The Case for the Fundless Fund: The Scalable Model to Back Female-Led Growth Companies
There’s no question that there is an untapped opportunity in supporting female entrepreneurs. The massive gap in financial backing specifically for female founders represents what Morgan Stanley has recently coined a “trillion-dollar blind spot.” Despite the rise in chatter highlighting the growth potential and financial returns to be made in funding women-led businesses, raising dedicated capital remains a significant barrier to entry for investment funds committed to supporting female founders.
To date, there has not been a single billion-dollar fund with a dedicated strategy to back diverse managers.[1] I mention the billion-dollar mark to underscore the capacity needed to make a meaningful impact for growth stage businesses led by female-founders.
As of 2019, just 2.7% of $130 billion in annual institutional capital was currently invested behind women-led companies. The absence of well-capitalized funds has led to a glaring void in funding for women-led businesses at the growth stages, particularly for rounds of $25 million or more.
In forming SGC, I knew that our ability to fill that void required us to make a meaningful investment in the context of the overall round size. In order be positioned as lead or co-lead, we needed a flexible structure that would allow us to scale up to a meaningful amount in the context of the given round.
For more than a decade prior to forming SGC in 2016, my partners and I closely observed the challenges — and opportunities — for growing and investing in women-led businesses through our roles as fund managers, analysts, executives and board members. With a desire to participate in — and lead or co-lead — larger growth financings of $25 million to $100 million at the Series C stage and beyond, and in recognition of the institutional fundraising challenges facing any fund with a new strategy, we have taken a more flexible approach to capital raising and deployment.
While we can’t claim to have invented the independent sponsor model, we have adapted it in a way that allows us to overcome inherent structural barriers and take a true leadership role in the funding and support of female-led companies. Our model resolves the usual limitations of smaller women-focused funds, while allowing SGC to leverage our collective operating and investment expertise, expansive networks and proprietary deal flow. We are unencumbered by an arithmetic check size, and perhaps most importantly, we are defying the conventional wisdom that an independent sponsor model won’t scale. In fact, our unique model is the very reason we’re able to scale in a way that hasn’t yet been done.
Staying true to our “fundless fund” model — i.e., one in which we do not have a specific fund size, but rather a network of LPs that allows us to scale up each of our investments as appropriate for the corresponding opportunity — hasn’t been easy in the face of consistent suggestions that our success is contingent on operating a blind pool of capital. We heard that if our strategy were credible, the capital would be there — and yet, even bulge-bracket and brand name institutions have struggled to raise a female-focused fund at a meaningful scale. Yet, I am hopeful that the continued strong performance of women-led businesses and firms like ours will accelerate larger capital raises by brand name firms and new entrants alike.
Filling the White Space
In the formation of SGC — and in countless conversations since — we’ve spoken with female founders about their fundraising journeys and the most significant challenges in finding financial partners to support their businesses. We’ve consistently heard that early-stage funding networks for women had evolved, yet female founders found themselves pitching their companies to a room full of men when it came to growth-stage investments. Universally, it has been clear that women founders want more women investors — not just on their cap tables, but as strategic partners and board members working hand-in-hand to scale their businesses.
Each of SGC’s investments to date, including in Hint, The RealReal, ClassPass, Aquis, and Fleur du Mal, are in companies founded by women — although our requirement is simply that each company have a woman in a key role in the C-suite, with an equity stake that is commensurate with her position. We do not see this as a limiting factor, but rather an advantage, core to our differentiated brand and positioning in the market. We are focused on the consumer category, where women in senior management tend to be over-indexed, and where the customer base is often largely female.[2]
SGC’s latest investment in Hint — one of the largest ever by a fund focused on women-led companies — exemplifies our firm’s flexible structure and capacity to lead a notable funding round.[3] With Hint, as with our other recent investments, SGC created a separate fund, allowing our limited partners (LPs) to opt in or out of the particular deal, while providing them a high degree of visibility and control in their investments.
Fortunately, SGC has received the backing of an ever-expanding LP base, and participation in our latest Hint funding round has included traditional institutions, family offices and high net-worth investors. Our strategy is serving us well. Since our launch in spring 2016, we’ve invested in a dozen financings, ranging from Series B to Series H, and with the majority of rounds sized at over $25 million.
But this is just the start. SGC has sought to create a model and structure that can take on larger and larger deals and create the magnitude of impact for female entrepreneurs and investors that we hope to see. The opportunity is right before us and with the continued support of new and existing investors, SGC can be the partner to create more female leadership in the C-suite and boardroom.
Notes:
[1] According to PitchBook Data, Inc., the largest fund with a specific mandate to invest in WMBE’s (women and minority-led business enterprises) is the Turning Rock Fund I raised in 2018 with $220 million in assets under management.
[2] Women spearhead around 70% to 80% of all purchases in the United States, both through their buying power and their influence.
[3] According to PitchBook, SGC’s lead investment in the recent $25 million Series D funding for Hint is tied as the third-largest ever financing led by a fund with a diversity mandate that included women-led companies, just behind a $35.1 million Series A financing for Brightside and the $25.88 million Series B financing for Rasa Technologies, both led by the Andreessen Horowitz Cultural Leadership Fund in mid-2020.
