MassMutual has added $100 million to its Catalyst venture impact fund for diverse-owned and rural businesses and investment funds headquartered in Massachusetts.
The fund’s objective is “to advance racial and economic equity and reduce structural barriers within the state”, Liz Roberts, who manages the fund as MassMutual’s head of impact investing, told New Private Markets. “It’s a small amount of dollars relative to the world but you can make meaningful, measurable impact with that focused approach.”
Several insurance companies have created dedicated funds to invest in diverse funds and companies. Prudential Financial, for example, announced a $200 million allocation to private equity funds managed by women and minorities in 2021, while Northwestern Mutual has earmarked $100 million for Black, African-American and minority-owned fund managers and businesses. Many US state retirement systems have also created allocations or funds for diverse-owned, emerging or in-state fund managers and businesses.
MassMutual’s Catalyst strategy, investing from the life insurance company’s general account, was launched in February 2021 with $50 million to invest in Massachusetts-based companies between seed and Series B stages. Approximately half of this was earmarked for Black-owned, founded or managed businesses; the other half was for rural businesses and those based outside the Boston. This is nearly fully deployed or committed.
In a separate impact strategy, MassMutual has committed a further $150 million to Black, Latinx and Indigenous first-time fund managers. The Catalyst fund will also make co-investments alongside the managers in this strategy.
MassMutual has a preference for “companies that are creating impact, whether social or environmental, that is directly tied to the financial returns of the company”, although this is not mandatory.
“We’re trying to create Black, Latinx, Indigenous and rural generational wealth, and that happens by investing in companies where they have people in those groups that have meaningful ownership,” said Roberts. Investing in these communities and funds “will mean that these communities have more to spend and have more access to the local economy and can participate in ways that we don’t see right now”.
For example, Black, Latinx and Indigenous founders who have exited their companies will be able to become angel investors for future generations of founders and start-ups. “We wouldn’t really want to broaden the scope of problems being solved right by putting more early stage capital into innovators who are from and by the economic majority,” Roberts added.
It is not just a moral imperative. MassMutual believes this strategy will uncover untapped, under-funded opportunities that will generate outsized returns for the investor. “Venture capital has an over concentration problem,” said Roberts. “Not only is it white and homogeneous, but particularly in Massachusetts, it’s also very urban centred. The vast majority of that [Massachusetts] capital is concentrated in Boston. And across the US, the vast majority of capital goes to Silicon Valley, San Francisco or New York City.”
This homogeneity means most venture investors do not recognise the problems that diverse and rural founders see in their communities – the problems these founders’ businesses are aiming to solve. For example, MassMutual invested in HourWork, a digital platform pitched as a ‘LinkedIn for hourly workers’. The platform reduces job-hunting and the volume of applications that workers need to complete, and job advertising for employers – which is particularly a problem in hourly work, where staff turnovers are high and workers often move base.
Other venture investors that HourWork founder Rahkeem Morris pitched to “just didn’t understand” this problem, said Roberts. “[They] had never had a part-time job, they’d never worked hourly. They didn’t have the perspective that this was a real problem to solve.” HourWork has increased its annual revenue by 4,000 percent since MassMutual’s initial investment 2021.
Although the Catalyst fund invests in both rural and diverse-founded companies, its most successful companies fall into the latter category. “Our black founders have outpaced our status quo in terms of hitting their milestones, [acquiring] follow on funding, de-risking… they’re like a rocket ship.” Roberts’ team believes this is because these companies “have been fundraising so long” and, faced with so much scrutiny and rejection, “have become so capital efficient”. “They knew exactly where they were deploying it to achieve results much faster. So the pace of hitting milestones [such as coming to market and] follow-on funding has been robust.”