Daryn Dodson is Managing Partner of Illumen Capital, an impact fund of funds addressing systemic inequity by reducing racial and gender bias in investing. Previously, Dodson led the Special Equities Program as a consultant to the board of the Calvert Funds, a $12 billion pioneer in impact investing. Through this vehicle, Calvert maintains a portfolio of more than 40 funds on five continents, representing over 350 underlying portfolio companies.
Would you share with us a bit of your journey into impact investing?
I started my career at the Self-Help Credit Union, where we lent more than $6 billion. There we applied systematic frameworks, controlling for many variables, to uncover more than $9.1 billion in annual overcharging of fees and interest by some of the world’s largest banks because of the race of the borrower. That analysis was used in 18 states by advocates to pass consumer protection laws. I then went to Stanford Business School, where I took a deep dive into how companies transform communities in powerful ways; before heading to New Orleans, where I worked with entrepreneurs rebuilding their lives and businesses after Katrina [in 2005]. For the eight years before launching Illumen, I served the Calvert Funds working on deploying impact capital.
Illumen is both an investment vehicle and a vehicle for change in the investment field. Tell us about your goals and the research that backs up your approach to address racial and gender bias of overlooked and underestimated entrepreneurs.
Illumen Capital is a fund of funds investing across seed, venture capital, growth and private equity funds. One of the things that differentiates us from many in the movement for economic justice is that we apply a market-based approach. We invest in leading fund managers and provide them with a systematic bias reduction framework over a 10-year period, aiming to increase the inclusion of women- and people-of-color-led companies in the investment selection process—along with attracting, promoting and retaining talent within those pools.
Through a partnership with a team of social psychologists at Stanford SPARQ, Illumen conducted research that interviewed nearly 200 asset allocators and ultimately published a paper that showed that not only does race influence the decision-making of professional investors but that Black-led fund managers face more bias the higher they perform. In fact, asset allocators are more willing to leave money on the table than invest in Black-led funds at higher ends of performance. In response, we built a fund to go after that latent market value — a massive investment opportunity for those who see not only the humanity of these fast-growing demographics but also the value they bring to the marketplace.
How do you perform due diligence that emphasizes both impact and financial return?
We look across transformative, tech-enabled solutions in environment, health, education and financial inclusion. Each of these impact themes has created massive economic value historically and are poised to capture new value in the future. One unique aspect of due diligence that we bring as a firm is our bias reduction methodology. We partner with our fund managers over a 10-year journey to find these underestimated and overlooked parts of the economic ecosystem that represent the growing new majority of the country.
Do you see more managers coming into the field to continue to diversify your capital?
Yes. While guest teaching at Stanford Business School, Harvard Business School, Howard University Law and other schools, I have seen the power curve of impact talent globally. Many in the next generation are focusing their career decisions on the importance of making meaning and impact along with financial return. It's exciting to see the most talented people in the world deciding that they are no longer willing to compromise their values. What an incredible boost this will be to the GDP of the country, what an incredible boost to communities and to inclusion throughout the world and to overall prosperity in a way that we can all be proud. These funds are poised for possible outperformance because they attract some of the most talented students who are orienting more and more in this direction.
As you focus on the sectors, is there alignment with the United Nations Sustainable Development Goals (UN SDGs)?
We anchor within SDGs to create broader impact via equity and inclusion throughout the world. Recognizing the overlooked and underestimated people of color and driving that intersectionality, particularly with women, is an important dimension to delivering on several SDGs.
Your partnership with Impact Experience and Stanford SPARQ is focused on both increasing the diversity of managers and helping them think differently. How do you help managers see through new lenses?
The Illumen Capital Impact Experience is a two-day deep dive into the history of slavery, lynching and mass incarceration so investors can have a sense of the periods in history that created the imbalance in the global financial markets. Only 1.3% of the over $70 trillion of wealth in this country is currently managed by firms owned by women and people of color. When we look back at our history, we can focus not only on the barriers to achieving transformation and change, but the leverage points. Managers begin to understand and unlock the pent-up potential of these already successful entrepreneurs and back them. We create ties between the fund managers of different races in our portfolio to generate powerful experiences to think tactically about the ways they can work together to offset systems of bias throughout the marketplace.
Is there any empirical evidence that shows alpha is created if you invest with values?
You can make good investments in impact investing or in the broader market, and you can make bad investments in both. The task is to do the due diligence and find these massive trends like overlooked and underestimated women and people of color who are leading companies that are often dismissed because of bias and not because of their return potential. Those who do the work to find these opportunities will win in the future.
What are your hopes for the field in 2030 and 2040 and the cross section of your team's work in accelerating that field?
I often reflect on the idea that Martin Luther King was assassinated over 50 years ago. And when we look at what he was doing in his life — fighting for economic justice — not much progress has been made within asset management. When I think 50 years into the future, I see a $30 trillion shift in assets toward women- and people-of-color-owned firms, which is where we would naturally fall if the screens of bias were lifted from the eyes of investors. My sense is there's a real possibility here for returns and impact in the world, and massive shifts of capital are necessary to create more global prosperity.
We need to think about the systemic bias we bring to the table to ensure the next 50 years don’t look like the last. We need to include women and people of color because of their humanity, but also because of the value they bring to the marketplace.
Interview by Phillip Wm. Fisher, founder of Mission Throttle in suburban Detroit, an organization dedicated to accelerating philanthropic innovation in communities; and Douglas Bitonti Stewart, executive director of the Max M. & Marjorie S. Fisher Foundation, also in suburban Detroit, whose mission is to enrich humanity by strengthening and empowering children and families in need.