In this issue of Criterion Connections, Christina Madden of the Criterion Institute speaks with Tracy Gray, Founder and Managing Partner of The 22 Fund, about her approach to investing in quality US manufacturing jobs, what impact investors can do to address gender and racial injustice, and why she no longer uses the word “inclusion.”

The 22 Fund’s Tracy Gray

‍Tell me about the mission of The 22 Fund. What are you investing in and what is driving your belief in where you see investment opportunity?
‍The 22 Fund’s investment strategy is to invest in companies to increase their export capacity and to create quality, clean, sustainable jobs of the future in underserved, low- to moderate-income communities. We are industry agnostic but our sector is manufacturing. What drove me to start this particular strategy was when I was senior advisor for international business to the Los Angeles Mayor. It was during the Obama administration during the recession, and exports was their number 1 job creation tool they, but only 1% of small- to medium-sized enterprises actually exported. If you look at the economies around the world that made it through the recession – Germany, France, China and Brazil at the time, India, Russia at the time -- they're export based. But the United States economy is consumer driven.I worked with the Brookings Institute to come up with a metropolitan-level export initiative versus the national-level initiative the administration announced without really having a plan to execute on the ground. The first metropolitan area they chose was Los Angeles. We looked at the system to see what the problem was, why people weren’t exporting. There are a host of reasons. The system is fragmented. Exporting is difficult and people don’t know how to do it. There’s all sorts of fear about doing business with another country: fear of being taken advantage of, of not knowing the language, of not knowing the laws. But then even when you fix the whole value chain, there’s no capital at the end. I saw an opportunity there.These companies are more resilient, they’re more successful. When you look at the companies in the manufacturing sector that export, they pay higher wages and are more likely to have healthcare. I get to click all these impact boxes without really doing anything. I philosophically want to invest in things where you don’t have to create all these machinations to create impact. You’re just investing and because of your passion and values, the impact comes.The majority of people who export are people of color. It’s not rocket science – I like to say that because I was a rocket scientist – it’s just that people of color usually have an affinity with another country, they're not afraid of “the Other.” Fear has a lot to do with exporting and these are the people who are more likely to not be afraid. They’re doing it, and a lot of times they don’t know they’re exporting already. They’re just selling to a country where they’re from or where they have family. Once you sell to one country, you’re already over the hump. You're an exporter. It’s just about expanding to other markets.So this clicked off a lot of impact for me and it covered all my passions: women and people of color, quality job creation because not every job is a good job, and technology. Tech is the future. The tech industry is not hiring people of color and women as much as they should. Because manufacturing is becoming more tech-based and tech-enabled, I saw this as the backdoor for people of color, women and blue-collar workers to get into the tech sector.It's a win-win for me and no one was doing it – I like doing what no one is doing – and it also clicked off a lot of risks. These are primarily existing businesses. You need to be cash-flow positive in the US because you don’t want to put your domestic operations in the US at risk. These companies are more resilient and more successful. Isn’t that what investors want? I say that cynically because the LPs still find problems. I honestly thought this would be a slam dunk for LPs because it checks off what they are worried about.

‍I heard you emphasize the quality of the jobs created by the investees The 22 Fund is targeting. What do you look for when you’re measuring job quality? And are enough investors emphasizing quality over quantity when they think about job creation?
‍I don’t hear a lot about quality jobs. I’ve seen one LP, and that came out of the Countrywide debacle. There is something called the Quality Jobs Fund here in California. In general you hear a lot about jobs, but $15 per hour or $20 per hour is not a quality job. With The 22 Fund we look at how much people are being paid. Because manufacturing has worker supply shortage, you can’t be competitive if you’re paying someone $15 per hour. And if the wages are too low, we don’t say, “We won’t invest in you.” We’ll say, “If you want our money, you have to raise your wages.” We will have “riders” in term sheets, similar to what some in the entertainment industry added, that codifies job quality and diversity.We look at wages, healthcare benefits, and the potential for upskilling. The numbers are off with COVID-19, but recent estimates said there was going to be a shortfall of 2.3 million jobs in manufacturing because of lack of skills. Everything is becoming more analytical so you need 8th grade math skills and, believe it or not, a lot of blue-collar workers don’t have that.When manufacturers export, on average, wages are around $90,000 per year and have healthcare. That’s why that sector is so important to us. And now with COVID-19 as a country we’re seeing why that sector is so important. You may have heard we’re still going to be short personal protective equipment for the next wave. There’s no plan for it so once again they’re going to need those manufacturers to pivot, and we don’t have the infrastructure for it because these manufacturers don’t have the capital.

‍I want to go back to what you said earlier about checking off all the things LPs are worried about. I’ve heard you say before that you've needed to convince investors to put money into investees that you don’t consider risky at all. What did you mean by that?
‍When the institutional investors like pension funds and foundation endowments say “We’re only about fiduciary duty" or "It’s all about managing risk,” I want to know where the research is that says investing in all white guys is risk-free. Shouldn’t you have to prove to me that investing in all those people was always risk-free?What they’re really worried about is reputational risk. If you pile onto BlackStone, BlackRock, or Sequoia and something goes wrong, all their colleagues were there and they don’t get blamed.But if they invest in a firm like The 22 Fund or MiLA Capital, and there aren’t many of their other colleagues, they’ll get blamed. Even though, if The 22 Fund were to fall apart, it would be like if I dropped a penny on the street. The pension funds wouldn’t even notice. So you know it’s about their reputation, not their fiduciary duty.‍

It's been all over the headlines lately that the Federal Reserve Bank of Dallas named systemic racism in the US as a major risk to the economy that is holding back US growth. With so much attention on race in America right now, do you think this is a moment where things may shift so that implicit bias or a homogenous pipeline might become a reputational risk for investors?
‍A while back people started to say, "Climate change is a risk. You have to put that in your due diligence.” So investors are doing that because people were jumping on them. Now they may do the same with race, but we’ll see. I’ve always said, how can it be risky to invest in the majority of the population?They keep asking for more and more research to prove it’s not risky. We don’t need to keep doing research. The data and the evidence is all there. They talk about a pipeline problem. It’s not my pipeline problem. My pipeline looks like the world around us. Their pipeline is the problem, because it’s not diverse.Every time we do more research, we’re saying to them that we don’t exist and we’re still risky.

‍Speaking of data, only 1 percent went to black start-up founders in 2018, and the number of black people in decision-making positions at the 102 largest venture capital firms in the United States is in the single digits. Those numbers get smaller still when we look at women of color, despite the fact that the number of businesses owned by black women entrepreneurs is growing faster than any other segment of businesses in the country. We’re now starting to see new initiatives pop up to support black founders. In your view, is it going to be enough?
‍With some of these initiatives, we’re talking about firms with billions of dollars in assets under management but they’re putting in a few million dollars for black founders and it’s coming out of their Donor Advised Fund. So they’re sending the message, "We can’t risk 'real capital’; it has to be philanthropy.” And it’s so little capital compared to what they’re giving others. Someone else did a $100M fund, which again is so little money in context.I always like to quote Joy Anderson, “Finance is not about money. It’s about power.”When someone says, “I'm going to have a Black Entrepreneur Month,” or "I’m going to put $100M into black entrepreneurs,” they still control it. The power is still with them. We’ve being invited into the system. I don’t like the word “inclusion” anymore. They’re giving me permission to be included at their table. I’m not interested in being at their table. My table has tastier dishes from different cultures made by those cultures...and better wine!I heard someone recently talking about the police system, saying we’re not trying to fix a broken system. We’re trying to break the system. It’s exactly how I feel about finance. I’m not trying to enter into or fix a system that was created by white men and works really well for them. They have no incentive to change. I want to break it and make something that works for us, the majority of people in the world –for women and people of color.

‍Whenever something starts “trending,” I always fear that the usual suspects are going to be the ones who get additional capital and lots of PR for recreating a bad version of what people like you have been doing forever in a much smarter way. And they’ll probably call all of the people who’ve been working on gender and racial justice for decades to extract as much information as they can without paying them for their expertise and without letting them into whatever initiative they’re probably getting lots of funding to create. They’re essentially being rewarded for decades of failed leadership, at the expense of the real pioneers.
‍It’s called failing upward and it’s happening now. And it’s going to happen more. And what that means is that they’ll fail and everyone will say, “We can’t invest in people of color anymore,” because they’ll think it doesn’t work. And then the moment will pass, unless the money is in the hands of people of color who actually know people of color.I just had three white women reach out to say they wanted to invest in people of color and ask if we could talk and share deal flow. I didn’t say no, but I just said, “I don’t invest in that strategy or stage. If you share your criteria, I’ll reach out if I come across companies that need money.” But I’m not going to do all the work to solve their problem for them. They need to do the work and change their networks.I get so many people coming to me right now for that reason. They’ll come up with all these sorts of ways to not look racist or to look like they don’t have bias. They're not taking any risks. They don’t know what they’re doing. They’re going to end up piling all their capital onto a few firms that are “trending.”Nothing is going to change unless the system changes.

‍I heard you say recently that you consider one of your personal failures to be that you’ve spent the past nearly 15 years trying to structure funds to fit the box other people think you should fit within. Can you say more about that?
‍Investors, including impact investors, have failed black and brown people for years. They put barriers in place. They don’t like to invest in first time funds, so you try to get into funds that exist so you can get a track record. But for starters, they don’t let you in those funds. If they let you in, the original fund managers don’t retire or die fast enough. They stay there forever until they’re in their 70s or 80s, and if you stay there with them, the track record isn’t attributed to you. You’re doing the work, but the reputation goes to the partners. So you’ll never be able to get the track record you want. It takes a really long time. So what I did was say, “I don’t have the attributable track record so let me find the partners who do.” So I found a partner with a long-term track record in angel and venture investing. Then the investors say, “But she doesn’t have the track record of investing in the same strategy.” At the same time, they’re saying they want niche or new strategies. How are you supposed to have a track record of investing in a new strategy if it’s new?Then they say, “You have the track record, but we want you to have worked together before.” How is that supposed to happen if you can’t get into the firms where you’re supposed to work together? You're not going to work together from two separate firms. What they want is for you to have spun out of some firm where you already have money and start a new firm. That’s what they mean by working together.Even though I’ve known one of my partners for 20 years, and another for 5 years and we’ve worked together on different things, it doesn’t count because the investors say, “But you haven’t invested together.”So that’s just on the personnel and management side.Then they say, “We’re impact investors, but we don’t come in on the first close.” The first money is the hardest money to raise for anything. If you don’t come in first, why would I need you? And why would I give you any good terms? I’m going to give whoever comes in the first close the preferential terms. What impact are you having if you’re only following other people? By then I don’t need you.Then, who’s going to seed you? Here’s an example. MacArthur Foundation did a big catalytic capital project giving over $100M to several firms but you could not apply if you hadn't already raised $10M.So how is that catalytic? Your capital is catalytic if you invest $10M in my firm, I can leverage it and raise $100M from others. Why couldn’t you commit $10M based on being able to raise another $10M? That’s reasonable. But they want you to have already raised the money and for the person who already raised the money, that first $10M was the catalytic capital. That first money is the hardest. That’s what impact investors do and that’s the same thing that mainstream institutional investors do.Another example is Annie E. Kasey Foundation. They were at the National Association of Securities Professionals emerging manager conference in Baltimore, talking about how they invest in emerging, first-time managers. Their idea of first-time managers’ assets under management minimum (AUM) was something like $1B. In what world is $1B AUM a first-time manager?There’s another thing they do. As a woman of color, you’re always raising a $5M or $10M fund because someone is telling you that you can’t raise more. But then you go to them and they say, “If you do under $100M, that’s too small. Our check size is $10M to $20M and we don’t want to be more than 10% of your fund.” So you have to be at least $100M or $200M. So first they tell you you’re too small and then too big. They’re always moving the goal post.I was on a phone call today – everyone is saying “You’re $100M. That’s so big. Why are you raising that much?” One, I want women of color to raise more. And two, you told me to raise more. Then I get on another phone call with someone else and they say, "We usually don’t invest in firms raising less than $300M.”The newest thing I heard was about the investor’s timing. It was so convoluted I didn’t even understand the excuse they were trying to make. I had to ask another fund manager and she had to read it five times to understand. It’s exhausting.In a lot of cases you have impact funds who will give the deal to their consultants who have never done impact before so they’re going to invest how they’ve always invested. The foundations and the endowments can say they’re doing 100% impact, but their consultants don’t know how to do that. So what they’re doing is piling on to any existing fund who at that point doesn’t need money. So what impact are you having if everyone goes into the same one or two funds? Someone who was raising $40M gets $100M and that’s it. He’s not going to leverage that $100M for anything else. Instead they could have gone to ten different funds, who then each would have raised more money, and scale the amount of capital going to women and people of color.Instead they pile onto one person, the sparkly/shiny object of the day.

‍If you see this as an opportunity for real change, what actions would you recommend capital allocators take?
‍It’s simple. Invest in brown and black fund managers. It’s literally a rounding error for them. The University of California has a $125B investment fund and they hide behind proposition 209. If they took $100M and invested in seeding first-time fund managers, they could leverage that to $1 billion dollars. And then you could leverage that $1 billion to $10 billion with other capital.Take that $100M fund and put $10M in ten different emerging funds. We then raise another $90 million each. That’s $1B. You just grow the pie just from 10 different funds. There’s nothing they have to really think about. They need to remove the barriers they’ve put up that are artificial and don’t really mean anything.When venture capital started in the 80s they didn’t have any track records. They just made it up. They got people to come in and no one said, “This is too risky.” Because they had a network. They all knew each other and trusted each other. They probably worked together before. They saw it as worth the risk. Why is it when we are saying, "Do the same for us,” why is that all of a sudden risky and about fiduciary duty? It’s because they don’t want to do it. And there’s bias.It takes around 2 years for a white man to raise a fund. It takes up to 5 years for a woman of color. You’re supposed to not pay yourself for 5 years because they want you to do this full time. How do you survive doing this fulltime if you don’t have income? You have to put your own capital at risk.What impact investors could do that would be a game changer if they’re too afraid to do anything else and want to dip their toes in is take their program-related investments or donor advised funds if they have them, whatever nonprofit money they have, and give technical assistance grants of around $1 million to first-time fund managers so they can have the proper back office, the legal they need, and pay people to raise a fund for five years. That’s nothing. It’s such an easy thing to do and it’s a game-changer.When we first started, we had to put all our own money into flying until a seed investor offered to pay for that for us. That was the only way we got to do it. And it happened because I was speaking at a conference and she was on a panel with me and she liked me. She is truly an angel. If there were more women of color with capital, they’ll help each other.Another thing investors do – and a lot of foundations and impact investors back this up—is set up an internship project. What that does, for one, is push down the road them having to do anything real, because they keep investing in interns and don’t bring any women or people of color into the fund. And it’s saying I don’t exist. It’s saying, “There are no professional women of color that I can find to bring into the firm so I’ll hire interns." So for the twenty years I’ve been in venture capital the numbers haven’t moved at all except to go down.What foundations could do is seed funds. They could be the anchor. That is catalytic capital. It’s a game-changer. If you have Ford Foundation, Kauffman, and all those foundations put in the maximum they can, you’re off to the races. People like to follow. You’ll get others to come in together. Just like Wall Street, the impact investors run together.

‍People are talking a lot about “building back better” in the context of our new economic reality and as we’re still grappling as a nation with the COVID-19 pandemic and all of the inequities it has exposed. As people are placing bets on how to invest in the recovery, where do you hope they’ll put their money?
‍“Build back” to what? “Better” than what? There’s a lot of work to do to fix what we did in the past and set us up for a different future.We know the numbers for the difference in wealth between black and brown and white people. We know what grows intergenerational wealth, and it’s entrepreneurship, ownership. Not housing ownership only. It’s about owning businesses. We need to look at the ways to build intergenerational wealth.I know what I can do. The “beauty” of racism is it’s in every sector and industry. I tell people, stay in your lane. You work on your system. My system is finance.For me, it’s simply investing in people that are trying to create a whole new system. Invest in brown and black fund managers because that’s when trickle-down economics actually works. You don’t have to be an impact fund. As long as you’re investing in people of color, especially underrepresented people of color, you’re going to have an impact on our country, on our world, and on our community.Philanthropy only doesn’t breed the growth we need. It shrinks you. There are so many things growing intergenerational wealth through investment would solve.