Fund Profile: Mission Driven Finance
This conversation was with Mission Driven Finance’s co-founder and CEO, David Lynn, and Lauren Grattan, co-founder and Chief Community Officer. Mission Driven Finance (MDF) is a San Diego-based community investment fund manager founded in 2016 to fill the gap between philanthropy and traditional investment, a field now often referred to as “impact investing.”
Mission Driven Finance
San Diego, Californiamissiondrivenfinance.com
contact : info [ at ] missiondrivenfinance.com
Total assets under management
Assets under administration
- private debt — absolute return / notes
- real estate
- private equity
Areas of focus
- health & wellness
- small / medium business development
Great to connect with you both, David and Lauren. Mission Driven Finance is doing lots of interesting work and I know you have some updates to offer. To begin, we might take notice of our common focus — building more shared ownership, right?
Yes, I subscribe to your newsletter and shared ownership is one of our core areas of investment and support. It’s part of our overall goal of mobilizing capital to increase inclusive and equitable access to education, health, and wealth. And that last one is where we think about shared ownership structures in the broadest sense, as a way of creating wealth and voice for people that don't normally have it.
So how do we create that form of asset ownership that can break intergenerational cycles of poverty, whether that's business ownership, asset ownership, or property ownership? Although we are not solely a shared ownership firm, shared ownership intersects with education, immigrants, refugees, and New Americans, which we also invest in.
We have a number of partners to whom we provide services, such as Obran, Apis & Heritage Capital Partners, and Project Equity. We are also looking at a shared asset project, a community real estate investment trust (or cREIT) to finance quality facilities for early education providers and to enable real estate ownership in that space, especially for women of color.
We have strong beliefs that capital can move differently than it has. We have been operating under a worldview for the last few centuries based on private ownership, the kind that combines both economic and governance control. We believe there are alternative models that allow us to bring deep values to our work, as well as our understanding of the nuances of finance.
At Mission Driven Finance, we have a very interesting mix of backgrounds on our team that allows us to work with a variety of kinds of investors. I call David a financial engineer because his brain works very differently than mine. He sees possibilities and solutions for how the financial structures can work.
But we all work in service of community. We understand what a donor-advised fund is looking for, what a community foundation investment committee needs to see, what private foundations need for a program related investment, as well as more traditional sources of capital like high net worth individuals, family offices, Community Reinvestment Act money. We understand how those work, and we are committed to unlocking them in service of community.
And that community dimension is exactly why Lauren’s here, trying to close the gaps in the system, trying to make markets and move money where it normally doesn’t go.
I think our readership is very attuned to that vision so they’ll be interested to hear how exactly MDF is a bit different from some of the other players in this space.
Yes, what we’re doing is a bit different from an Obran or a Project Equity. For example, I am not the best person to walk you through cooperative governance structures; there are better people for that. But what I can do is understand the financial mechanics, and the interpersonal motivations of investors to allow for money to move into a cooperative or worker ownership structure.
What’s different about the MDF Capital Partners Fund is that it’s based on something we recognize structurally in the investment space: there are absurdly high minimum investment sizes from institutional capital, much too large to go into what I call community-sized impact. There are wonderful funds targeting between $2 million and $20 million, because that’s what their community needs and what their community can absorb in a reasonable period of time. You might see some stretching up to $30 million — like Apis & Heritage, which just had their first close. But unless you’re really targeting $50 million for your first fund — which is a big leap to take for a new offering — institutional investors’ minimums are effectively a hurdle that is stopping capital from flowing into shared ownership structures.
We’re working to be the platform and the fund administrator for these smaller entities, taking out a lot of the operator risk so that we can help facilitate more capital to flow into these projects. We do that by bundling community funds and projects in a way that allows for institutional investors to meet their $1 million or $10 million minimum check sizes but have that spread across a variety of impact initiatives, so they don’t have to take too much of any one underlying portfolio and become over-weighted. It allows them to be more distributed for that deep impact they want but only need to do one round of due diligence.
I think I’m hearing you say MDF is moving toward a kind of a platform strategy, as opposed to a fund of funds strategy.
Well, first on the platform strategy, that was always our vision. We started with a place-based strategy in San Diego in 2017 to show that we can move capital in a different way. That we can do it without credit scores or personal guarantees, in that gap for small businesses, social enterprises and nonprofits that are too big or outside SBA guidelines, too big for microfinance, but not yet qualifying for banks or CDFIs. Businesses generally not on the VC path, where there’s no “hockey stick” returns — and owners that generally don’t look like me.
We also want to support organizations doing something in service of community — in our case, around education, health, community development, and housing.
That’s where we started, but our vision wasn’t just to do Fund One, Fund Two, Fund Three, making bigger and bigger check sizes. We asked ourselves, if we can run $5 million or $20 million in San Diego, how could we do the same thing for partners around the country? As Lauren was saying, we see exciting $2 million funds, initiatives, community projects and real estate opportunities, or whatever it is — critical things for their community.
But it doesn’t pencil out, or it doesn’t have all the infrastructure to run it. You can't draw in the institutional capital you need due to all sorts of size and due diligence minimums. Those projects just get stuck without access to capital. Even the big entities we respect — folks like Calvert Impact Capital, RSF Social Finance — they generally can’t touch a $2 million project. That’s not what they’re structured for.
So we asked, how can we bring the infrastructure, the platform so that we can work with a partner, say, Project Equity, a wonderful organization led by two amazing women in the shared ownership space? They’re a nonprofit technical assistance provider — not a fund manager.
What they kept finding was, okay, we can do all this wonderful work with these businesses that want to convert to employee ownership, we can help them, we can structure, we can do everything, but then if they go to their bank or a CDFI, how much did that technical assistance matter when it’s time to put the financing together?
They know they need a capital source, but it doesn’t mean they want to run it. In Project Equity’s case, we did end up with a full co-managed fund vehicle that’s on its way to $20 million, with a first $5 million close. We can finance small businesses that are ready to transition to employee ownership, operating businesses, generally positive EBITDA, with an owner ready to exit, who wants to sell to their employees — we can finance that transaction.
Partners have said to us, MDF, you do it; we don’t want to deal with it. Other times it’s their fund, their subsidiary, but they need the capacity from us to provide augmented due diligence on all the pipeline companies or the full fund administration and management, or the investor relations side.
We saw that we can bring all the infrastructure, we can put them on our platform, we can cost-effectively run a million-dollar fund or a million-dollar community development project or whatever that is up to maybe $5 million, $10 million, $25 million. As Lauren was saying, we work in the sub-$50 million range.
If you’re launching a $100–$200 million fund or project, then there are different capital options. It doesn’t mean the project might not need some help, but there’s not the same gap as when we’re talking sub-$50 million, where there’s just a gap in capacity. Even when a firm takes its 2% management fee, there’s just not enough room to pay for the team, infrastructure, and expertise you need.
We do all this work, we set up the infrastructure, help develop the fund model, hone the investment thesis, get everything set, and then our partners might be raising money for a year, maybe two years. It still takes a long time to convert that capital.
As we’ve seen more institutional capital groups increase their trust in MDF, in our ability to connect them to partners and deals like this that they might not otherwise have found, that’s been great. We've had a couple of them tell us, because MDF is backing this deal, we’ll invest. For us, that means we’re delivering on our mission — we’re unlocking capital that wouldn’t otherwise be available.
But the first question from investors is always: who else is in the deal? We asked ourselves, how can we bring a source of capital that we can quickly deploy to accelerate these things from years to months? If we’re bringing the infrastructure, can we also bring a tranche of capital whose mission focus from our standpoint is all around inclusive economic opportunity across our five pillars — of which shared ownership is one?
Looking at the intersectionality between shared ownership, inclusive place-based work, immigrants, refugees, education and environmental justice, how do we bring those things together as much as possible and invest in them?
For us, the reason for the MDF Capital Partners Fund is to be able to take those early mover positions with our partners, develop pre-portfolio and warehousing transactions so that we start getting a couple deals done to take the first position in a fund or a project vehicle, but all with the purpose — and we tie part of the carry in the fund to this — can we mobilize other capital to follow us?
If we put in a million, can we unlock another $5 million? That’s our target, five to one. It’s not necessarily causal; we can't say we drove this. But from our own impact metric, it’s not that we took the whole position, it’s that we were in and more money followed. That builds our platform in terms of us bringing capital and capacity to bear in a way that hopefully is structuring them back to what Lauren was talking about.
Let’s say we have this funky community land trust or a local investment deal, how do we position those for relatively traditional investment capital, particularly private capital? How can we get private investors to play alongside philanthropy and government in these vehicles that don’t look normal to their investment committees?
The more we can position them in a way that builds fund models and structures that to investors it looks like a simple investment, even though there’s maybe this funky shared ownership vehicle in the background and it’s going into a set of co-ops. It’s still a question of how we dial it down to something that can get through the due diligence of institutional investment.
I think I’m hearing you saying that, beginning from a place-based organization, you’re putting together a new package that is a national offering.
Absolutely. The MDF Capital Partners Fund is our first national offering of size in the form of a diversified private credit portfolio, balancing impact across initiatives all over the U.S. We know we’ll have some investors that say, we only want your women-led opportunities, or we only want those in the Southeast.
And we’re fine with that, we know that in the impact investment world we have to slice and dice, we have to let people play other ways. Our feeling is, let’s just embrace that rather than fight it. And we aim to pull people along as we expose them to things like shared ownership, distributing voice and power, which is really novel to traditional investors. We can say, using Project Equity as an example again, it’s their fund, it’s not MDF’s fund. It’s not our thing; we set it up from day one so that they have more control over it than we do.
That’s contrary to the normal notion of how you control a fund, how you make as much money as possible. We believe the fund’s impact will be more powerful, more sustainable, better for the community, the more we distribute that power and have other voices involved. I think that’s really our notion of one way to change the way capital flows into community and who retains the power.
Very cool. You’re building what Astrid Scholz of Zebras Unite calls the missing middleware.
Yes, you know, she calls us a plumber. Astrid is I think the one who coined that term for us, if I’m remembering correctly. She was like, “You guys are like the plumbers!”
She said something like, “You guys are building the plumbing.” It’s like when you move into a house, there’s a difference between the people who actually install the plumbing and the people who fix the plumbing. Our hope is to set up clean pipes that won’t clog.
That’s great. We all agree, we have to build up to the next level, one level up, right?
Right, and I’m actively working with Astrid and Mara Zepeda and others with the Inclusive Capital Collective. They’ve been incubating and helping to design a facility for community fund managers. We’ve got many things in the hopper that are very cool.
All of it boils down to the way we want to see capital flowing to the community. One of the things we like seeing, particularly in terms of your topic of ownership, is the work flowing into creating community ownership structures, so that’s a big piece of our work.
Thanks so much for your time — wonderful work it is.