups.

Highlights from this week’s conversation include:

  • The Growth and Evolution of Impact Investing (0:47)
  • Misconceptions about Impact Investing (3:34)
  • Impact Investing in Political Climate (7:59)
  • Spring Point Partners’ Mission (11:07)
  • Venture Capital and Impact Strategy (12:28)
  • Assessing and Vetting Fund Managers (14:41)
  • Impact Labeling for Fund Managers (16:47)
  • Fundraising Strength and Networked Wealth (19:13)
  • Silicon Valley Diversity (23:03)
  • Shared Ownership and Participatory Investment Models (28:31)
  • Insider Segment: Stock Option Funding (33:33)
  • Climate Investment Opportunities (42:13)
  • Intersection of Planetary and Human Well-Being (44:06)
  • Community Ownership in Renewable Energy (46:04)
  • Industries and Investment Trends to Avoid (49:47)
  • Applying Historical Frameworks to Investing (55:04)
  • Final Thoughts and Takeaways (57:02)

 

Spring Point Partners is a social impact organization that invests in the transformational leaders, networks, and solutions that power community change and advance justice. We do this by: 

  • Seeking out and supporting community leaders who have the vision to see what’s possible and the drive to make that real.
  • Connecting the experience of partners with comprehensive and flexible supports for shared learning and impact. 
  • Investing in innovative ideas and adaptive solutions that can spark and scale change for all. 

Whether we’re partnering on youth development, human-centered learning, animal welfare or water sector leadership or investing in new business models that close opportunity gaps and boost social and economic mobility, we center equity and justice in all we do — supporting individuals and ideas that can have a catalytic impact in their communities and on our society.  Together, let’s change the way social impact is achieved. Learn more: www.thespringpoint.com.

Vested empowers startup employees to capitalize on their hard-earned equity, primarily by providing funding to help exercise stock options. The company’s overarching mission is to democratize access to equity, ensuring that startup employees both understand and have a real chance to tangibly benefit from the shares they’re granted.

Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies.

The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.

Transcript

Earnest Sweat 00:03
Welcome to Swimming with Allocators. I’m Earnest Sweat and each episode Alexa Binns and I give you a VC podcast from the LP perspective. You ready? Let’s dive in.

Alexa Binns 00:13
Today we are thrilled to have Margot Kane, Chief Investment Officer at springPoint partners, join us. Spring Pointe focuses on deploying investment as a tool for social impact. Margo is a sought after impact investor in both social change and sustainability. Currently on the investment advisory board of the EPA, and particulate capital, we’re thrilled to have Margot on to share her lessons learned in her long impact investing career from capital impact partners to Calvert impact capital to closed loop partners. And now springPoint. Thank you, Margot.

Margot Kane 00:45
Thanks for having me.

Alexa Binns 00:47
Well, many of our listeners are not impact investors. And given your extensive experience in the field, could you share a bit of an overview of how impact investing has changed?

Margot Kane 01:01
It has grown immensely. I mean, when I started in this industry, it wasn’t a phrase, you could do community banking, you could do socially responsible investing, which was really in public equities. And so they were these niche, you know, established Bodies of Work Based on decades of folks’ efforts, that really started to coalesce in terms of a multi asset class, more holistic vision for assessing the fact that all investments have an impact. So if you’re not intentional about the kind of impact your investments are having, likely you’re supporting negative impacts and negative externalities. And I think that’s probably the biggest shift that’s happened in the last decade, which has really grown the possibilities. I think that it has, you know, also highlighted the need for multidisciplinary skill sets and areas of expertise to do this well. To develop that intentionality that blends both investment expertise in a given strategy, or asset class or geography with a deep understanding of the levers of impacts that are, you know, either human impacts or planetary impacts, or both. I think people have a hard time sometimes facing some of the intrinsic trade offs inherent to becoming more intentional about the kind of impact you’re having in the world. And that’s, you know, for me, that’s the one of the most interesting things that is facing the whole concept of impact investing. Can you have your cake and eat it too, right? If you’re trying to build a more humane and better for the planet form of capitalism? Can you still walk home with your AI bank? Or bonus at the end of the day? Probably not. And so, you know, we’ll see, we’ll see where that goes. But, it is maturing, and growing rapidly as a kind of theory and practice. Thankfully, I think most people now understand it’s not an asset class in itself. And yeah, I’m excited to see what the next generation could bring?

Earnest Sweat 03:29
Are there any misconceptions about impact investing today?

Margot Kane 03:33
Lots, I think, both internal to the kind of community and external. One, you know, one, I think, I hope is now put to rest is that it is an asset class like some kind of weird philanthropic asset class. Not that I think the biggest one that comes up a lot when we interface, as you know, I do in my work at co invest with a lot of folks that are not impacted investors self identifies that, that we don’t care about financial returns or, you know, profitable business models, we lack rigor. When in fact, not only do we care about those very much, we’re adding another layer of analysis into our diligence. So it’s often more complex, not less. That’s on one hand, I think, on the other hand, there’s also an I think this kind of life institutional, you know, financial services level. There’s a misconception that you can basically slap a green leaf on a product and call it impacts. I think that’s starting to they’re they’re trying to learn their way out of that. The SEC certainly is taking issue with it and clients are dumb, and vote with their feet right? Uh, but I think we’ve got some ways to go on that front and in, you know, the concept of impact washing. Getting past that at the kind of institutional level

Alexa Binns 05:13
For retail investors, do you have any suggestions if they do want to be voting with their dollar savings accounts?

Margot Kane 05:25
Yeah. Um, I think everyone, you know, has different times of their lives where they have different capacity and bandwidth for this conversation, honestly, I, but the plus is that there’s always an entry point. I mean, consider where your banking, right is the bank, where you’re depositing your savings, they lend that money out, they’re doing stuff with that money is not just sitting in your account, figure out what they’re doing with it, or, you know, look for local credit unions, local community banks, where you can place deposits, because they are mandated to circulate that capital within your community. So certainly, there’s a lot of thematic pooled funds, around 401k’s and various retirement accounts that have, you know, either passive or active strategies around intentionality in terms of climate impacts, social impacts, governance, etc. When you’re opting into those, you know, check it out. Even the robo advisors have them now, you’d have to pay more for these options. So I would just like to work it into your every day, because if, you know, I think it’s a big ask to ask folks to kind of go out of their way to do this, if it’s not part of their everyday practice, it just becomes another chore. But the options are out there on the retail front, the products, at least in the public markets, and on the banking side are out there. So just, you know, yeah, consider it, and always ask your financial advisor, it’s always a good test to see like, are they really doing this work to meet your needs and values? Or are they trying to kind of make their own lives easier? And there’s a very interesting, you know, set of regulations right now being debated, that’s gonna really affect the financial advisory community, around their fiduciary duty to their clients. And so, you know, there’ll be upheaval there anyway. And I think it’s always worth asking.

Earnest Sweat 07:38
It’s 2024. So as much as a lot of us are maybe ignoring it or waiting to the end, where do you think impact investing fits within just kind of our political climate? And where will it kind of end up in 2025 2026?

Margot Kane 07:59
That’s a big question. Earnest in an election year, um, there’s a lot of anti ESG and, you know, other forums, there’s a campaign being waged against taking into account social, environmental externalities and investment strategies, broadly speaking, this is not unique only to impact investing. And a part of me views this coordinated campaign as a little bit of oh, you know, we’re making a difference, or now finally wielding some influence and investment practice. But these lawsuits are going to have at least a temporary effect, certainly. And they could have a chilling effect, particularly the ones that are claiming reverse racism in affirmative action, like activities and, and Diversity, Equity and Inclusion activities. So I think, without a similarly coordinated defense strategy, we could see some setbacks depending on how these cases wind their way through the courts, depending on certainly, you know, political parties in power, its state and federal levels. But we’re still on the right side of history, right? You can ignore climate all you want, Florida, but Miami is still going to be underwater. So like the lived experience of the citizens will show and if our investment practices don’t catch up to the real world people are living in you know, we’re in for a world of trouble. Yeah, across multiple fronts. So I think there’s some short term pain. And long term, I think the arc is impact investing. It’s just investing. Yeah,

Earnest Sweat 10:15
That makes me think of talking about living in the real world. When my friend said, his mother always told him, you can either learn or feel. And so if we don’t do these certain things, we’re going to feel it no matter if we learn it or not.

Margot Kane 10:30
Yeah, that’s a learner feel like and you can you can learn through feeling to lived experience, that’s what we’re talking about, like, you can react or you can, you can learn and adapt, and we’re all gonna have to adapt. I mean, even what we’re doing now is insufficient. So

Earnest Sweat 10:53
With that, that kind of light note, a cheerful landscape, the question I brought up, could you tell us more about spring point partners, and the mission? Yeah,

Margot Kane 11:07
we’re mission driven organization. We deploy capital in a variety of ways through multiple tools, including both grants and investments. And we’re deploying capital to support our partners to achieve transformative and systemic impact in our aligned impact strategies. Our directors include the members of the fifth generation of the Bruins family based in Philadelphia, their values and their vision have really shaped our strategic direction. And our work since we were founded in 2016. And they were very deliberate about setting us up as a very flexible organization. We’re a little hard to define. But we are impact driven. And a lot of our investment practice focuses on our impact strategy around economic justice. So we’re really looking at wealth building strategies for underrepresented families, entrepreneurs, communities, and that takes a variety of forms. And where

Alexa Binns 12:19
Does venture capital fit into this diverse, nebulous strategy? You have a hard job, Margo. Yeah,

Margot Kane 12:28
I It’s hard to be concise about it. In conversation. Yeah. So venture plays a pretty important role when we think about where you get the overlapping kind of Venn diagrams of the opportunity to create intergenerational wealth, and socio economic mobility. With access to new markets for folks who have historically been locked out of those kinds of wealth generation activities, with the kind of resources an operation like spring point can bring to the table. That’s kind of where you land into supporting emerging and underrepresented managers in venture who themselves have investment, theses and strategies around supporting underrepresented founders. So it’s a bit of a ripple effect. And so we are consistently deploying to venture kind of outside of a classical allocation strategy, because of the wealth generation opportunity. We see, you know, we know that venture is a tiny percentage of the broader markets that have broader activity in terms of who’s going to be a successful founding team and generate that kind of wealth. But it is still an essential component. We do other kinds of small business style work in Philadelphia, we look at other types of strategies like distributed ownership as well, and kind of different asset classes, or kind of late stage businesses. But venture is near and dear to our heart for that reason.

Earnest Sweat 14:10
I believe you all began, I could be wrong, but supporting emerging underrepresented fund managers in 2020. Are you still looking to add additional venture managers to the portfolio right now?

Margot Kane 14:24
Great, yes. We’ll add probably between three to five new managers this year in addition to, you know, supporting the existing managers in our portfolio that are going back to market.

Earnest Sweat 14:36
So how do you assess and vet these managers? It

Margot Kane 14:41
probably wouldn’t be that different from any other LP honestly, you’ve had on the podcast, we just probably take a slightly different slant to some of the elements we’re looking at. leadership and team building approach. learning mindset to impact alignment in terms of their dedication to making sure capital is floated flowing to places that it’s otherwise kind of scarce fundraising strength, right now in this market, that’s a pretty big area of Fortunately, it’s kind of binary right now in terms of whether or not you can get off the ground execution capacity, right? Access to deal flow portfolio construction deal making ability, we will take proxies for track record, certainly, that you have to if you want to authentically support emerging managers, there’s a few different kinds of ways that we’ll think about that. One area where we have to get really creative is sort of mapping their understanding of fund management. Right, you can be a great investor and know nothing about fund management. And we’re, there’s there’s elements of that, where we’re willing to take the bet on the learning curve, and there’s elements of fund management where we’ve learned, you know, folks kind of have to have this understanding before they launch or there’s some painful corrections at. So yeah, those are kind of, you know, main areas.

Earnest Sweet 16:19
That sounds very consistent with what we’ve heard. Some, I think, even some more rigor like digging in, and being very descriptive on what qualities you’re looking for. But one question I had just around, who’s the right type of fund manager to interact with? With you, Margo? And the way I’ll ask it is how many fund managers actually label themselves as impact managers you think that are within your portfolio, in how many don’t? Because I think, yeah, within the community, there is a fear of being kind of put in a box, even though you’re balancing and having conviction. So

Margot Kane 17:00
I think maybe half or less in the venture box, and we’re fine with that. Just because we’re an impact investor, doesn’t mean you have to be, it’s on us to determine whether your strategy, your culture, you’re creating, in your firm, the kind of work that you’re leading, you know, is showing the positive externalities we’re hoping to generate. We care a lot about values alignment, we spent a lot of time assessing our relationship with those managers. That’s far more telling for us, versus whether or not you have impact KPIs in your decK, right? That the impacts that come from that relationship and our alignment in terms of strategy and the work you’re doing day to day. And I fully empathize with those that even if they think they’re doing this with an impact lens, they don’t want to brand themselves like that. That’s because of some of the misconceptions we’ve talked about. That’s an extra burden to carry for folks that are already carrying multiple barriers in terms of accessing the kind of capital they need to be successful.

Alexa Binns 18:08
I am intrigued to hear that fundraising. Strength is something that you look at in the same way that, frankly, we look at founders on, are they going to be able to raise that next round? And I was just looking up some of the most recent data. And we’ve only recently had over 100, black female founders raise over a million dollars. Yeah, this is recent history. And, yc has 500 companies a year and they’re two cohorts. So you put that in context, that fundraising capability is a really sticky topic. When I think those stats alone tell you it’s not on those women, there’s something happening apart from their fundraising strength, that we only have 100 women, black women who have over ever raised over a million dollars.

Margot Kane 19:11
Yes. So, you know, I remember when that article came out, and it was my first time reading that I was selfishly very pleased, because I felt really validated. I could see so many of our partners in that list who backed These women. And I was like, Oh my gosh, it’s work. It’s working. But obviously, the bigger story is this is a very low bar. That’s not okay. And you’re ready. Like fundraising. Fundraising strength is not limited only to the capacity of the individual. And I’ve been doing a lot of things Thinking about the concept of networked wealth. And I think this is some of what the challenge is, is a lack of networked wealth in, in black communities in brown spanic indigenous communities within, you know, differently gendered communities. So, you know, a couple of things in that article. I mean, one takeaway is we need more black women investing in black women, which means the black women need resources to do bigger checks. The network of wealth needs to be supported to grow. Because I think that leads to so many other things, not only, you know, your first few checks, whether you’re starting a fund or a business, but also access to talent, access to expertise, access to deal flow. I think one of the biggest things is who gets to take risks? Right. And so you may have, you know, you definitely have superlative black female investors at top tier firms, who if they were from a network, wealth, white male background, would have spun out their own firm three years ago. But they did it. How can you change that dynamic, so that they do in the future? And they’re making different investment decisions going forward and building generational firms that are making different investment decisions and supporting different kinds of founders going forward? I think that’s something we’ve been thinking a lot about, and some of it has to do with personal risk and hurt a lot of us with personal wealth, but also like, do they feel supported to do that? And I think we can say pretty, you know, honestly, in, in our current society, no, they’re not supported to do that. Yeah. So how do we change that dynamic? How do we get those firms to support them to spin out?

Earnest Sweat 22:03
Agree with all those things? You know, when looking at the factors of despite, I think a lot of times people look at just educational backgrounds and assume things, right. And I can’t remember what group said is some foundation I was reading, but they said people should actually look at which zip codes people have traveled from, right? So if we aligned all zip codes and based on socio economic, standing, and where you started as a kid to like where you are now, that would have more implications on your desire to take more personal risks, because it’ll probably be around trends of like, okay, you might be, and this is me and Alexei, like, you’re in middle management age, right of not just your career, but your personal life. You’re managing future generations, and sometimes taking care of older generations. Yeah. And so all those things are factors. The other piece I have is like, and I won’t do this, because it’s not the point of the podcast, but like, I think people would be surprised on how many statured Silicon Valley, Silicon Valley firm Sand Hill Road firms have never had a black GP, but that’s a whole nother thing people can do. On their eyes.

Margot Kane 23:26
They can do the numbers very clearly. Fighting disclosing diversity data.

Earnest Sweat 23:33
Yeah, some have just pushed people to spin out. But that’s a whole nother thing. If anybody wants to respond to it, they can’t but I was gonna. Yeah. But

Margot Kane 23:45
that’s, that’s such an interesting, like the, the rise from within versus the encouraged to spin out dynamic. That’s a very sticky one, too. Because a lot like, yeah, culture, culture can be very sticky. Yeah, in those firms as well.

Earnest Sweat 24:04
Yeah. And we haven’t had till this for now, it was always we haven’t had an Obama moment, right? Or somebody is a managing partner of an established firm, right? And then how that can change a lot of things. Love is changing our political system, both good and bad, right. But like, we start to see more participation from a lot of different, a lot of different groups. So when you’re investing in these transformational leaders and solutions, that is thinking about really, really big problems. You know, what, what are some of the challenges you face your fund managers have faced and how do you overcome them?

Margot Kane 24:49
I think when you get down to like, very specific strategies, in let’s just say let’s pick a sector like in education, or early childhood education, Let’s say you see, one of the biggest challenges we wrestle with is, is this the right solution? Is this the right lever to pull, like you see a broken inefficient marketplace, which means opportunity. But it might not be an investment opportunity, it might need policy first, to create a functional marketplace for investment to then flourish. And so are we supporting the right leader and solution for the problem at hand. And that’s where the kind of systems thinking has to come into play. A lot of folks just use the tool they’ve got. And I’ve been around venture long enough to know it’s really not a solution for a whole host of social challenges. It can actually exacerbate a lot of things if deployed incorrectly, or without guardrails. Hello, AI? So I think that’s one of the biggest challenges, honestly. Are you kind of like working with the right lever, supporting the right solution? And you never have a clear answer that is right. So it’s a very internal kind of conviction conversation, but it’s a good practice to do because you can get otherwise very enamored with charismatic leaders and persuasive solutions and strategies. And that’s always I think, a good check on that, on that tendency, all of us investors tend to have. The other one is, are we a good partner for you? As I mentioned earlier, we spent a lot of time on alignment. And that, you know, I think I think you’ve had previous guests talking about how investment relationships are not transactions, their relationships, especially in Canada, GP LP world. And so, you know, early diligence through post closing, like, that’s, that’s the start of a relationship. And we are constantly kind of evaluating the qualities of that relationship. And are we, on the same page, are we driving in terms of communication style, transparency, what we expect from each other, our values aligned. I think relationship quality for us is essential, because once you’re in business with someone, in order to generate transformative changes, which is what we’re going for, you have to be willing to take a lot of risks, you have to be willing to really bet on a leader. And so if you don’t have a kind of a foundational relationship there, based on mutual trust, understanding, you’re not gonna want to take that risk. So that kind of alignment doesn’t mean that they’re not the right leader, or the right or leading the right strategy. It is kind of like in another context, but we’re maybe not the best investor for them. And those conversations can be hard, because I can see like, you’re gonna be great, you’re gonna be amazing at what you’re going to be doing, I believe in what you’re building. But the way you’re going about it, it’s just not like the way that we go about it. It’s that our styles don’t really live. And it’s going to just generate friction in the long run.

Alexa Binns 28:17
Do I have this correctly, that part of your style, or your sort of theory of changes to shared ownership? Could you enlighten us on what participant Tory investment models are? Yeah,

Margot Kane 28:31
so we really like to see, and we’re really hoping to see folks that are thinking deeply about ownership. And this applies to venture as well as other classes and thinking about the effects of dilution. Not just from a, you know, sheer financial return standpoint, but from a, you know, control an agency governance standpoint, and taking into account the history for especially, you know, bipoc business founders, and where in the past, there’s been very intentional wealth and ownership stripping, from from these founders, but also they’ve because of the lack of inherited wealth had to start businesses with less equity to begin with. So so we see, we get, you know, we know that we’re values aligned when we’re meeting a fund manager that has kind of built in redemptive equity has has thought about revenue based financing has has also thought about how they open up their fund to small dollar investors in order to diversify that wealth generation opportunity. So that’s, that’s a very kind of introductory component to this kind of shared ownership thing which can go all the way to participatory, which is a flavor of it. And you’ll see, you know, participate in Ettore investing models where governance rights are widely distributed amongst stakeholders, a lot of them tend to be placed based or company based. So cooperative models, for example, are kind of company based. You’ve got a Boston impact initiative is more of a place based participatory model. And in between, like these two examples, right, you’ve got everything under there are a lot of different models that are basically their spectrum in terms of whether they’re whether it’s to what extent they are distributing governance and economic rights to a broader base of stakeholders. So you can have a perpetual purpose trust, where, like, the fun that common trust is standing up, where a business not only is now perpetually responsible for their employees, financial well being has employee governance and cemented economic rights, but they may also say they are responsible for community investment and well being. You have Aesop’s, which Axios just had a great article about how successful Aesop’s are at wealth building for, you know, blue collar workforces. And we back a personal heritage, which is a firm that really focuses on transforming companies with a majority minority workforce into Aesop’s with strong kinds of Cooperative Governance models. So there’s a wide range. I think we kind of need all of them. I’m not, you know, trying to pick one, because different types of approaches will work for different kinds of sectors and companies. But we really think there’s more opportunity to be more equitable in our wealth distribution. And that extends all the way, you know, the history of the public equity markets, right, like the reason companies went public, to raise money, but to generate wealth building and opportunities for the broader, broader American public. And, you know, wealth has been highly concentrated there as well. And it’s one of the drivers of inequality in the country. So I think this is, you know, it can seem like a very niche, crunchy, crunchy thing to focus on. But really, it underpins the entire entirety of our capital markets. And we should all be thinking a little bit more rigorously and broadly about ownership and governance rights. Taos

Alexa Binns 32:46
did not invent this note. This stock market is option one.

Margot Kane 32:55
Right and when we defamed proxy voting it, you know, at all of these things to consistently concentrate power, in management, and in a few BlackRock and State Street institutional shareholders, right, we start to see real governance challenges which link back to our earlier conversation about impact, and who’s making decisions, you know, for whom? And what are the externalities and things, things that are occurring in our society because of that.

Earnest Sweat 33:29
Now, we’re gonna take a quick break to speak with our sponsor.

Alexa Binns 33:32
Next up, we have our industry expert and sponsor, Dave Thornton, co-founder, CEO and chief investment officer of vested, who provides funding to exercise your stock options. Thank you so much, Dave, for joining us.

Dave Thornton 33:46
Yes, happy to be here. Thank you for having me. What is the origin story behind vested vest is an interesting business. So originally invested began as a company intended to help startup employees understand their stock options. Almost everybody that works invested either has directly screwed up some decision related to startup equity, or knows friends who have. And so the first incarnation of acid was a website with free content and free tools to help you just understand and not screw up your startup equity. Then we had a very, very interesting set of inbound opportunities start to come in about a year, year and a half into the business, which was when a lot of our initial users who were coming to the vessel for the education started asking us for money. And we did not, at the time, have plans to be a capital provider of any sort. However, some of us have financial services backgrounds, and our antenna went up at the opportunity to be a capital provider. And when we took a look at what the nature of the capital requested from our own users was, we found that it was almost entirely Really this one unserved issue that is endemic to the world of startups. So I shouldn’t say, we thought we’d see five or six different use cases, we thought some people would want to sell some of their shares in their private company for the purposes of putting a down payment on a home and other people would want to buy a car. And some people have unexpected medical bills, and whatever. And all those use cases did present themselves at various points. But, by far, the dominant request to us was, oh, man, I just left my startup. And I figured out for the first time that I had 90 days within which I’m Yes, come up with the money to exercise my vested stock options, or else they go away. The clock is ticking. Yeah, 90 day clock, which is just all over the place that fights, it starts in the employee stock option plan, which is a boilerplate set of documents, which most startup founders don’t think about when they’re putting everything together the first time. And it itself propagates all the way through. And so this problem that we ran into is kind of just following the structural flows of a labor market of startup laying, like anytime anybody leaves for any reason, they’re likely going to be in a spot where they have 90 days to not lose their stock options. So we took a look at the market that we assumed must exist around this problem, since it’s not a particularly new problem. And when we canvass the market a few years ago, we saw that there were four or five, stock option funding providers that were out there, depending on how you want to count four, or five, and they almost all some intentionally, and some practically served the senior employees that were leaving the latest stage startups. And so after having done our market research, and then looking what looking back at our user base that was coming in to us, what we realized was that our user base represented kind of the rank and file startup employees, not the senior people, not necessarily the people with like a 10, that million dollar option exercise need. But you know, the folks who needed 50 grand at a time. And in the scheme of startup equity, which can have very high value, that doesn’t seem like a really big dollar amount, but at the same time, the brutal startup comp cycle is your under cash count working at a startup, like they’d make it up to you in the equity that you get granted. And as a result, you don’t have 50 grand lying around your ring for this unexpected rainy day. So the I mean, that’s the origin story of vessel, which is what you asked, we looked for interesting ways to become a capital provider to what we saw was a very fragmented and distributed but completely almost completely unserved market, which was the rank and file startup employees that needed 50 grand to not lose their options. Now,

Alexa Binns 37:57
What a great example of listening to your customer or your user, what is the core product now.

Dave Thornton 38:05
So from an employee perspective, the core product is funding for your expiring stock option exercise. What we do fundamentally is we buy a subset of the shares that you’re exercising your way into, as the machinery for getting you all the money you need to do your full exercise. And so it ends up being some split between us where the math depends on the strike price and the current fair market value and all these other things. But the bottom line is we’re just buying a portion of your shares so that you can unlock the rest. And then on the flip side, where our capital comes from is we raise investor capital, from LPS who are interested in accessing the venture asset class. And what we promised them is a diversified unconcentrated pool of fairly high quality venture backed companies, which is the exposure that we get when we buy the employee shares to help them exercise.

Alexa Binns 39:00
Now, and there’s some interesting signal there that the people who are inside, think it’s worth vesting their stock option. Yeah,

Dave Thornton 39:08
Actually, there’s always a signal. So first, there’s the motivation to make sure that they retain their equity, which is a very positive signal, then there is the fact that they’re selling only the minimum number of shares necessary to unlock the remainder of their equity, which is a positive starting posture. And then there’s the possibility that they want to sell all of their equity and just take a bunch of cash and run, which is a very negative signal. So there’s, there’s a, there’s a spectrum of signals based on the behavior of the users that come to us, but actually, for whatever it’s worth, most people want to hold on to their equity.

Alexa Binns 39:42
That’s an interesting observation that most people want to hold on to their equity. Do you think that has changed in the sort of post frenzy or VC has cooled a little bit? Yeah,

Dave Thornton 39:56
I don’t think it’s changed but the types of deals that were able to get done have changed because of the so-called crash in the private markets in the last year and a half or two years. There is a concept for the common stock that employees usually have the right to buy through their stock options, which is called the fair market value of common stock. It’s a capitalized term, it’s an independent valuation firm that the board approves, whatever they do, that becomes the fair market value of common stock. And the fair market value of common stock gets kind of redone on an independent basis, at least once a year. And although investment rounds don’t happen all that often, and maybe a company last raised during the gogo times of 2021. And that price hasn’t changed. Usually, the fair market value of common stock has changed since then, and now reflects the current market environment. And so we’re only able to support stock option funding deals where the stock options are actually in the money meaning that the fair market value of the underlying shares is higher than your strike price. And so there are marginally fewer deals that we can get done, because a lot of companies have taken an FMV. Right down which moves some employees from in the money options to out of the money options.

Alexa Binns 41:13
No. And are there other considerations too on who is eligible, or who isn’t to work with you all,

Dave Thornton 41:24
We try to be there as much as we can, for a broad set of employees. What we noticed in the user base that was coming to us initially was that there’s just a very long tail of rank and file employees that can’t find money for their stock option exercise. And so we tried to, we tried to help as much as we could, I guess, is the right way to say it. It’s still the venture asset class, and we’re still not trying to buy the common stock exposure to companies, they’re very likely going to zero. So I mean, there are some companies that we can’t help on the basis of that alone. But if the company seems like it’s doing okay, we’re, we’re going to try to do it there.

Alexa Binns 42:02
Thank you so much, Dave, to start working with vested, you can please email investors@vested.co. And mentioned this podcast. And now back to our LP interview, one

Earnest Sweat 42:13
kind of vertical that has a lot of impact. And we mentioned it already was climate, and there has been a lot of money, especially kind of during 2021 2022 poured into climate. You have a lot of experience there. What are the biggest opportunities in this care category you think for returns and impact?

Margot Kane 42:38
There’s, there’s a lot. There’s a lot of opportunity, when you’ll get kind of the longitudinal history of American capital markets, is the kind of expansive periods for a given sector, let’s say energy. Always come after significant collective public investment. We built the railroads. Coal followed massive fortunes built on the infrastructure that the Publix taxpayers have underwritten. And this is no different. The IRA is pumping billions 10s of billions of dollars into building the infrastructure to enable a much more robust investment marketplace across multiple types of assets. Have I meant that in terms of asset class, as well as natural resources? So there’s a significant kind of incentive being put in place today. And that’s on top of having made the ITC, you know, permanent so that you have kind of this tailwind as well behind the solar and wind markets. So I think the opportunity is massive. I think though, so, you know, if I could, if I could wave a magic wand and encourage money to flow in a particular way, I think the most durable opportunities are where the planetary well being intersects with the human wellbeing. A lot of the early climate strategies were born out of conservation, which really viewed humans as a problem. And this is, you know, essential, we are the problem, right? My son once said, like, aren’t humans and invasive species I was like, that’s not actually your ego. But I think it’s a short term strategy. Humans can only like to be part of the solution to the crisis that we ‘re going to, we have created it, and we’ll continue to create if we’re not part of the solution. So you have to solve for human livelihoods, you have to solve for their cultural and historical connections to their ecosystems and natural resources. You have to solve for their health and financial inclusion in the climate solutions, and in solving for adaptation and mitigation. And I think that’s actually where the most durable marketplace market opportunities live. versus kind of like ring fencing, you know, natural resources and telling humans to stay out which, you know, frankly, husband, some of the history in there, certainly, I think there’s some really exciting kind of just pure tech plays and battery storage, etc. But I think that the intersections with human behavior are the ones I find most interesting and have the most transformative opportunity. Could

Alexa Binns 45:58
you give us an example of something like that, so we know it when we see it?

Margot Kane 46:03
Um, so I think some of the some of the examples in renewables and in solar and community solar where they are building the assets or building the infrastructure tied to long term revenue streams, so tied to PPAs, with utilities, in a way that ensures the community has ownership or no, we’re an economic right in those underlying assets. I think those opportunities are really interesting. So that it’s not, you know, an industrial solar field off the side of the highway, where the only people you know, profiting are private equity backed funds, right. And people can kind of understand the impact on their lives, like there’s free energy being, you know, distributed within that community, because those assets have been placed on the rooftop of your local school and hospital, right? And so, you know, people are being trained to maintain that infrastructure, and there’s job creation as a component as well. I think those types of opportunities that really view the community as an asset to be built up alongside the renewable infrastructure are really exciting.

Alexa Binns 47:26
Is that the kind of thing you’re reviewing with the EPA?

Margot Kane 47:30
So, I’m on the environmental financial advisory board with EPA, and we were asked by the EPA to provide some recommendations around the deployment as a greenhouse gas reduction fund. And you can see the public meetings, meeting minutes from that last winter. And those funds are also under the justice 40 initiative under the Biden administration, which directs the funding to go into communities that have historically been under invested, or kind of locked out of this type of funding, and prioritizing, you know, majority, minority communities, indigenous communities, etc. And I think, you know, one of the really interesting things here and it goes back to that human or section is that the most vulnerable communities from a climate perspective, are also the most under-resourced communities historically, from a financial and infrastructure perspective. So a lot of the recommendations that the E fab worked on, was was trying to figure out ways to help encourage that money to flow down to the less resource to resource communities, and not kind of get Stoppard up at, you know, levels, municipal state levels, where, you know, you had I mean, there will be money spent at those levels, for sure, a lot of it. But those entities have shovel ready projects, they have the capacity to apply for and report on, you know, federal funds and the like. And I think the Biden administration, as well as the leadership at EPA, were very aware that there needed to be a different approach to make sure that these funds reached vulnerable, rural and urban and island communities that otherwise don’t have access to this kind of funding historically. Just

Earnest Sweat 49:35
curious over kind of like the entire landscape. Margo, what industries or investment trends are you steering clear from right now? Ah,

Margot Kane 49:47
Well, so many. So just personally speaking, yeah. I mean, obviously, other than the usual fossil fuels, arms, tobacco, alcohol, etc. We have and this is potentially controversial in the impact investment space steered away from student debt. This is one of those like, is this the right lever thing? Slightly better student debt in a fundamentally extractive predatory, unsustainable marketplace is not a net good in our opinion. So yes, there are better ways to do it, but also we just shouldn’t be levering up our young people with unsustainable levels of debt to get educated. So that’s one area we stay away from, and the markets have kind of validated that in recent history. Unfortunately, for everyone, it also kind of fuels an asset bubble that sustains some of the worst players in higher ed in particular. cybersecurity, it’s when you mix cybersecurity with with for profit incentives, it’s very hard to know or control whether or not you’re empowering states that are committing human rights violations upon their own citizens or others in mass scale to so I think that’s an area where we’re, we’re definitely not trying to deploy capital that’s very popular. And, you know, I was saying this also three years ago, when this was not a popular point of view, but cryptocurrency because I think until you have a transnational regulatory infrastructure, it’s either a scam or a fantasy or both. Sam Bateman got 25 years in prison for all of the above. But I think you know, that’s, that’s more of a mark of an industry attracting scam artists, because it is not like a real exchange of value and productivity yet. And then I was also in this position for three years, and now everyone would agree with this. But three years ago, no one agreed with me specs as a vehicle, I think are absurd and shouldn’t exist, frankly, and I would always avoid those as sort of a untenable, kind of like, fee capture for no risk amongst the sponsors. And I think you have like this amazing combination of like the two worst things possible when you see truth, social launch under a spec. So that’s like the epitome of what we would never put a single dollar towards. And to kind of round that one out. A much trickier position to do consistently is not back any business that is really organized around collecting and profiting off user data, particularly that of miners. So that would kind of be all of big tech right now. And that’s, that’s, that’s a tough one. It’s the majority of our kind of economic growth engine over the last decade. But I think we’re reaping the negative rewards now and the mental health crisis, just to pick an example amongst youth and their, you know, their crusading against, you know, blocking access to social media accounts,

Alexa Binns 53:32
I think it speaks to is very helpful to hear the tangible examples of what you sort of opened with saying every investment is somewhere on this spectrum of positive or negative impact, or combination,

Margot Kane 53:49
right. And we all have to kind of determine, like, what trade offs are we willing to accept? Oh,

Alexa Binns 53:55
yeah. Oh, yeah. Any final thoughts to share with this audience? We’ve got allocators, GPS.

Margot Kane 54:05
I think for both audiences, I was a history major in college and then quickly realized I was not cut out to pursue a history PhD. Probably to the relief of my family, but the disappointment of my mentors, but I love kind of applying the frameworks of history to the practice of investing. And I find ventures especially entertaining in this regard. Everything is cyclical. And the venture industry is, you know, very true to form in that it gets far more hysterical than than most other asset classes in terms of its response to the cyclicality of reality. So their cycles cause more whiplash. We’re seeing You know, a correction cycle now. There was a, you know, boom cycle previously, etcetera, I lived through several of these now. And I think what I would try to tell folks is like, don’t buy into the hype or the bust, you know, just try to stick to your path and your beliefs and the people that you’re working with, just people you’re working to support. And it’s kind of going to even out over time, if you stick to that, and you don’t jump into the volatility slash hysteria in one direction or another. And it’s, it’s tough right now, I think. The other kind of the other thing I think about a lot is how lonely it must be, especially solo GPS. And I think it’s really interesting that investors think that, you know, we should make sure we create a founder community, we have to connect our founders to other founders, so they can learn from their peers and, and feel like that support, but they don’t do that for themselves. And you guys are all out there busy building businesses. Also, you’re found GPs are founders. And you need friends and peers, and you need to spend time on cultivating that community as well for your own mental health and the long term kind of sustainability of what you’re trying to build. So I would encourage people to spend some time with their friends and peers and consider that community as a resource, especially, you know, right now.

Alexa Binns 56:40
You wouldn’t know this, Margo, but that’s actually how Earnest And I know one another is we formed a group of basically junior partners, sort of comrades to all be able to talk about what’s going on in our careers. Yeah.

Margot Kane 57:00
I love it. Look what came out of it.

Earnest Sweat 57:03
Birth to podcast. Margo, thank you so much, especially for those last two points. You can apply those not only to this asset class, but just to life. And so thanks so much for being on soon, with allocators. Thank

Margot Kane 57:17
you so much for having me. It’s been a pleasure.

Alexa Binns 57:22
See you later, Allocator!

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The Hosts

Earnest Sweat

Earnest Sweat is the Founding Partner of Public School Ventures, a dynamic syndicate of over 600 technical operators, go-to-market specialists, and LPs. Previously, Earnest built new venture capital practices at Prologis and GreatPoint Ventures. His focus is on investing in value chaintech, specifically vertical SaaS, applied AI, middleware, and B2B marketplaces, which are poised to revolutionize foundational industries like real estate, insurance and supply chain. Earnest has sourced and led investments in companies such as Flexport, Flexe, KlearNow, and Lula Insurance.
Alexa Binns

Alexa Binns

Alexa Binns is an angel investor and LP. An experienced investor and operator, she has climbed the ranks from associate to partner at Maven, Halogen, and Spacecadet Ventures and built digital and physical products for Kaiser, Disney, and Target. Alexa has worn every hat in venture from fundraising to sitting on boards. She invests in companies with mass consumer appeal, focusing on the future of shopping, health/wellness, and media/entertainment. Key angel investments include The Flex Co, Sana Health, and Chipper Cash.

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