Venture Capital for the State of California with Derrick Tang of IBank California

With Derrick Tang,
Deputy Director of Venture Capital, IBank California
This week on Swimming with Allocators, Earnest and Alexa welcome Derrick Tang, Deputy Director of Venture Capital at IBank California. During the episode, Derrick discusses his journey from a chemical engineer to leading California's first public venture fund focused on underrepresented fund managers, entrepreneurs, and climate justice investments. He emphasizes the importance of aligning venture capital with public interests, addressing funding disparities, and supporting diverse decision-makers. Derrick concludes by inviting fund managers and limited partners to collaborate with them, particularly on issues relevant to California. Dave Thornton from Vested also shares how the haircut to fair market value has been influencing employees.

Highlights from this week’s conversation include:

  • Derrick’s background in venture capital (0:19)
  • Transition to public sector (2:27)
  • The Government’s role in innovation (4:55)
  • Public perception of government in venture capital (8:40)
  • Government programs for venture capital (10:48)
  • Constraints of public funding (13:11)
  • Coordination among state programs (15:18)
  • Purpose of public venture funds (17:14)
  • Supporting Underrepresented Small Businesses (17:34)
  • Investing in Diverse Teams (22:41)
  • Insider Segment: Vested’s Differentiation from Competitors (24:59)
  • Considerations for Pre-IPO Shares (25:35)
  • Thought Leaders in the LP Community (27:11)
  • Allocation for Diversity and Climate (29:16)
  • Definition of Climate Justice (31:01)
  • Unique Aspects of Climate Investing (34:02)
  • Mission and Returns in Inclusive Investing (37:30)
  • Fund Size and Deployment (40:35)
  • Final thoughts and takeaways (42:15)

 

Derrick Tang serves as the Deputy Director of Venture Capital at IBank California, a role he was appointed to by Governor Gavin Newsom. With a rich background in climate change, venture capital, and government leadership, Derrick has dedicated his career to increasing access to capital for entrepreneurs. His work focuses on supporting underrepresented fund managers and entrepreneurs, with an additional emphasis on climate justice investments. Derrick’s previous roles include leading the Climate Investments team at the Bay Area Air Quality Management District and managing grants at the California Clean Energy Fund (CalCEF). He holds a B.S. in Chemical Engineering from Cornell University and is passionate about leveraging venture capital to drive social and environmental change.

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 00:12
Today on Swimming with Allocators, we have Derrick Tang, Deputy Director of venture capital at iBank, California. Derrick was appointed by Governor Newsom to lead California’s first public venture fund for underrepresented fund managers, entrepreneurs and climate justice investments. Derrick has a rich background in climate change and investments in both the public and private sector. Derrick is coming today to share with us his approach to investing and underrepresented fund managers, and giving us a perspective on how fund managers should interact with the government as an LP. Derrick, thanks so much for being on the show today.

Derrick Tang 00:54
Thank you for having me here.

Earnest Sweat 00:55
So Derrick, you know, I went over and could have put in a lot more within your rich background of all the things that you’ve done, could you just walk us through your journey to being an allocator? in venture capital?

Derrick Tang 01:06
Yeah, of course, a rich background is a nice way to put it. Right. I was a nonlinear circuitous, but But it got me to where I am. So in terms of venture capital, I think I kind of got into it like two different times. I started as a chemical engineer, so quite technical work on the on, on climate change technologies. But earlier in my career, I wanted to sort of broaden my skill set beyond the purely technical. So that’s how I somehow managed to join a fund to funds only shortly after learning what a fund of funds was. And I think it was helpful, you know, like growing up in Silicon Valley rallies, I told myself, like, I was absorbing what it was like to, to live in BC ledge, I don’t know, that’s quite true. But it was definitely a big education with a lot of context, working at a fund to funds, investing in those top tier name brands, Silicon Valley VC firms and beyond. But after, after working there, I transitioned to the public sector. So really, most and really, the second half of my career has been working with government or in government, especially in the context of climate change. But with a focus on increasing access to capital, increasing access to resource for climate startups especially. So through that work, I was still working, you know, with, with VC and with CO investors, but more at an arm’s length. That’s really what this this role now that I joined just over a year ago, where it feels like a rejoining a VC, but as a different, different person. I read about prior BC as a foundation that really that public sector work and bringing those two aspects together. But still, without that through line of finding ways to increase access to capital for entrepreneurs at the very center.

Earnest Sweat 02:59
With that perspective of kind of the public sector, how has it really informed you now going back into venture like, what do you think you’ve learned or unlocked that can help? You know, within kind of like, the things you’re thinking about with ROI of both, like, not only returns but impact?

Derrick Tang 03:17
Yeah, I think it’s, it’s the whole difference. Really, you know, a lot of the fundamentals of venture investing, especially fund investing haven’t necessarily changed in terms of the types of things you might evaluate in a diligence. Like people say, it’s about underwriting people, and you’re really looking at the team, first and foremost, and then kind of extrapolating from that, so that part hasn’t changed. I think it’s about how you apply that and for the government for public venture funds. I think the main reason I’m in this is because I think there’s a lot of how the government has funded innovation, and how the government should fund innovation that has really encapsulated in the industry of venture capital. I think so just to give some examples of that. I think the traditional view of thinking is that the government funds innovation, and likes really basic fundamental r&d, through grants, because it’s for the public good. And then the result is that we create things like the internet and GPS, and these things that are great, but they’re free, you know, they’re free in terms of open use of technology. But then in terms of return multiple than ROI, it’s a 0x return, right? Like its grants are, by definition, guaranteed. 0x. So then it ends up being the private sector, these companies that develop smartphones using these technologies that make the literal trillions, right? What ends up happening is we socialize the risk by bringing innovation, but then privatize the rewards. And I think in many ways, just the design of a public venture fund itself is an equity project. Because the government is not a separate entity, it’s the public we are, is part of the state of California and represents the 39 million Californians. So the more profit we make from this program, the more reward there is for the public, to make up for the risk that we have, we have collectively taken in funding this type of innovation. And by the way, these are not my ideas. A lot of this is influenced by an economist named Mariana mazzucato. And a lot of her work has really led me, my work and my perspective in working in the public sector.

Alexa Binns 05:44
It’s an interesting trend, right, that I think a lot of VCs are looking to piggyback on some of this public grant money, particularly in climate. But as it relates to healthcare, you know, there’s other areas where there’s plenty of public grant money. How do you feel about that strategy?

Derrick Tang 06:04
I mean, I think I give all my power to them. Right, like it’s you, there is definitely a need for non diluted funding for companies to scale out. But I think it’s not, you know, I wouldn’t blame them. It’s not their fault. It’s more of like a broader social societal discussion we need to have, and really about, I think, the narrative and reputation of the government, you know, the government is not seen as a good investor. There’s a lot of discourse about letting the market do its thing. Government is there to fix things. But then if you step back and start to look at some numbers and compare, like, what was the cost of these different types of bailouts? How has the government performed when it does invest? Again, that’s another example. And the importance of narrative, especially in climate, we think about Solyndra. Solyndra is just one example of a clean energy investment that the government guaranteed with a loan guarantee. And it was highly public, President Obama went there for the factory tour and everything. And then shortly after that, it went bankrupt. So then, all the narrative was around, oh, look how much money the government lost of taxpayer money by investing in Solyndra. But then Solyndra itself was part of a much larger portfolio of loan guarantees that historically actually outperforms many types of public security investments. Even when they created the program, Congress, involving both parties, expected losses that weren’t designed to take these riskier things, but ended up actually making money for taxpayers. So then this lack of portfolio narrative on what the government was doing, really made it so that the narrative ended up being incomplete. So I think there’s always gonna be, I think, a place for grant funding and basic research. But to me, it’s more about just changing the framework and how we view the public and private sectors working together, I think, especially when it’s around mission driven work. And mission driven work doesn’t mean that it’s not also profit driven. They’re not mutually exclusive. So I think finding those areas of intersection are the areas where that collaboration and as partnerships are going to be the richest.

Alexa Binns 08:26
That’s such a helpful tangible example. Are there others you can share misconceptions that you find yourself correcting? Either your comrades in venture or the general public?

Derrick Tang 08:41
Yeah, I mean, people in general, I think in this country, more than other countries, like in Europe, for example, people don’t expect the government to be part of VCs. That’s a bit of a surprise. And honestly, in California, we haven’t had a public budget program like this until last year. But so our source of funding is from the federal government. That’s part of a $10 billion program called the State Small Business Credit Initiative, or sspc. I for sure, it really rolls off the tongue. So that is kind of like a misconception, because most people don’t know that. That exists. And that’s starting to change now. But it wasn’t really designed as a Venture Program in the first place. There’s like a lot of governments that have never really been very good at marketing, or outreach. And often because there isn’t a budget for those things. And it doesn’t begin, there’s a conception that taxpayers shouldn’t pay for the government to advertise. But I think the cost of that is that there’s a kind of a lack of awareness of government programs. So I think, you know, the surprise might be that there’s actually a lot more out there. In terms of how the government is, is playing in the private sector, as a market actor as a city A skewed investor and as a collaborative partner in ways that might surprise people, because sometimes when people think about government, they just think about IRS or, or the police or whatever it is that that really made their day worse. And there are many, many more aspects of what the government does.

Earnest Sweat 10:15
Derrick, you mentioned SSB CI. And we were talking before we started recording all the acronyms, and I got it confused with SB IC. Could you talk about the you know, those two programs or if they’re even others that maybe weren’t originally thought to be used for Vinter, but now are in some ways that states are creatively being a market participant?

Derrick Tang 10:48
Yeah, for sure. Very confusing with lspci and sbrc. Same letters, totally different programs run by different departments at the federal level. So Sdic, and I’m definitely not an expert in that. But they also can support venture capital funds, so they’ve been doing it in the form of sort of alone with repayments. And they recently changed the rules to make it much friendlier and much more aligned with how VC and LP interactions work. So I think that’s just been rolled out in the last few months, it’s definitely worth looking into. If you’re a VC with SSPI. Just to give you context for the California Program, and many other state programs, our focus is primarily on funding investments. So we’re an LP into venture funds. But we can also do direct co investments directly into companies. And most states or territories or jurisdictions have similar flexibilities, I think a lot of focus on funds, but then the ability to do direct investments. So lspci is quite able to do that. And I think it more so than Sdic enables states to market LPS or look like other LPs, there are a few additional restrictions and constraints because of this federal funding. But they’re not bad considering like in the history of lspci it was actually created as a mostly a debt and credit program, using loans and guaranteeing participating loans. And actually within the treasury, they carved out the ability to do venture capital at all, using this program. So there’s quite a bit of administrative, bureaucratic jiu jitsu to be able to do this in the first place. And that’s really why we have some of these kinds of weird restrictions, constraint constraints. But I think what when you talk to different states that are running their sspc AI programs, really that what we’re trying to do overall is streamline that as much as possible and translate the kind of the policy guidelines and understanding what the VC market is like to make that process as easy as possible. So with SSP CI, we are able to look as much like any other LP and Vc as we

Alexa Binns 13:06
can briefly Do you mind touching on what some of those constraints are

Derrick Tang 13:11
lspci, the S and the B stands for small business. So one thing that is no requirements, or restrictions on how the funding can be used is that if a company is raising more than $20 million in a single round, so as a VC example, if you’re raising the companies or startups raising $25 million, Series B, that in those investment rounds, the SSB CI capital cannot be used. And I think I’m guessing the thinking around that was, if a company is raising more than 20 million, they’re not a small business. And that $20 million mark was set about 15 years ago with the first versus the second version of sspc. So the first version is that when they set that limit, they haven’t updated it since then. So like there’s no inflation adjustment or anything like that. But it can be really hard to change these things, because they’re in federal statutes. Yeah, that’s something that we all have to live with now. And, and what it ends up doing is it kind of forces this mostly into an early stage strategy, which is not, which is probably where we would want to be anyway. But then it does create these things that we just need to discuss with farmers so that if they are doing a follow on, it’s, you know, it’s not gonna be uncommon for rounds to be in outsiders. And Southern California, we’ve come up with ways to address it. And we were actually able to sort of fundraise internally, from state funds to say, Okay, for this follow ons, we can use a different sort of funding to participate in those because we want to be able to have our VCs be as unrestricted as possible. But not all states have that luxury necessarily, but there’s still other other workarounds but that’s one example of how an sspc ILP might be non standard.

Earnest Sweat 14:59
Are there best practices traded amongst the different state programs? Like I’m just curious, because, you know, I’ve heard from other states being other restrictions like, how much capital can go outside of companies from that state?

Derrick Tang 15:17
There? Yeah, I think to the credit of the US Treasury, I think they actually do quite a good job convening in the different states. We have, I think, on average, once a week or twice a week, different types of working group meetings, with the different states working on just venture capital. So the communication or coordination is quite good. Or just you pointed out that, like different states have different programs in the law that are actually not related to the US Treasury. What we found is that for all different states, it’s often like an economic development agency in that state, sticking to the funding. And that’s where there might be some of the additional restrictions on investing only within the state or a certain percentage in which they. So that’s trickier. Because what it ends up doing for our customer with the VCs is that when they learn one state’s lspci program, they’ve learned one state CCI program. I think the best practice, I want us to California has one of the better practices there, but we’re not as constrained. And like, we can support fund managers outside of California, we just generally show this kind of qualitative benefit to the state when we make these investments. So it doesn’t need to make sense for California. But once we make the fund investment, we don’t want to require or restrict that our fund managers only invest in the state because they should go where they go. But that’s but we still have to follow certain restrictions overall, like, what allows us to do that is that we have other programs within SSB CR. So there’s like there’s either kind of state by state calculations that would have formed a state’s ability to do that or not.

Alexa Binns 17:00
And I’ll read this back. California’s public venture fund is for diverse managers, entrepreneurs and climate justice investments. What is the purpose of this pot of money, these public venture funds?

Derrick Tang 17:14
Yeah, so I think, beyond the, I think, a general purpose of a public venture fund, like funding innovation and all that. In California, we have beyond just participating in venture, this mission to really support a more inclusive venture ecosystem. And just to be clear, I think most of the states and territories working on this have a very similar mission of supporting underrepresented and small businesses, either through underrepresented fund managers or funds that support those underrepresented founders. I think the idea there is also that we believe our mission is very much a line of public interest. And VC has a lot going for it very much embodies the California Dream, the American Dream that like with an idea you can really make it and entrepreneurship is a legitimate Path to Wealth Creation. So because of that, the access to that path should be fair, and the people in the California IBC ecosystem. It shouldn’t be representative of the people in California. So it’s really that simple. But I think this is somewhere where the government as an LP particularly aligns with the public interest, because I think it would make sense for the industry to look more like the state we represent. One

Earnest Sweat 18:43
pushback could be with already so much VC activity in California. What’s the need for this program?

Derrick Tang 18:54
I think that was part of the thinking. And the first, the first version of lspci, back in 2009 2010 was like, like, there’s no, there’s no need for VC. But I think you just look at the numbers, right? Like, even within California, Wherever you look, the numbers do not are not representative of any, any reality of like when you walk down the street, right. So clearly, the need is still there, because it is left to its own devices. Things haven’t changed that much. You know, I think in terms of like, I was first in venture about a decade ago, when I came I kind of came back but I think with a different lens. But then I was actually kind of heartened to see how things had changed in terms of organization and community building. We got these groups like black VCs, almost all VCs, like just a really strong set of networks that I don’t think I saw before. But what hasn’t changed is the dollar amounts or the percentages. I mean, they Seems like a little bit but really on the margins, nowhere near to again, what, what the what’s representative of California. So, and I think I’m also heartened to see more LPS have this as part of their vision mission. But again, those numbers and those percentages are still quite far away from where the population numbers might be or whatever type of benchmark you might use any type of comparison, and there’s still a huge gap to cover. So I do think part of the role of government is to try to cover those gaps. And

Earnest Sweat 20:35
I can, from that answer, picture myself as a fly on the wall, seeing like, Okay, you got approval, the pitch, the data, is there. The reason there, we got the funding. Now, you’ve been fast forward, you’ve been on this journey for about a year. What surprised you on just like, you know, whether it could be the mission, the market? What surprised you the most on this journey?

Derrick Tang 21:04
I think the good surprises were the organization and the community building. Not a surprise was like, maybe even like, what the numbers still are. But I think one thing I’ve noticed is that sometimes, perhaps the expectation is that an underrepresented fund manager should also have an explicit investment thesis to only invest in underrepresented founders, or have explicit targets related to diversity, or something like that. And I don’t hold it against funds that have that. I just want to make sure that they don’t feel that the pressure is coming from something else or someone else, right? Our thesis is around backing underrepresented investors, with the idea that they are much more likely to invest in underrepresented founders. So by supporting the decision makers, you’re really empowering them to make what they think is the best choice. But then there’s data to support that that’s a really effective way to get more access to capital to ultimately the founders in those small businesses. So then, when we do decide to back a fund manager, we’re relying on a thesis and then we want to give them the best chance to succeed, which means not raising any additional or unnecessary barriers that may distract them from what’s what’s usually their life passion to do what they do and invest in finding the best founders and companies, I

Alexa Binns 22:41
have had the luck of getting to work for one of the very first female GPUs specifically investing in female founders, Jesse Draper, and the portfolio had co Ed teams. You know, like, when you look at who is a female founder, every company has people of all gender. And so it’s, it’s interesting to sort of think of many, you know, she’s a solo GP, so she is a female solo GP, but the portfolio is full of fantastic male and female co-founders. It’s kind of ridiculous to assume there’s going to be businesses built by just women like Amazonian.

Derrick Tang 23:33
There are plenty of businesses that are right, but then like, it doesn’t, it’s not necessarily a strong investment strategy on its own. Yeah, invest only in those teams for just for the sake of investing in those teams

23:47
are gonna work, eventually there will be a man in the deep. Yes,

Derrick Tang 23:51
somewhere. And I think the idea that really, I think most people embrace is that the more diverse a team you have, the more options you have, the more things you think about. And there’s ways to help that team grow in ways that a more homogenous team might not be able to access. So I think that part like most people will generally agree with that. And so if that’s true, then it’s really about backing the decision makers and giving them that freedom of saying like we trust you, you’re going to get what you’re gonna do.

Earnest Sweat 24:33
Now we’re going to take a quick break to speak with our sponsor. Next up, we

Alexa Binns 24:37
Our industry expert and sponsor, Dave Thornton, co-founder, CEO and chief investment officer of vested, provides funding to exercise your stock options. Thank you so much, Dave, for joining us. Who else would you consider competitors like fun funds or other indexes? And this is a chance to maybe talk about how you’re a little different Yeah,

Dave Thornton 25:00
The truth is I don’t really consider any of the folks that might be on paper competitive to be true competitors. I guess the best like strongman competitor is a fund of funds, in the sense that you can buy one ticket and get diversified access to venture, the way that we differentiate from a fund of funds is actually a couple ways. So one is funded funds tend to have stacked fees, whereas we don’t, one of the benefits of outsourcing apparatus going directly to employees is that we don’t need to pay somebody else for the right to do the sourcing. And so one layer fees instead of two is a big deal. Another is that fund of funds tend to have higher look through concentration than investors are aware of. So like, you may be invested in 10 managers, and they’re probably all in stripe separately. So you have significantly more concentration and a couple of the names, then you will end up wanting. And yeah, those are the two largest differentiators, the other assuming that we pop up the new business model is that we’re going to be able to be programmatic and present you something rather than be reactive to whatever deal sourcing happens through the funds bandages.

Alexa Binns 26:38
Yeah. And on the LP side, how do fees work?

Dave Thornton 26:42
So historically, we’ve done two and 20 funds. With an 8% preferred return hurdle, we believe that the upgrade of the business model where we’re going to be able to curate these portfolios and drop them into funds is going to be, we’re going to be able to access things in a better way and more efficiently, we’re also going to be able to drop the fee structure. So we haven’t decided what it will be dropped to in a little bit of that is to be determined by some research that we need to do, but it’ll be cheaper

Alexa Binns 27:14
going forward. And the fees for the employees. So

Dave Thornton 27:18
For the employee, we’re just buying shares from them, until they have the amount of money they need to do their full exercise. There is a commission that’s charged by an affiliated broker or a wholly owned broker dealer that we use. But at the end of the day, the fees the way, the way that the employee conceptualizes the fees is they’re selling some subset of their shares in order to own the rest, and there’s no set number of shares you need to sell like, you might need 100 grand and if the current fair market value of your shares is $5, then we might need to buy 20,000 shares. And if the current fair market of your value of your shares is $10, we only need to buy 10,000 shares. And so there’s no set split with the invoice, what

Alexa Binns 27:58
are some of the sort of trends you’re seeing from folks who are coming to you interested in selling?

Dave Thornton 28:07
Interestingly, alright, so a couple things. One is, we will typically buy at the existing, which is a price that every single venture backed startup will have associated with its common stock at every moment. And so we’re usually not price setting independently. And relatedly, we have a volume business, and it would be impossible for us to kind of sit down and analyze each individual company on the basis of whatever the management can produce for us. And so like, it’s a fairly Take it or leave it offer because of the business model. However, I can say that certain market values have dropped in the last year and a half or two years. And mostly it’s just reflecting that we don’t live in the Super High Times anymore, I would say that across the board, they probably dropped by about 50%. But late stage companies have had their fair market value dropped by quite a bit more than 50% and earlier stage companies. By less the dynamic there is mostly that there were some venture capital firms that were really bidding up the late stage companies during the good times. So a soft Bank is a well known example and maybe tiger in those companies had further to fall to correct.

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.

Earnest Sweat 33:51
In the beginning, we spoke about the fund’s focus on diversity and climate as well. Could you share what kind of breakdown you envision, percentage wise? Is it? Is there a specific kind of metrics like a, we’re going to have this half is going to be for diversity half or climate or is it more opportunistic?

Derrick Tang 34:15
Yeah, there isn’t a specific allocation. So we have 250 million overall to deploy. So within that, we actually do have an allocation, about 200 million of that for fund investments. And then the remaining 50 million for direct co investments. And then with those direct co investments, they’re likely going to be uncovered investments into funds that were in it doesn’t have to be the case, but that will be much more opportunistic based on GPS that we’re familiar with. And then when there’s investment opportunities, we have a pot of money for that. We don’t have a specific climate allocation. So overall, we’re a generalist program, how we build climate into it is that Our mission has, there’s basically four ways for a fund to to be eligible or qualify for admission. So one is that the fund managers themselves are underrepresented. The second is that the fund has a focus on underrepresented founders. The third is the fund, or is focusing on underserved regions of California. So areas that don’t traditionally get a lot of DC in terms of geography. And then the fourth is climate justice and climate equity. So how it ends up playing out is that if you don’t meet any of the other criteria, but you’re a climate justice fund, that would still qualify for a program, any one of those four criteria would fit, you don’t have to check all the boxes, doesn’t matter how many boxes you check, but climate is one of the one of the ways to qualify. So it’s there, but there isn’t a specific allocation around it.

Earnest Sweat 35:57
Derrick, what’s, what’s your definition of climate justice?

Derrick Tang 36:00
Yeah, climate justice, to me, is different and distinct from just climate tech. So you know, both within climate change and how to address it. But climate justice has a focus on the people that will be already the most severely disproportionately impacted by the effects of climate change. And, it’s trying to address how to bring about equitable solutions to address that disparity. So things like renewable energy and batteries are definitely critical to address climate change overall, with climate change, Justice would frame it in terms of who is benefiting and who’s being burdened by given technology or innovation.

Alexa Binns 36:52
Is there an example you can share?

Derrick Tang 36:56
I think it’s, I honestly think it’s kind of rare to see this in VC. And the example I always end up giving, it feels kind of outdated now is the company block power, where they have the fundamental technology of, you know, heat pump for or the types of materials you need to weatherize a home. They have, I think, aspects of AI to identify buildings that are really ripe or ready for decarbonisation, or electrification. But then they’re their business model, that really, the purpose is around bringing energy and cost improvements to tenants. So people who don’t typically have power to change their environment or where they live. So they also develop a financing package to make it really easy for the landlords to take on these projects. And they also bring in aspects of local workforce development to implement those projects as well. So it’s like a technology focused, you know, there’s hardware and software. But then the kind of the business model focuses on the tenants themselves and how to bring them with financial and environmental benefits in terms of literally cleaner air and breed. Solving that by creating a financially attractive package for the landlords, who are then intentionally or not passing those benefits on to the tenant. So I’ve been using that example a lot. I think there’s more out there. So if there are people, climate justice funds, or companies listening out there, please, like prove me wrong and tell me how outdated I am, because we definitely want to hear about those examples. Especially in the context of VC funding.

Earnest Sweat 38:46
So you have a lot of experience in climate and it’s been hot as of late, maybe currently not as hot as it was a year ago. What do you think is unique about investing in this space today?

Derrick Tang 39:02
Yeah, I think, you know, a lot of like, more frontline investors can speak more directly to the VC landscape, you’re maybe I’ll say that the thing about the climate change crisis is that it’s extremely time dependent. So everything is about how quickly we can act. So that’s going to make every time period quite unique. And I think we’re at the point now, where there’s greater recognition and acceptance of the various different types of funding mechanisms. But if they would have been nine they would have that many climate startups will need to be able to access the scale. But it’s also I think, there’s this ever increasing clarity that the type around the type of markets that are going to be disrupted in really major major ways. And like people use the word unprecedented a lot. I think climate change might be one of the most important things that we Really don’t know what’s gonna happen to our systems and what’s going to change. And like everything, the scale of everything we’re talking about, it’s gonna be so much bigger than anything we’ve ever seen, I think. So in those cases, in those really major shifts, there’s going to be a lot of wealth creation, which is great. But I don’t think we really succeed, if we don’t make sure that wealth creation happens in an inclusive way.

Alexa Binns 40:26
We’ve talked a little bit about what it sounds like three out of the four focus areas. One I’d love to learn a little bit more about is the geographic diversity or like where other VC capital is not going?

Derrick Tang 40:41
Yeah, exactly. Again, it might be hard to find a whole fund dedicated to this. But I think we’ve seen promising examples of at least portfolio companies within funds, that are finding these companies like really, really good companies that are just not in the middle of major VC hubs. So the idea is like, you know, it’s not all about Silicon Valley, or LA or the major metro areas. I think, to the extent that, again, we’re representing all of California, it’s a, it’s a big place, lots of different regions. A really vast state university network. So I think there’s a lot and we see this on a national level as well like with local economic development efforts. So I think it’s similar to that within the state. And there might be good opportunities on the direct co investment side, to find these types of companies in the Central Valley, that are working on really interesting things that have really tailored solutions to the local economy, but have a really strong opportunity to scale beyond that as well. Because ultimately, I think all those things matter a lot: local economic development, good paying jobs, and just bringing the kind of the aspirational qualities of VC to small businesses no matter where they are. No,

Alexa Binns 42:10
it’s like agriculture or water, we have plenty of forest fires to address.

Derrick Tang 42:18
I think it’ll be quite quite feasible to find that too far in terms of an underserved region, that’s also finding really creative solutions to address climate equity, climate justice,

Alexa Binns 42:30
Are there other things you find yourself just explaining to people that we would all be lucky to hear from you, given that you’ve got this unique seat? I mean, you, you’ve got the Horsley bridge training, and now the public sector person perspective, like, what else do we get wrong?

Derrick Tang 42:53
A lot of we’ve talked about aspects of this, but I think part of what we’re trying to prove about it is good to go back to our like metrics for success as well. We’re trying to make money with this. And it can feel weird to think about or to hear the government talking about making profit. But the way we’ve designed this program is it’s an evergreen program. So as we make VC investments, all the returns go back to this program for further reinvestment in the same mission inclusive VC. So we do have this kind of goal in our heads for this to approach from zero to 50 million today to a billion dollar fund over time. And I think it’s really important for us to see a lot of overlap between us and like impact investors. I think the term impact investing can be kind of a loaded term. And we want to make it really clear that we have this mission. And we’re looking for those top two your market, superior returns that the venture is associated with, and that they’re not mutually exclusive things. I think if we’re seen as concessionary in any way, I think that could actually hurt our mission, because we’re seeing where you know, that there’s a cost to having a mission around inclusive investing, I think it’s quite the opposite, where inclusive investing means that you are finding differentiation, right, like literally differentiated deal flow, and, and, and alpha is generated from that kind of differentiation. So I think it’s important to prove that we can do both, or that inclusive investing is a means to generate better returns. And I think that various audiences have different thoughts on that. And somehow these do have a more of a concessionary impact focus and I think there is a place for that too. But if you As a VC, you’re talking to us just know that we care about the return profile. Like that’s, that’s, that’s really important. And it’s not, it shouldn’t come at the expense of what the machine is.

Earnest Sweat 45:10
Derrick, how can fund managers get, you know, engaged with your program? You know, what’s the best process?

Derrick Tang 45:20
Yeah, so that is where the disclaimer comes in. Because we do have Cambridge associates as our partner. So they lead all of our diligence. And they said, if you can just go to like the, if you search for IBC, you’ll find our website, it’s a really simple process, you just send your your pitch decK to the email address, which goes directly to the Cambridge team we work with we’ve got two $50 million that we’re really trying to deploy in the next three, four years. So probably one of the most active allocators out there right now, because we’re looking for all new managers, we’re starting with a portfolio of zero, currently, there’s two fund managers. So lots of new flights. And then based on that, you know, we’re looking to write five to $10 million checks in these funds, which means the fund size that we’re looking at, are in the 50 to 250 range. So that’s kind of our sweet spot. I think things can evolve over time. But based on some of the intricacies of how our federal funding works, we do need to get it out sooner. But then the idea is that with this evergreen structure, as the distributions come in, we grow our base to work with and we also grow our flexibility in the types of funds we can support. But right now, that’s the focus. So we do have a lot of overlap with other music kinds of emerging manager initiatives and in the universities that they’re working at. I know some, some can do smaller and I know that’s the point of, of a complaint for a lot of fund managers for sure. Because it’s 50 is a lot, right. But we do have to start somewhere and right now deployment is a big priority for us as well.

Earnest Sweat 48:42
Any last thing last parting thoughts for our audience of GPS and allocators?

Derrick Tang 48:48
I think the steward reiterates that we are in business you know, we’re very active allocators come talk to us for both GPS and LPs. And not only are we in business we’re also here to change the way we do business in VC. So to try to work toward this idea of not always doing things the way they’ve always been done. So if you share that vision please let’s find a way to work together.

Alexa Binns 49:15
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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