Volume 90: Rethinking Catalytic Capital — A Purpose-Suited Approach
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Heather Matranga & Nathaly Botero, Village Capital
Catalytic capital is intended to be first-mover, flexible funding — filling market gaps and taking on higher risk and/or concessionary returns to unlock impact otherwise unattainable. Yet early-stage impact investors often default to traditional venture capital (VC) models, drawn by the promise of scale and market-rate returns. The problem? VC structures prioritize high-risk, high-reward growth — an ill fit for many mission-driven startups tackling systemic challenges like climate change, health access, financial inclusion, and social inequality.
Historically, a tiny fraction of startups (less than 1% in the U.S.) have raised venture capital. When applied indiscriminately, VC structures can do more harm than good — creating a vicious cycle of continuous fundraising and pressuring impact-driven startups to compromise their missions.
Further, the VC model relies on power-law dynamics: a few companies return the entire fund, while most fail. This high failure rate can be especially devastating for impact ventures serving vulnerable, high-need communities. Even when startups survive, exits pose another challenge. Successful exits are rare, leaving early impact investors with capital tied up indefinitely and limited prospects for meaningful returns. And in the rare cases where liquidity is achieved, it often comes at the expense of mission. Consider agritech startups — a popular VC-backed sector in emerging markets. Many begin with the goal of boosting smallholder productivity, yet pressure for rapid scale often pushes them toward serving large commercial farms, sidelining intended beneficiaries. Similar patterns emerge in fintech and health tech, where solutions risk becoming inaccessible to the very populations they were designed to serve. While market and business-model challenges contribute to pivots, we must ensure our capital does not create perverse incentives. Catalytic capital holds immense promise — especially when it truly prioritizes impact over short-term gains. But to realize that potential, we need a fundamental shift in how we invest. As catalytic investors, we must rethink processes, structures, and return expectations. Our goal should be to enable startups to scale impact without compromising mission — while laying the groundwork for long-term value that attracts aligned downstream capital.
“For impact investing, this shift is not just about new instruments. It’s about adopting a new investment philosophy — one that amplifies innovative approaches.”
Our Solution: A shift to Purpose-Suited Capital
A growing movement in the broader startup financing space recognizes a spectrum of capital beyond traditional VC and debt — designed to serve both entrepreneurs and investors effectively. Investors such as Capacity Capital, Collab Fund, Calm Company Fund, and Greater Colorado Venture Fund, alongside ecosystem leaders like Aunnie Patton Power, have pioneered “innovative finance” approaches — such as redeemable equity or revenue-based financing, where investors are repaid a percentage of revenue up to a set multiple.
When implemented well, these tools allow businesses to grow sustainably without the pressure for hypergrowth, while still creating viable returns and liquidity for investors — especially in cases where traditional equity would be a poor fit.
For impact investing, this shift is not just about new instruments. It’s about embracing a new investment philosophy — one that scales innovative approaches.
At Village Capital, we support impact-creating startups with diverse business models. While some align with VC expectations, many do not — particularly those whose solutions aren’t built for the rapid growth VC investors demand. Rather than adopting the VC playbook, we are advancing “purpose-suited capital” to help startups pursue impact-aligned growth.
The purpose-suited capital philosophy begins with the goal of maximizing impact and enterprise performance, then builds growth and capital strategies around that goal. Rather than a one-size-fits-all approach, it tailors capital structures — whether equity, debt, or flexible models—to align with a company’s actual needs, trajectory, and ownership objectives. While purpose-suited capital may use familiar instruments (e.g., equity), it differs in philosophy: prioritizing impact and enterprise performance, not just scale and financial return. We’re shifting from a rigid, single investment strategy to a more flexible, diversified approach. Instead of relying on VC-style markups to show short-term value, we’ll measure realized impact and sustainable returns over time — while preparing startups for the complexities of downstream capital, ensuring they access the right funding at the right time. We’ve already implemented this approach in more than a dozen impact-creating startups across various investment facilities.
For example, we’ve rethought the use of convertible notes — structuring one deal to align with Islamic finance principles, and another to function like a term loan upon maturity instead of requiring a lump-sum payment. These weren’t radical structural shifts, but they introduced meaningful flexibility — allowing companies to scale at a sustainable pace and providing a clear path to investor returns. This isn’t just about adjusting terms. It’s about helping the majority of impact companies prioritize profitability as a foundation for scale — reserving blitzscaling for the rare cases where it truly fits.
Broadening Adoption of Flexible, Impact-Driven Capital
“Blending traditional and innovative financing is not new — but it remains underutilized in impact investing. It requires rethinking what scale means, moving beyond the assumption that hypergrowth is the only path.”
Blending traditional and innovative financing is not new — but it remains underutilized in impact investing. It requires rethinking what scale means, moving beyond the assumption that hypergrowth is the only path. Early-stage investors deploying catalytic capital can — and should — adopt purpose-suited strategies to better align impact goals with financial returns.
We’re not alone. While traditional VC plays an important role, it can’t be the only option. A purpose-suited approach expands the toolkit, ensuring entrepreneurs grow sustainably, stay misaligned, and access the right downstream capital. Driving real change means moving beyond the status quo. At Village Capital, we’re committed to expanding this approach, sharing tools like Capital Explorer, and equipping founders to align their capital strategies with impact and long-term success.
We know we don’t have all the answers. But we do know this: capital is only truly catalytic when it is structured to serve its purpose.
*This article is a reprint of content originally published by Impact Entrepreneur
Heather Matranga serves as the Vice President and Managing Director of Impact Investments at Village Capital, where she drives capital to early-stage, impact-creating startups. In this role, Heather leads the organization’s investment strategy, managing and supporting multiple catalytic investment vehicles while employing innovative approaches to lower barriers for entrepreneurs. Her work includes developing inclusive investment strategies and advancing innovative financing structures to ensure that the capital deployed is truly catalytic. Additionally, Heather has spearheaded data-driven research aimed at reducing bias in the investment process, with a particular focus on closing the gender financing gap. Before joining Village Capital, Heather worked as an attorney advisor for the Federal Emergency Management Agency, where she provided critical legal support to facilitate disaster recovery efforts for individuals and government entities. Heather holds a J.D. from SUNY at Buffalo Law School, where she graduated Summa Cum Laude, and a B.A. in International Studies from Virginia Commonwealth University.
Nathaly Botero, Senior Manager of Learning and Innovations at Village Capital, works on projects focused on developing new insights and solutions that can better support entrepreneurs, increase their access to capital, and strengthen the startup ecosystem. She’s passionate about translating research and data into actionable, innovative solutions and helping build impact-generating systems. Prior to joining Village Capital, Nathaly worked at Finance in Motion, where she supported technical assistance projects designed to assist financial institutions and agricultural producers in Latin America in the adoption of sustainable investment and production practices. Before that, she contributed to the implementation of peace-building projects in Colombia as a consultant for the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and the Conflict Analysis Resource Center (CERAC).