Miami – May 2, 2017 – A new report offers insights on how foundation investments in local institutions can help them attract additional capital and create wider social and financial impact. Focused on the John S. and James L. Knight Foundation’s $2.5 million investment in the Detroit Development Fund, a Detroit-based small business lender, the report highlights lessons in impact investing for community organizations, funders and others.
“Taken together, the report demonstrates the power of strategic investment to strengthen institutions,” said Luz Gomez, Knight Foundation director for learning and impact. “We believe these findings will be tremendously valuable for funders as they look to use their capital to amplify positive economic impacts in communities.”
Detroit’s small businesses — especially in low-income, moderate-income and black neighborhoods — have long struggled to access business loans, even before the city filed for bankruptcy in 2013. The nonprofit Detroit Development Fund provides small business loans and technical assistance with the goal of revitalizing underserved neighborhoods. In total, it has made $43 million in loans since it was founded in 1996. It has been a key player in the redevelopment of retail hubs in formerly desolate parts of the city such as Midtown and West Village.
In 2015, Knight Foundation converted a $2.5 million low-interest loan previously made to the Detroit Development Fund into a grant to strengthen its ability to attract new capital and help spur small business lending. Using this conversion as a backdrop, the new report, “Changing Gears in the Motor City: A Financial and Social Impact Assessment of Detroit Development Fund,” details the findings of a financial analysis conducted by rating and information service Aeris, and a social impact analysis completed by The Aspen Institute.
The report finds that the conversion improved the fund’s financial stability by strengthening its balance sheet and improving its overall net worth. It also led to an influx of various forms of capital from other investors. The fund has been able to secure commitments on three new lines of credit totaling $13 million and $6.5 million in new investments for its Entrepreneurs of Color Fund. In addition, to improved financial stability the report found the conversion resulted in:
- Positive economic impact: The Detroit Development Fund is contributing to economic development in the city. Capital is reaching fund-supported businesses that are growing, adding employees to the rolls.
- Heightened prospects for growth: The Detroit Development Fund had projected various growth pathways post-conversion, and data show it is meeting aggressive growth projections.
- Gains in diversity with room for improvement: The fund is growing a more diverse client base that can support job creation in Detroit’s redeveloping neighborhoods. From 2014 to the first quarter of 2016, the percentage of minority-owned businesses borrowing from Detroit Development Fund jumped from 40 percent to 71 percent, while the number of women-owned businesses went from 26 percent to 79 percent.
“Investing in small business growth in Detroit is critical to the city’s continued redevelopment,” said Katy Locker, Knight Foundation program director for Detroit. “This report confirms that the conversion had its intended effect, and it’s encouraging to see that the additional capital is reaching a group of residents who more closely reflect Detroit’s diverse population and that their businesses are showing signs of sustainability and growth.”
“The conversion of Knight’s loan to a grant was the key factor in our ability to grow our organization and increase our impact over the last 18 months,” said Ray Waters, president of the Detroit Development Fund. “Detroit entrepreneurs of all kinds benefited from the positive effect on our balance sheet, which allowed us to raise the additional capital we needed to close and more than double the number of small business loans in 2016 than in the previous year.”
Report findings offer lessons to funders, community organizations and others focused on impact investing including:
- Exploring new investment models: The core idea of impact investing is to use investment capital—debt, equity and other return-generating financial products—to create positive social change. However, in some circumstances, foundation grant dollars can play an important role in strengthening institutions and helping them leverage additional capital.
- Finding a measure of stability: Community lending organizations looking for more stable models can learn from the Detroit Development Fund example. Several other foundations were already investing with the fund or were interested in working with it, and the conversion had an impact on their decision-making.
- Tracking progress: To stay competitive and increase growth, the Detroit Development Fund must develop its capacity to track and publicize the outcomes of borrowers who receive funding. The fund is upgrading its technology infrastructure for tracking its existing portfolio and social impact.
Collaborating for impact: The report showed that working in collaboration with other investment efforts and local funders in Detroit can provide multiple levels of return and social impact.
To download the report, visit: http://kng.ht/ddf and read the blog post on the impact of the Detroit Development Fund here: http://kng.ht/2rbwddy. Follow @knightfdn on Twitter for updates.
Support for the Detroit Development Fund is part of Knight Foundation’s efforts in Detroit to attract and keep talented people, expand economic opportunity and create a culture of engagement. Knight Foundation, along with several other players, has also supported Detroit’s “grand bargain,” a deal between the state and the city to help ease it out of bankruptcy. Since 2008 Knight has pledged more than $80 million to Detroit, including a $19.25 investment in the arts announced in October 2012.
About the John S. and James L. Knight Foundation
Knight Foundation is a national foundation with strong local roots. We invest in journalism, in the arts, and in the success of cities where brothers John S. and James L. Knight once published newspapers. Our goal is to foster informed and engaged communities, which we believe are essential for a healthy democracy. For more, visit knightfoundation.org.