Help Design the Earnest Opportunity Fund

These days it’s common for venture funds to raise an “opportunity fund,” a separate fund that sits alongside the main fund so they can invest more cash the performers in their portfolio. These funds are about opportunities for the fund. I want to talk about opportunities for founders.

We are designing the Earnest Opportunity Fund, an early-stage fund with the same investment thesis as Earnest Fund 1, but solely dedicated to backing underrepresented and underserved founders.

One year ago, we posted our draft ideas for how to design “funding for bootstrappers” and got tremendously helpful feedback from the entrepreneurial community on what became the Shared Earnings Agreement. We’re here today in the spirit of transparency with the same intention in mind. To put forward our best ideas on how to tackle a challenge and to solicit feedback so we can be better aligned with the founders we end up working with.


We often talk about ‘bootstrapping’ but very few founders actually build a business with literally no outside capital, savings, or help. In our personal experience, from asking lots of founders in private, a large portion used their own accumulated savings from a high paying job, had a spouse that covered the bills, had a windfall or inheritance, or relied on loans and help from family members. Every one of these is systematically harder in some way for founders of color, female founders, LGBTQ founders, and founders from underprivileged geographies. Note, none of these are insurmountable and we all know folks in every one of those categories who has successfully bootstrapped a business, but bootstrapping as we know it is systematically tilted against underrepresented founders in a way that we believe justifies a countervailing strategy.

The world of capital allocation is not much better. Statistics abound, like these from the Kauffman Foundation, showing that all-female founding teams and founders of color are able to access dramatically less investment capital from across the spectrum of venture capital to bank loans to credit cards.

Our experience with Earnest has led us to believe that we are still ‘downstream of privilege’ in a lot of important ways. We expect founders to find a way to build and launch a product, get some amount of revenue traction, and have a roadmap to build the company profitably without relying on too much additional outside capital. Perhaps unsurprisingly, as I’ve tweeted before, the vast majority of the inbound applications have come from all-white-male founding teams. We don’t officially collect this data at this point but anecdotally I would say it’s 85-90% of the 1,000+ opportunities I’ve seen this year. To date, Earnest Capital has not had a mandate to invest in diverse founders. We have tried to pick the companies that most closely matches our funding for bootstrappers thesis and those that showed the most traction and trajectory. So our portfolio looks a lot like our inbound: full of amazing founders, but predominantly all-white-male founding teams.1

We had roughly the same experience with the process of buiding our mentor group, largely as a result of our “skin in the game” rule that requires mentors also be invested in the fund, and thus in the founders they are mentoring. We’ve gone over that in more detail in a previous post.

It’s become cliche to say that “talent is evenly distributed but opportunity is not” but it’s correct. The point here is we have an opportunity to do better.


So here’s what we’re proposing, drafting, and looking for feedback on.

Earnest could launch a second fund with the same thesis and stage of investment as the main fund: still early stage, $50-250k checks, business models with a focus on capital efficiency, profitability, and sustainability.

We’ll be investing concurrently out of both funds, in some cases from both into the same company. We may not even make it obvious which fund is investing—though it would probably be impossible to completely obscure that even if we wanted to—or may leave it up to the founder to decide if they want that information public.

Update: After publishing this idea and subsequent discussions it became clear that operating two independent funds and choosing which to invest out of had too many possible conflicts. I think a better solution would be to have the Opportunity Fund simply amplify via a co-invest alongside the main fund in a fixed ration (1:1 or 2:1 most likely) any deals that met the criteria. So a $150k check to an underrepresented team would be either $75k from each or $50k from main and $100k from Opportunity. This way there’s effectively no decision on my part of how to allocate across funds, but the Opportunity fund gives us more dry powder to allocate to underrepresented teams.

Founders would have undifferentiated access to mentors and the community. This would not be a separate cohort or have a separate mentor group (though we would also love for this process to expand the diversity of our mentor group as well).

One big open question is what is an appropriate, fair, technical, and legal way to define who exactly is an underrepresented founder. If anybody has some well-tested best practices to share, perhaps from another industry, I would love to hear them.

So why bother having a separate fund?

One question we’ve been asked, and asked ourselves, is: why not just make a concerted effort to invest in more underrepresented founders out of the main fund? It’s a fair enough question. Here’s our current thinking on it:

1/ We raised money for Earnest Capital to prove a very specific, altogether different set of assumptions around investing in early-stage companies, that were not on the VC track, while still generating an appropriate risk-adjusted return. Earnest as it exists today does not also have a mandate to invest in underrepresented founders, so to date, we just haven’t taken it into account in our investing process.

2/ Whether in investing, recruiting, or conference organizing, everyone who does this well seems to agree, it takes work to build a network and a pipeline of underrepresented people. It doesn’t just happen. We are practically bootstrapping Earnest ourselves and operate with an extremely lean team. It probably makes sense for well-funded established funds to try to make efforts to move the needle across their entire operations, but for us it has felt like balancing too many different priorities with too little bandwidth.

3/ Based on tons of discussions on this, our current position is that to make a difference here you need to really plant a flag. As we launched Earnest, and we noticed the lack of diversity in folks applying and would occasionally reach out to underrepresented founders with interesting side hustles and ask why they hadn’t applied.

One of the things we heard most commonly was “Oh, I just thought this isn’t for me.” Well… this is for you. So let’s get to work!

Is this a publicity stunt?

No. But it’s a fair question and one we want to be held accountable to. To be clear, the Opportunity Fund is not live (yet) and may never get there. Launching funds is extremely challenging and the more constraints you begin to stack up—funding for bootstrappers, Shared Earnings Agreement, underrepresented founders only—the less likely it can be to get it off the ground. We’ll see what happens.

Who will run it?

The current plan is to have one or a small group of folks in a role modeled on “venture partners.” Here is a good explainer on how these roles typically work. The gist is they are part-time roles focused on sourcing and vetting opportunities, working with and mentoring founders post-investment. The compensation is primarily (though not exclusively) in the form of carry on the profits of the investments we make out of the Opportunity Fund.

Some have suggested that if we’re going to do this, we should add a dedicated general partner for this. We agree it is the right goal, but finding a new general partner is not something to rush into and not something that should hold up this process. Ideally the Opportunity fund is a huge success and one of the venture partners becomes a full general partner in the future.

Are we, at Earnest, even the right people to run this? Honestly maybe not. We’re still going to try this but if somebody else wants to take the idea and run with it, we’ll help.

We’ve already had a number of conversations here but it’s very important to break out of our filter bubble for this process. So, who should we be talking to?

Time for feedback

We’ve turned on comments for this post and would love to hear any and all feedback. You can leave a comment below, tweet at us, discuss on Indie Hackers here or Hackers News here, or email me directly.

  1. Although interestingly Earnest is far more geographically diverse than any venture fund portfolio we’ve ever seen.

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