Raising An Inclusive Fund Was The Hardest Thing This Portland Entrepreneur Ever Did

After raising nearly $20 million for a tech startup in the late 1990s, Nitin Rai swore he would never ask for money again.

Nearly two decades later, he is back at it, driven by the opportunity to lead a pair of venture capital funds that invest in founders outside the traditional borders of geography and demography. It is a growing area of venture investing — Harlem Capital is a high-profile entrant — but based on Rai’s experience, investors may be reluctant to follow their promises with real cash.

Rai thought it would take about a year more to raise $13 million for two funds, which formed in 2016. It ended up taking more than two years and the funds closed on their goals only after a successful exit returned 75% of the capital that had already been poured in.

“It is the hardest thing I’ve ever done in my entire life,” said Rai, who is managing director of Elevate Capital. The firm is based in Hillsboro, Oregon, a Portland suburb and part of an area referred to as Silicon Forest. Before turning to investing, Rai founded a company called First Insight Corp., where he remains president and CEO. The company, which has about 200 employees, develops practice management and medical records software for eye doctors. 

Paula Hayes, one of the companies in Elevate’s portfolio, found Rai after striking out with mainstream investors. She is CEO of Hue Noir, a Beaverton, Oregon-based manufacturer of cosmetics for all skin tones.

Potential investors could not fully grasp the problem of finding makeup for darker skin tones, she said. “I had a very, very, very hard time getting them to really understand the need even for my venture. Many of them were guys, and not just guys. They were not people of color,” she said.

Hayes said Rai quickly grasped her company’s potential. So far, Elevate Capital has invested about $400,000 in the company, which was founded in 2009 in Hayes’ kitchen. Hayes decline to disclose revenue but said sales have been growing. The company now has six employees and a 4,000-square-foot plant, and it sells products online at Costco.com and Sally Beauty Supply LLC, among other retailers.

Rai has been helping her think about the next stages of her business, which could include sales overseas, she said. “He’s just been such a great sounding board for me.” 

State and local agencies’ role

Elevate’s two funds are the Elevate Capital Inclusive Fund and Elevate Capital Fund. The firm’s leaders, in addition to Rai, include venture partner Robin Jones, who has experience in tech startups and is former head of West Coast investments for Motorola Ventures; executive partner Michael Choi, co-founder of Portland-based Axiom EPM; and executive partner Raghu Raghavan, founder of Act-On Software.

State and local agencies seeded Elevate Inclusive, which closed at $3 million. The fund is focused on Portland-area startups led by women, minorities and veterans. It makes pre-seed and seed-stage investments of between $25,000 and $100,000.

Rai was seeking more for Elevate Capital, which was initiated by a Portland foundation, the Meyer Memorial Trust. Meyer Memorial tapped him to manage the fund, in part, based on his track record as an angel investor through TiE Oregon, a local chapter of TiE Global, an entrepreneur support group. TiE stands for The Indus Entrepreneurs.

The trust pledged to match 25% – or up to $2 million – of what Rai could raise. His goal was a $10 million fund with a broader focus than Elevate Inclusive but with an eye on under-represented entrepreneurs. The fund makes seed-stage and Series A investments between $100,000 and $500,000. It is not limited to Oregon companies.

Even though Portland has a reputation as a progressive city, many would-be investors were reluctant to put money into either fund, Rai said. “People were paying lip service but when it came to writing a check, they were hesitant.”

Others, however, resonated with the inclusive mission. “They liked the fact that I was going to invest in a demographic that is disadvantaged,” he said. “They liked the fact that it was Oregon-centric as a starting point. Many liked the fact that I had an early-exit model.”

He thought about closing the funds short of their goals – the Capital fund was at 75% while the Inclusive fund was at 80%. But he kept going. “We had people knocking on our doors for money,” he said.

Then, in 2018, one of Elevate’s portfolio companies, cloud-based software developer RFPIO, closed on $25 million in Series A funding from K1 Investment Management, which is based in Manhattan Beach, Calif. The exit allowed Elevate to recoup 75% of its capital. Rai returned two-thirds to investors and used the rest to close out the two funds.

Elevate has since had a second exit, a salad-focused restaurant called Garden Bar by Evergreens, which has several locations in and around Portland. Elevate Capital’s internal rate of return is 50%, Rai said. He described the IRR for Elevate Inclusive as being in modestly positive territory. 

Metrics provided by Elevate show founders backed by the firm are diverse. Nearly half, 48%, of Elevate Capital’s founders are women and 20 percent are African American. The fund has made 26 investments. The figures for Elevate Inclusive, which has made 26 investments, are 65% and 30%, respectively. 

But for Rai, an equally important measurement is the cash returned to investors.

“Otherwise, it’s all just charity,” said Rai, who describes early exits as part of his approach to the two funds. “It was important to show that these companies can get to liquidity in a faster amount of time, and so we did it.”

Rai is now looking to raise $40 million for a fund that will invest nationally, potentially in cities like Atlanta, Detroit and Washington, D.C., which have large African American and Latino populations without access to capital.

As Rai looks outside Oregon, he may see competition. Funds focused on inclusion are becoming more common, said Banu Ozkazanc-Pan, director of the Venture Capital Inclusion Lab at the Nelson Center for Entrepreneurship at Brown University. She is familiar with Rai and Elevate Capital. 

“I feel like these are the vanguards of the venture industry and they recognize that what we have in place is broken,” said Ozkazanc-Pan.

The need for a fix is not lost on traditional VC firms. In 2015 members of the National Venture Capital Association pledged to advance entrepreneurial opportunities for women and minorities. 

Ozkazanc-Pan has been collecting information on whether the pledge led to changes in investment practice. 

“It’s a mixed bag right now, it really is, and frankly, I’m not surprised,” she said. Absent carrots or sticks, funds tend to lean on their entrenched models, which lead managers to invest in people who look and think like they do.

Among the challenges for cities like Portland is creating an entrepreneurial ecosystem that feels truly welcoming to diverse entrepreneurs, said Christopher Gergen, CEO of Durham, North Carolina-based Forward Cities, a nonprofit seeking to boost entrepreneurial networks in smaller cities.

“There are some promising signs,” Gergen said, citing Detroit and Cleveland. But, he added, “For the most part, cities are behind the curve on it.”

SIDEBAR

(Some founders have been supported by both funds)

Elevate Capital Inclusive Fund 

Assets under management: $3 million  

Total investments: 25

Founders who are

Women: 65%
African American: 30%
LatinX: 13%
LGBTQ: 9%
Veterans: 4%
Other minorities and immigrants: 17%
Entrepreneurs of color : 61%

Elevate Capital Fund 

Assets under management $10 million 

Total investments: 26
Founders who are

Women: 48%
African American: 20%
LatinX: 8%
LGBTQ: 8%
Veterans: 4%
Other minorities and immigrants: 16%
Entrepreneurs of color: 44%

Source: Elevate Capital