We sat down with our Chief Legal Officer Joe Pileri to learn about fund basics and what a fund is in the context of impact investing and Mission Driven Finance. After all, managing funds makes up a lot of what we do at Mission Driven Finance! Here we share an abbreviated version of our discussion to help demystify our work.
We were built to connect the community with capital.
On the one hand, we know there are entrepreneurs and nonprofit leaders doing impactful work in their communities. They could probably do their work a bit better if only they had more money.
We can think of the gap between businesses and nonprofits and the capital they need as a giant gulf.
On the other end of this gulf are people who have access to money and are interested in the work that the entrepreneurs and nonprofit leaders want to do.
What they don’t have is a mechanism for providing those businesses and nonprofits the money (besides donations). That is Mission Driven Finance's job—to bridge that gap.
To close gaps in the system, we needed to sit in the spaces between conventional capital and community pillars. Accordingly, Mission Driven Finance is structured not as a nonprofit, not as a CDFI, and not as a clear-cut conventional fund manager.
Instead, our parent company that employs our team is:
Mission Driven Finance, LLC often serves as the general partner (GP), manager, or investment adviser for private fund vehicles.
We consider ourselves a hybrid organization—part asset manager, part consultant, part educator, and guide. We work across the capital continuum from philanthropy to institutional investors.
Because of the above, Mission Driven Finance has a unique vantage point in the market.
A fund, in the simplest sense, is money designated for a particular purpose.
Think about a fund as its own company that has taxes, bank accounts, and a corporate structure. It exists as a standalone entity with the purpose of moving money into companies, organizations, or other funds. We use funds to create pools of money for entrepreneurs.
David Lynn, the CEO & co-founder of Mission Driven Finance, explains, “A fund can make investments in the form of debt or equity. Any of the investments can be debt, equity, or a combination of both.”
Mission Driven Finance primarily makes loans as that’s the gap we identified in the market. We also mostly have debt from our investors, not LP shares (equity).
One of the reasons is because it’s relatively simple: we accept money from investors at a certain percentage and for a certain amount of time and then we lend that out to small businesses and nonprofits for some percentage and amount of time within that investor window.
Another big reason is the variety of regulatory requirements that our investors have. Debt investments into funds have different risk considerations than equity investments and debt structures work for our current investors.
Now that funds have raised money by taking money from investors, we need to move this money out to achieve its purpose. How does it do that? It makes investments into investees—portfolio companies like small businesses and nonprofits.
The investees that received capital from the fund in the form of a loan or equity investments are paying back that money.
In the case of debt, investees (borrowers) have payments of principal and interest that they make according to a set schedule called an amortization. That’s how a fund makes money. A fund then turns around and makes a kind of payment (maybe principal and interest, profit share) and pays the money back to the investors. The investors ideally end up with more money than they started with.
In our basic structure, Mission Driven Finance is not a fund. We are the investment manager. We are the mechanism that closes the gap between capital and community.
Lauren Grattan, co-founder and Chief Community Officer of Mission Driven Finance, says, “One-on-one investments are fairly simple, but start adding more investors or more enterprises on either side of the equation, and it gets more complicated. That’s what Mission Driven Finance specializes in. We are a team of savvy finance nerds not afraid of a challenge.”Aside from being a lender, we also wear a slightly different hat of working with partners around the country to set up their own impact funds. Examples of partnerships include the Employee Ownership Catalyst Fund (in partnership with Project Equity) and WEPOWER St. Louis’ Elevate/Elevar Capital. See some of our other client partners across the country here.