The Enterprise Innovation Fund
Corporate Responsibility III : Dr. Edward Sorre
This website is required reading for this course although there is no longer a requirement for completing I and II. Guest speakers will include Gene Samuelson, pitch deck expert, Mamie Smith, principal of venture firm MMS, and other relevant players tbd. There is also the live feed from former Queens Assistant District Attorney Benjamin Pred who brilliantly muses extemporaneously about relevant legal matters. Students can access the complete syllabus and reading lists from the professor's homepage.
A Proposal for a Public-Private Investment Partnership that Supports Entrepreneurs and Creates Jobs that Drive Economic, Social and Environmental Impact
The Enterprise Innovation Fund (EIF) will invest in public-private partnership funds that target innovative enterprises that have the ability to make broad social and environmental impacts on a sustainable basis. Proposed $4 billion in equity funding provided by the Government in one-to-one matching allocations of $5 to $50 million to private sector fund managers. Government shares equally in the upside but provides some downside risk mitigation to encourage participation of private-sector impact investors.
The vast majority of new jobs are created by small businesses and entrepreneurs drive key innovations that strengthen our society and grow our economy. Risk capital investment is needed to empower entrepreneurs and develop innovative enterprises, new jobs and resilient economies. Unfortunately, the credit crunch and market meltdown has starved the early-stage investment sector of capital, scaring off institutional investors, choking innovation and halting job creation. Moreover, mission-driven businesses often fall between the cracks as they do not grab the attention of classic venture capital funds seeking maximal financial returns, nor do they compel community debt lenders that accept a lower rate of return but need secure investment, such as community development financial institutions (CDFIs). The OPIC and SBIC programs are debt-leveraged programs to enhance an investor’s upside. Yet what is needed now is a new kind of public-private partnership structure that attracts private capital investors, who, in these challenging economic conditions, are more concerned about downside risk than large upside gains.
Funds would be catalytic, accelerating capital flows – the government would offer one-to-one matching capital from $5-$50 million, creating new equity funds ranging from $10-$100 million.
Funds would be impactful, driving social benefit – the government would support new funds that target a reasonable rate of return but also that take equity positions in early stage firms focused on critical aspects of our national recovery, such as clean tech, health and wellness, renewable energy, urban renewal and local resiliency.
Funds would be fair, ensuring standard practice – At a time when the country is dealing with bank bailouts and excessive compensation, fund managers would be paid only fair rates, such as the standard 2 ½ / 20 ratio (2.5% percent expense cap per annum and 20% carry on profits generated by the portfolio).
Funds would be risk-sharing, yet permit reasonable rewards – the government seeks to encourage private capital into the field with incentive-based models, so it might structure distributions to reduce investors’ downside risk but share in long-term upside. For example, on receipt of distributions: • 1:1 on expenses • 3:1 favoring private until the private is paid back; • then government catch up; • and a 40:40:20 split with a 20% carry going to the Fund Manager thereafter.
The EIF's capital structure is responsive to the needs of the new generation of investors and entrepreneurs in this particular time of challenge. While this is a new model that provides downside risk mitigation, it will build upon lessons learned from incumbent programs that have used federal funds to stimulate private investment in various forms of small business. Specifically, it will draw key lessons from the SBICs and MSBICs managed by SBA; OPIC; the CDFI Fund, the BEA Awards and the New Markets Tax Credit Programs handled by Treasury; and the Low Income Housing Tax Credit supported by HUD. Further, EIF will integrate insights arising from the Community Reinvestment Act and its engagement with the commercial banking sector. These approaches resulted in significant capital flows to underserved markets and helped shape new industries.
Governance and Measurements
EIF would require an advisory board of independent directors sourced from the private sector as well as governmental representation.
This board would be responsible for several discreet tasks:
- Selecting fund managers (via RFP process);
- Establishing investment criteria based on economic, ecological and social standards;
- Advising on policies and programs;
- Reviewing fund decisions and evaluating firm performance;
- Developing metrics around social and ecological impact of the program.
Government staff, in consultation with the Board, would review individual Fund’s investments against their projected goals at the earlier of two years or 50% of capital call. If a fund appeared misaligned with EIF mission and missing its goals, the government could choose to discontinue funding, the threat of which would ensure program compliance.