August 10, 2023
Originally published on the VC Include blog. Good Scout Capital is a 2023 VC Include Fellow for Impact Fund I Managers.
Karlo Marcelo and Rupal Patel first met in the early 2000s, while working as student activists and campus leaders at University of Michigan’s Gerald R. Ford Graduate School of Public Policy—an origin story that makes perfect sense in light of their current work together at their co-founded firm, Good Scout Capital.
The Origin Story
Marcelo and Patel both grew up in the Midwest in the 1980s, where manufacturing, manual labor, and supply chains were all around them. Living in this context informed their respective insightfulness into the dynamics of labor as related to capital, economic mobility, and justice.
“We’re both children of immigrants,” Patel mentions, “and the number of opportunities that were available to us in our younger lives is probably double or triple what they are today. You could own a home, you could start a business, you could go to school affordably. And homeownership and getting educated are really out of reach these days.”
Patel shares her own family’s experience as an example. “My father came to this country from India with eight dollars in his pocket,” she says. “As a non-managerial engineer at a defense contracting company, he was able to get stock in the company and lives off of that today. Ownership has the ability to break cycles of generational poverty. It did in our family’s case.”
Marcelo has a comparable story. “My mother worked for M&M/Mars. She had a pension as an hourly worker, and she now lives off that pension.” But before she made it to that role, soon after she immigrated to the U.S. from the Philippines, Marcelo’s mother was working at a different manufacturing firm. Feeling disrespected by her boss, she stood up to him and threatened to walk out in front of other people in the office. The boss then offered a different opportunity in IT, making Marcelo’s mother one of the first women working on IT systems in corporate America as a result of her taking a stance. “This is what Rupal and I are also trying to do: call things out to make a change.”
A Crisis in Corporate America
“There’s a crisis in corporate America in a way,” Patel reflects. “They’re desperate to articulate their people and planet benefits to their consumer base as consumers are becoming more demanding in terms of what they expect.” The demand for corporations to become more people- and planet-friendly is clear, but companies don’t have enough of a clean supply chain to meet the demand. Major corporations like Nestlé, Costco, Walmart, Mars, and others are clamoring for supply chain partners to demonstrate to their consumer base that they’re doing good things. “And these supply chain partners exist and want to do good things,” Patel says, “but they don’t have access to flexible finance capital.”
Marcelo elevates the prevalence of impact washing and green washing among corporations, and at the same time urges that there are, “serious challenges in this country that make us fragile politically and economically.” His emphasis is on the need to interrupt the impact washing and green washing by investing in solutions that will have true impact. As Patel points out, “Solutions don’t just pop up overnight; you have to finance people and planet objectives in order to meet them.”
Marcelo reminds us that we’re living in a context where we are not financing the people who make our daily lives possible. “UPS workers,” he says, “who play a vital role in ensuring people and businesses across the country can function, have to threaten to strike in order to get fair pay.” Meanwhile, the UPS CEO made $19M in 2022 (down from $27.6M in 2021), which is upwards of 350x the 2022 median worker salary.
“Workers are getting more productive, executives are making more money, and our investment thesis is to bring ESG alignment to everyone.” Patel provides additional texture, posing the questions, “How do we take everyday laborers, make them a part of the capital stack, and help them build wealth? How can we break the cycles of generational poverty that persist in manual labor supply chains?”
A Private Equity Firm Focused on Inclusive Capitalism
“Good Scout is a firm that’s been years in the making,” Marcelo shares. “For a decade since reconnecting, we worked independently – and together in spirit – toward a world that is more equitable.” Patel worked as an immigrant and environmental justice organizer before moving into private equity, where she was investing in solar systems, supply chains, and employee ownership, including her work originating the first farm labor cooperative in America, California Harvesters. Marcelo worked in politics and philanthropy to influence a more reflective democracy, and gained recognition as a market-leading researcher on millennials as a consumer group. “We didn’t learn about finance until later in life,” Marcelo points out, “and here we are now.”
“Good Scout Capital is about revitalizing the American Dream,” Patel shares with enthusiasm. “It’s about making economic mobility a reality for more people.” Good Scout Capital is rethinking risk calculus to focus on the American worker, invest in the American workforce, and harness untapped potential. The firm seeks to revive and preserve the middle-class dream for future generations by investing in capitalist enterprises that promote inclusivity and increase equity.
Marcelo points back to the pair’s respective upbringings: “That really grounds who we are,” he says. Patel adds, “We want the everyday worker to feel as safe and as secure as we were able to feel when we were growing up in this country and trying to build our wealth. Without this workforce, American democracy and American capitalism will fall apart. What saves this country is the way we create opportunities for people who would never have them otherwise.”
Launching Scout Fund Alpha
“Rupal and I went from studying anti-poverty solutions and we got so creative and experienced that we landed here,” Marcelo explains. “We had both seen that capital is such a catalytic force for change – Rupal on the private equity side, me on the politics and philanthropy side – so we understand how that capital comes to bear.” Once they got started on their work together at Good Scout, they looked at the investment landscape writ large to see where they could add the most value based on their backgrounds.
After conducting a landscape analysis, Marcelo and Patel were clear that there are lots of solutions already out there. Their focus was on putting together sensible, “low-hanging fruit”-type of solutions, and making clear that they have an ESG-aligned investment product. “We identified the thesis of Scout Fund Alpha just from hearing large corporations struggle to find supply chain partners,” Patel says.
They found significant motivation from Patel’s success with California Harvesters, which is not only the first of its kind in the U.S., but also one of the largest farm labor contractors in the country. Seeing the promise of the solution energized them to launch Scout Fund Alpha. With the fund, they’re continuing to engage low-wage workforces in the value proposition of profitability and sustainability that companies assert.
“Our deal pipeline is made up of supply chain partners that already have corporate contracts, and these corporations love the product and want to scale with them,” Patel explains. “The only thing excluding them from scaling is financing and a good partner who really understands this connection between people, planet, and profit.” Marcelo and Patel are closing this gap with Scout Fund Alpha, a $50M, ten year growth equity fund investing in a portfolio of seven to ten companies, with an average check size of $5M. They’re focusing on climate-sector businesses, DEI/diverse workforces, and employee ownership.
“We’re not trying to define diverse workforces as solely focused on BIPOC,” Patel offers. “We want to talk about how the working poor make up our corporate supply chain base and we need to address the working poor inclusively.” Marcelo references the work and teachings of Dr. Martin Luther King, Jr. in relation to the fund’s philosophy. “It’s really hard to just hold up Asian Americans and lift that strategy forward if we don’t try to bring everyone who’s part of the economic struggle together.”
They’re seeking 50% diverse workforces – in rank and file as well as management – and 20% employee ownership pools where employees can participate in the profit sharing and the equity of that company. “It’s about flexibility with employee ownership,” Marcelo articulates. “There are other strategies that seek to make the firm much more employee-owned, and there are really big firms out there who are doing it.” But what Scout Fund Alpha is doing is widening the funnel of deals for people so they don’t have to go from 0% employee ownership to 80%. They’re supporting companies to start somewhere and then position themselves to build on their progress.
Scout Fund Alpha is primarily focused on the west coast, where, in Marcelo’s words, “State law is already in place to build employee-owned businesses; the consumers are already here for it; and the companies want to expand nationwide.” There’s an abundance of corporate supply chain partners whose management teams already have tremendous experience and leadership. These partners are already doing their work on a smaller scale, but in order to get these mega contracts that will allow the growth potential that Scout Fund Alpha seeks, they have to be in multiple markets.
Participating in the VCI Fellowship
“There’s no dollar value on what we’ve been able to experience in the VC Include Fellowship,” Patel says without hesitation. “This is by far the best emerging managers fellowship we’ve been a part of. Exposure to peers and mentors, really understanding the ins and outs of running a private equity firm, with tangible resources we can utilize to build our team and our thesis along with being able to be in a room with a group of values-aligned people who believe in the promise of capitalism is unparalleled.”
“The timeline is intense, but appreciated,” Marcelo contributes. “It’s a very thoughtfully designed curriculum and program. We looked at and were approached by a bunch of other programs. VC Include was always an ally to us from the start, whether or not they would have accepted us. That made us feel like they were the right program to join; just like you choose a capital partner, we chose them.”
All of us at VCI are elated that Good Scout Capital chose us, and we look forward to continuing to add value and visibility to their work.