Do Good While Doing Well

Surprising Ways You Can Bridge the Funding Gap

Every year when the statistics come out about how little funding goes to female entrepreneurs and people of color, I cringe that we are not moving the needle faster. In Chapter 5, you learned about what needs to happen to start changing this, and you can also use more creative solutions. The three ways we will cover in this chapter are not common but are quite easy to implement and, depending on your financial situation, could be preferred over the traditional methods we have been talking about throughout the book.

• Donor-Advised Funds (DAFs): Investing using philanthropic dollars.

• Individual Retirement Accounts (IRAs): Investing out of your retirement accounts.

• Revenue-Based Financing: Investing capital for a percent of ongoing gross revenues instead of a percent of ownership.

If more people knew about the surprising ways to invest in start-ups, which we are about to review, we could start to bridge the funding gap at an accelerated rate.

Investing with Philanthropic Dollars

“Wait—I can donate to charity and invest at the same time? How does that work?” This was my reaction when I first learned about investing through a DAF. A DAF is a personal charitable account set up to hold money or securities to donate to 501(c)3 organizations. According to Fidelity Charitable, DAFs are the fastest-growing charitable vehicle in the US due to their ease of use and their many tax advantages.6 For example, let’s say you received a bonus from your employer and want to donate a portion of it to charity. You’re also not sure you will get a bonus next year, and you want to continue your giving plan. Rather than give the entire amount this year, you could open a DAF and set up grants to go to charity (or charities) over several years. The entire amount committed to the DAF is tax deductible in the current year, and while the funds are sitting in the DAF, they can grow tax free. The one caveat is the assets within the DAF can never go back to the donor.

Many people have the money within their DAF invested in stocks, bonds, or mutual funds so the funds will grow until the grants are made to the charitable organizations. However, a little-known secret is that in a self-directed DAF, the money can be invested in private companies or start-ups as well. The returns go back into the self-directed DAF, which can then be either reinvested in another start-up or donated to a charity. This allows the donor’s impact to be even greater if the start-up goes on to produce significant financial returns. This approach is also attractive for those who cannot directly invest in a start-up on their own because investing from a DAF does not require someone to meet the accredited investor requirements discussed in Chapter 4.

Custodians that specifically handle self-directed DAFs are listed on my website at marciadawood.com/dogood.

Leveraging DAFs to Get More Capital to Women

Early in her career, Alisha Griffey was an innovative entrepreneur working to improve areas she cared about, like clean energy and health care. Alisha and I got to know each other through the ACA, and in February 2023, she was a guest on the Angel Next Door podcast. On the show, she explained that she became an angel investor because of her frustration at the lack of funding going to women and people of color. However, she didn’t want to approach investing in the typical manner, as she believed there were a lot of strong businesses that were overlooked by equity investors because they weren’t chasing hypergrowth. She founded Daintree Capital, an investment firm that provides working capital loans to underrepresented founders to fund growth investments that drive near-term revenue.

Alisha initially considered the traditional route of raising a fund but realized that this approach would shift her focus away from helping early-stage companies that needed relatively small investments to fuel growth. Instead, she sought an alternative path that was less widely understood or expected. An offhand comment from one of her portfolio companies mentioning a loan from a DAF piqued her interest. This prompted six months of intensive research, leading her to discover innovative approaches within the DAF space that could creatively harness charitable capital for investing in for-profit businesses.

Alisha identified three main issues: the underfunding of women and people of color compared to other founders, the overlooking of certain business models by venture capitalists, and the disparity in women-founded companies surpassing the million-dollar revenue threshold.

Venture capitalists tend to prioritize companies seeking a ten-times return or a billion-dollar valuation within five years, often overlooking sustainable, strong businesses that do not chase mega markets or hyper growth. Alisha noticed that women-founded companies were less likely to break through the million-dollar revenue barrier. These women-led businesses offered products or services that customers valued but often struggled to gain momentum to cross into higher-revenue success where more investment options become available.

Daintree Capital targets companies with revenue ranging from $100,000 to $2 million. Since its inception in 2020, Daintree Capital has granted eighty-three loans, maintains a less than 1 percent default rate, and plans to expand further. Daintree has mainly funded companies to increase inventory quickly when demand exceeds supply. Loan sizes range from $10,000 to $75,000 and commonly span nine to twelve months. This model suits companies that can use a small amount of capital to generate a significant increase in revenue within six to twelve months.

The DAF approach may be confusing to grasp initially because it involves the understanding that donors don’t necessarily get back the returns on their investments. Remember, these are funds they designate as gifts; the DAF essentially allows them to operate their own charitable foundation with no more difficulty than investing in a mutual fund. With that firmly in mind, donors can view returns on their investments as further opportunities to give. And once a donor places money into a donor-advised fund, they get a tax write-off. Although they lose direct control over the funds, they can still advise how the money is utilized and, importantly, can invest that money with all returns on that investment accruing back to the DAF, not the individual.

An investment in Daintree’s Impact Fund provides funding to start-ups through loans. When that investment is made through a DAF, the principal and interest are paid back to the investor’s individual DAF. From there, the investor can use that money to donate a 501(c)(3) organization of their choice or reinvest it back into the Daintree Impact Fund. The money, however, cannot be transferred back to the investor’s bank account.

DAFs open new possibilities not only for nonaccredited investors but also for those who may be hesitant to invest in early-stage companies. These individuals might be more comfortable with philanthropy and can now explore investment opportunities in causes they are passionate about through their donor-advised funds.

Overall, DAFs offer an innovative solution for kickstarting risky or capital-intensive ventures that might not attract funding from traditional investors. By leveraging unallocated DAF money, it’s possible to create momentum in areas that need it the most, ultimately creating a more significant social impact.