Convertible Debt With Wraparound Entrepreneurship Support Services
ICA Oakland, CA
The Practice
Undercapitalization is the chronic condition for most small business owners, especially manufacturers. It impedes their ability to buy needed equipment, hire new talent, invest in research and innovation, and access lines of credit to support daily operations. These challenges loom even larger for entrepreneurs of color who — as a result of inequitable and discriminatory practices in education, employment, and the financial system — experience a yawning wealth gap relative to white families, depriving them of capital to start or grow businesses.
Cohort member ICA recognized that small businesses can drive wealth-building opportunities for owners and their employees, especially for women and people of color. But ICA knows too many small business owners lack access to the growth capital — and the coaching and connections that help fuel growth and build wealth while creating good jobs in their communities. This is especially true for owners who are women or people of color, who are often turned down for financing because they have insufficient assets—a legacy of structural inequities resulting in a racial wealth gap.
To begin to address that gap in an innovative way in the San Francisco Bay Area, ICA is helping to deploy convertible debt as a way for undercapitalized entrepreneurs to attract investment to their growing companies. A convertible note is a flexible financing tool that is structured as debt—including terms and interest rates— but that can convert to equity at maturity. This is an especially attractive option for the owners of growing businesses who can decide either to repay the note with increasing revenues, or allow the notes to convert to investor equity knowing that the overall value of the company is increasing (and, therefore, not unduly diluting owner equity). Convertible debt is also relatively easy to put in place; agreements don’t require a company valuation, as stock agreements do and the legal agreements are typically much simpler. And, importantly, these funds show up on companies balance sheets as assets, which improves their ability to pursue loans from traditional lenders.
In addition to capital, ICA also offers a structured, four-month acceleration program that includes mentorship through a network of 60 pro bono professionals who ensure growing businesses have crystallized their growth strategy, including a plan for attracting and on- boarding talent that will be aligned with the growth strategy, and preparing for additional rounds of investment. About 30 companies, approximately a third of whom are manufacturing businesses, have gone through ICA’s accelerator with five receiving investments, through convertible notes, totaling $2.5 million. ICA estimates that these companies have earned $30 million in revenue and support 350 jobs. In the past 5 years, the equity ICA has invested has grown by three times (though not all of it is yet liquid).
ICA’s focus is agnostic in terms of sector. Their primary focus is on businesses that are creating good jobs that are accessible at the entry, pay family-supporting wages, and have pathways to advancement.
ICA’s CEO, Allison Kelly, saw the opportunity to increase both the volume and velocity of their convertible debt investments in high-growth-potential entrepreneurs of color. She is currently raising a new $10 million fund now and is working with ICA’s network of community-based partners to identify potential candidates for future investment and acceleration. “We have an impressive set of robust selection criteria,” Kelly says. “Our primary focus is on a business’ fundamentals — a sound business plan and growth strategy. But we also focus on metrics that support the impacts ICA is looking for, including employment opportunities with quality jobs and opportunities for wealth building. Applicants get extra points if they are people of color or women. We think it’s profitable to invest in businesses owned by people of color and women; we want to help them grow their firms into true assets that create wealth for them and their employees.”
The Practitioner
Allison Kelly
ICA
Allison Kelly is the the chief executive officer of ICA Fund Good Jobs, a business training organization and CDFI based in Oakland, California. Her work explicitly focuses on creating more opportunity for entrepreneurs of color.
At home she seizes the opportunity to explain why to her kids.
On Martin Luther King Day 2020, Kelly took her two children, seven- and nine- years-old, to the African American Museum and Library in Oakland. They watched a documentary about the famed minister and civil rights leader, which left its mark.
“They felt sad, scared, and confused,” she said. “I told them there are still places in our world that have systemic racism and sexism built in [and] we had a very wide reaching conversation on humanity.”
It was around this time that she proposed a goal to her coworkers at ICA Fund Good Jobs. “I’m hopeful that on the 100th anniversary of the death of MLK there will be no work for our organization,” she said.
To date ICA Fund Good Jobs has worked with over 600 companies that employed 5,500 people and paid out $105 million in wages. They invest in high-potential businesses that are committed to paying good wages and treating employees fairly through benefits and other means.
Food manufacturers make up a significant chunk of their portfolio. Those businesses range from vegan meat makers to manufacturers of ghee, the clarified butter.
Despite a strong two decades in existence, Kelly said they were excited to join the Pathways to Patient Capital cohort to share their expertise and absorb the expertise of others. They’re also looking for more funders that are willing to invest in the ICA Fund Good Jobs model and its holistic approach to business training and investment.
“Like our entrepreneurs, who encounter obstacles to capital access on a daily basis, ICA also faces challenges to building a network of mission-aligned capital providers,” said Kelly. “Our main challenge is to identify capital providers that align with our mission and investment strategy to provide patient, equity-like capital and fill the gaps within the small business capital ecosystem.”
They’re also looking for support as they double down on their target of supporting women entrepreneurs and entrepreneurs of color. “We still aren’t seeing the outcomes we need in terms of equity in access to capital across racial, gender, geographic, and industry lines,” wrote Kelly, in a letter that opens up ICA Fund Good Jobs’ Impact Report 2019. “With an explicit focus of directing resources and capital to these communities, ICA is testing and measuring the outcomes this kind of work creates.”
With those principles in mind, they just might be on track towards creating a better investment environment by Martin Luther King Day 2068.
UMA has assembled our Pathways to Patient Capital practitioner cohort because each member has found a successful or promising approach to helping entrepreneurs of color — including makers and manufacturers — to get access to the capital and know-how they need to realize their business ideas and plans at scale. We know there is great benefit in lifting up and sharing this information among other practitioners, but also with other audiences, such as policymakers, lenders, and other funders. We compiled the brief profiles you are about to read to give these audiences a sense of both the personal and the practical: one section describes the people and organizations doing this work and the inspiration that guides them (“The Practitioner”); the other describes the innovations in capital access or readiness that each is pioneering or bringing to scale (“The Practice”). You can read the full report here.
