CEO Coach Blog 2018-06-20
Equity & Impact Investors
Impact funding is often referred to as funding companies with a “second bottom line.” Venture capitalists and angel investors who choose to support businesses that foster social benefit are called impact investors. They make individual investments in impact companies or they form entire groups or funds that focus solely on impact investing.
It’s exciting to see growing evidence that indicates that impact investing supports the conventional bottom line with better returns for investors. In other words, investments in impact companies are returning higher ROI to their investors than companies that don’t take into account the social impact of their work.
The value of double bottom lines is worldwide, Andy Rabens at US State said “Economic prosperity is critical to national security and entrepreneurs build economic engines.”
That said, the economics of investing for social impact have to make sense to investors. Hardly a charity operation, investing is a financial activity and returns are critical to the equation.
Impact Investing Pays
Eveline Buchatskiy, co-founder of One Way Ventures, which funds immigrants exclusively, says: "ALL of the best performing startups in Boston’s Techstars had immigrants on the founding team. Investing in those startups proved to be good business. “Impact investing is the only one that makes a difference not just because it is the right thing to do, but because immigrants found two-thirds of all start-ups. Further, she adds, “Because immigrants do not have access to VC networks, their valuations are typically lower, making a better business case for us to invest.”
Funds investing to improve gender equity in early stage funding are reporting the same – consistently higher ROI to their investors when they fund teams with at least one woman in a leadership role. We do that at the Sybilla Masters Fund and look at other diversity, inclusion, and belonging issues as well.
Is not exclusively funding one or another underserved demographic itself prejudiced? Exclusionary? No, because here’s the thing about equity. It’s not the same thing as ‘equality’. Equity seeks to create equal OPPORTUNITY by providing extra support to those who need it.
Not all impact investments involve capital investment directly into companies. Indeed, our US State Department runs a program in partnership with the German Marshall Fund to bring young entrepreneurs from dozens of European countries to US startup hub cities and connect them with mentors in each. This is an impact investment on the part of our government to foster prosperity in regions critical to our national security.
For example, Croatia, Macedonia and the rest of the former Yugoslavia have been fought over by powers from the East and West for millennia, beginning with the Romans, and then continuing as pawns tossed between the Ottoman empire of the Turks and the Austro-Hungarian empire of Europe. Religion played a role, as Islam and Orthodox Christianity vied to hang onto their congregations. However, their greatest vulnerability was geographic, being in the path of the ebb and flow of competing empires. And so it continues today, as these tiny countries are on the front lines between Western civilization and the influence of Eastern powers. And even outright encroachment.
Yet numerous stable and successful companies there have built products and services for local and foreign markets. Their challenge is to sell worldwide, but many are breaking into new markets with the support of impact investors who invest time, mentorship, business advice, and champions. SwissContact is another such impact investment group bringing business advisers and mentors to the region to increase the quality, quantity, and long term success of tech-based businesses.
SwissContact’s Jakob Modeer said, “We are working to contain economic migration. When all the intellectually capable youth leave to pursue careers in other countries because the standard of living is better, it is easy to turn the remaining people to Facism. We work to develop a different mindset among young people that there are other options in their lives than growing up to work for the government. That’s why our focus is on developing an entrepreneurial ecosystem in each country and operating events in which they collaborate to increase the value of businesses together. We are developing economic engines, interdependency, collaboration, and networks. These are the building blocks of prosperity, which is the foundation of peace.”
Thinking about the breadth of this statement and then hearing subsequent panel discussion here at home in Philadelphia on building local talent pipelines for tech companies led me to a big ‘Ah-ha’ moment . . . an epiphany, if you will.
As much as current events, and the democracy recession worldwide may dismay us, if we can all ignore the high drama coming from the top – which, honestly, sounds more and more like a trashy spy novel these days – if we keep our heads down, working at our jobs in the trenches, as do these companies located in contested countries like the Balkans and similar areas of contention, we can stem nationalism by developing economic engines. Rarely, does one equate investors or business advisors with working for world peace, but it’s quite clear we are quite literally able to do just that by providing services and investments that stabilize important areas of the world.
What can we do here in the US that will foster our ability to increase the value of our own economic engine, while supporting those of other countries around the world?
Well, how about welcoming immigrants and easing their paths to legal employment or establishing successful startups of their own? We can revamp programs in schools to foster entrepreneurs in underserved regions of our own country. We can look at forming public-private partnerships to bring prosperity to vacant city properties and underserved regions.
What I’m advocating is that we act locally. In time the top will be taken care of. Populations who are secure in their belief in their own survival, and who have hope for the future – the ability to thrive and provide increasing quality of life to their children – are better able to withstand the siren entreaties of nationalist and xenophobic agitators. Furthermore, prosperous economies which trade with each other don’t generally seek to kill each other. It is still all about the economy. Always was.
$16 Billion and Counting
Impact investing has been around for a while, funding clean energy, electric automobiles, and other environmentally conscious efforts. There were notable exits: Tesla, SolarCity, NestLabs and 7th generation. Since 2001 such companies have invested $13 billion, and $10 billion of that since 2010. Another $3 billion raise was announced last year by TPG Ventures, and Breakthrough Energies to fund solutions to infrastructure in far reaches of the world.
One of the earliest VC’s was DBL Partners, for ‘double bottom line’ formed in 2004 to “invest in companies that can deliver top-tier venture capital returns (1st bottom line) . . . while enabling social, environmental and economic improvement in the regions in which they operate (2nd bottom line).” Note DBL was co-founded by a woman, Nancy Pfund. The fund invests in clean energy, healthcare, IT and sustainable products. Tesla and SolarCity were among their big exits.
Of course, you could say that $16 billion over 16 years is a drop in the bucket compared to the $148 Billion invested worldwide in 2017. But, the trajectory of increased funding since 2010 is encouraging. If $10 Billion has been invested since 2010, then that’s more than three times during the previous nine years.
Today, funds are taking on investment strategies around inclusion of specific underserved communities and demographics, such as investing in immigrants’ startups, like One Way, or those founded by blacks and Latinos, or women, as we are with the Sybilla Masters Fund.
In Austin Texas, Techstars has launched an accelerator expressly for impact startups. Managing Director Zoe Schlag says, “We are looking for entrepreneurs whose business model and impact are intrinsically tied to each other so the business scales in lock-step with impact.” The kind of companies she is seeking should increase access or affordability to basic services, reduce poverty or inequality and increase diversity and inclusion. Their first cohort will begin next month.
In Portland Oregon, Elevate’s Nitin Rai has grown his portfolio to 15 startups for his fund, which reports investing $2.1 million to founders, 80 percent of whom are women, racial minorities or veterans. Elevate’s portfolio has raised a total of more than 24 million and created 198 jobs. When we spoke with him more than a year ago, he was already “bullish on inclusion”. (https://webmasterradio.fm/episode/bullish-on-inclusion-tie-globals-nitin-rai-1). Nitin Rai is the 2018 Chairman of TiE Global, a 25-year-old organization formed to aid underserved founders around the world.
Also based in Portland Oregon is the Women’s Venture Capital Fund, founded by two women Edith Dorsen and Monica Dodi in 2011 to fund diverse founding teams. In 2017, they announced a second fund of $20 million to focus on Series A-stage startups, where they observed a gap for growing companies looking for cash. We came to the same conclusion, which led us to form the Sybilla Masters Fund.
And then, there is the big news of Q2 2018, that Backstage Capital, founded by Arlan Hamilton, has raised $36 million to invest in minority women founders, $1 million each. Arlan has quite a story. Five years ago she was homeless. Yet persisted in creating a VC fund for overlooked founders and took her first check in September of 2015, going on to invest $4 million in 90 startups in less than three years. Arlan predicts by 2020 there will be a major exit by a minority founder too big to ignore.
Who else is doing impact investing? The list keeps growing. Ted Rheingold compiled a spreadsheet of venture capital firms seeking impact investments and put it up on Google docs. https://docs.google.com/spreadsheets/d/1buv2c0Q-2A220IBnBeRgYCOF4EiuPofAEhmlLd_36iY/edit#gid=0
To be clear, let’s point out here that we are talking about venture capital funds rather than angel investors. There are some heavy hitters there. A rough tally of the size of the funds comes to more than $10 billion – that’s with a ‘B’ -- available. Among them are Kapor Capital, which reports half it’s investments are in women founders, and in particular invests in those that address gaps of disproportionate effect on minorities.
Village Capital recruits leaders from around the world to join their mission to democratize entrepreneurship.
Tumml Urban Innovation Fund was founded by Clara Brenner and Julie Lein to to provide entrepreneurs with the tools to help scale their impact and enhance quality of life in cities everywhere.
Impact America Ventures, led by Keisha Cash to create opportunity and enhance quality of life for all Americans.
And last, but certainly not least is SoGal Ventures, the first female-led millennial VC firm. http://www.sogalventures.com/. Founders Pocket sun and Elizabeth Galbut have invested in 50 startups to paint the future of how their generation lives, works and stays healthy in the U.S., Asia Pacific and Europe. Along the way they expanded SoGal to more than 10 chapters world wide.
So it is safe to say, we are not alone.
Here are three things we have observed:
- Impact investing is growing, with somewhere North of $10 billion – yup with a ‘B’ available. And that’s just from the ones compiled by Ted Rheingold.
- Impact investment started with investors interested in environmental sustainability and world health, in some ways like many non-profits and NGO’s. But here’s the difference: it’s turns out investors can make money and create social benefits at the same time. This is being proven over and over again that doing well by doing good and doing good by doing well both work, and return value to investors.
- After 15 years, a trend is growing toward investments in diverse founding teams from under-represented groups, such as minorities, women, veterans, and emerging markets worldwide.
Watch this space. There is more to come!