Nonprofit VC funds, explained

Venture capitalists get a lot of sh*t — often with good reason (just check out @VCBrags).

But there’s a new trend in the world of venture capital worth celebrating: funds that are part venture capital, part nonprofit, per Axios.

These funds…

… are set up as nonprofits, and managed by philanthropic sponsors. Examples include Andreessen Horowitz’s TxO (Talent x Opportunity) Initiative, and Fifth Star Funds, which allows donors to write “Friends & Family” checks for Black tech founders.

Here’s how it works:

• Like traditional VC, these funds invest in startups
• Unlike traditional VC, they have donors instead of limited partners, meaning any returns on capital get reinvested back into the fund rather than returned to investors
• Donors can recommend where they think money should be invested next

Since all returns get recycled back into subsequent investments, these funds can become self-sustaining if the investments are successful.

The model…

… could help level the playing field in funding. Per Fifth Star, Black founders get 1% of total VC funding compared to 77% for white founders.

Of course, the success of these funds depends on fund managers, who are often incentivized to maximize returns, which these vehicles won’t do.

The hope is that philanthropic missions will be all the incentive fund managers need. If the model helps make fundraising more equitable, it’ll make for a VC brag we can all appreciate.