An increasing number of venture investors are hunting for small
companies that could yield social benefits as well as high profits
Gaia
Herbs sounds like an unlikely candidate for venture capital. Ric
Scalzo, a medical herbalist, founded Gaia in 1986 to produce,
distribute, and sell organic supplements. The $16 million, 125-employee
firm prides itself on its commitments to improving society, including
funding education in the South Pacific islands and Sumatra, where the
company sources some of its herbs. The alignment might sour most VCs,
who train a strict eye on bottom-line benchmarks. Nonetheless, Gaia, in
Brevard, N.C., received a $3 million venture investment in July to
develop new products and expand its reach in the fast-growing natural
products market—and for Gaia's new investors, Scalzo's social mission
was a selling point.
"They have such an aligned
vision with the growth and development of Gaia," Scalzo says of his new
partners at TBL Capital, a venture firm in Sausalio, Calif., dedicated
to funding companies with social missions. Venture capital fueled the
companies that revolutionized such industries as semiconductors,
biotechnology, and the Internet. Now venture capitalists want to use the
same combination of financial might and business savvy to stem global
warming, create jobs, and alleviate poverty. The idea of putting
VC-style investing to work on social problems has been around for the
better part of 20 years. What's changing, VCs say, is how much interest
in social enterprises has grown—among both investors and consumers.
Indeed,
a growing number of venture investors want to back companies that, in
addition to financial returns, will also yield environmental or social
benefits—a model called the double- or triple-bottom line. "The market
has moved in our direction," says David Kirkpatrick, co-founder and
managing director of SJF Ventures in Durham, N.C. He says the
10-year-old firm, with $45 million under management in two funds, has
been investing in growth-stage companies that create jobs in low-income
areas as well as such industries as clean technology "before it was
cool."
Potential Social Impact
No one can say
exactly how much social venture capital has been invested, partly
because exactly what constitutes a social venture is hard to define.
Many VCs who are agnostic about portfolio companies' social missions
have nonetheless poured millions into ventures with other
benefits—clean-energy companies, for example—because they see market
opportunity.
On the other end of the spectrum,
nonprofit funds such as the Acumen Fund make loans and investments based
more on their social impact than on financial return. For example,
Acumen has backed A to Z Textile Mills, a Tanzanian manufacturer of
antimalarial mosquito nets, which now produces more than 16 million of
the lifesaving nets each year at a final cost of about $5 per net. But
even the line between Acumen-style enterprises and for-profit ventures
is blurring, as entrepreneurs seek new markets in what University of
Michigan professor C.K. Prahalad famously called "the fortune at the
bottom of the pyramid." Investors have formed entire VC funds, such as
the Monterrey, Mexico-based IGNIA, to back for-profit companies serving
these markets.
Joshua Humphreys, director of the Boston's
Center for Social Philanthropy, has tracked at least $7.3 billion
invested in 100 socially responsible alternative asset funds, which
include venture capital, other types of private equity, and hedge funds.
Of that, he estimates that $5 billion 10 $6 billion is venture capital.
That's still a small chunk of the VC world, which invested more than
$28 billion in 2008 alone. But it includes funds from such marquee VC
firms as Kleiner Perkins Caufield & Byers, a firm that backed Google
(GOOG), Amazon (AMZN), and Intuit (INTU), and now counts Al Gore as a
partner. "The brand-name, top quartile funds are investing in the very
space we're investing in," says SJF Ventures' Kirkpatrick.
No Need for a Tradeoff
While
some social VCs concede that they will accept lower financial returns
for social benefits—particularly those who back nonprofit ventures as
well as for-profits—others don't see the need for a tradeoff.
Kirkpatrick says SJF Ventures has the same investment expectations as
traditional VC firms, because his firm backs companies that have social
and environmental benefits "fully baked into a sustainable business
model," rather than as an add-on that they have to balance against
making money. "SJF's focus is no compromise, financial or mission," he
says.
The key difference between social VCs and
those purely seeking profits is that mission-driven investors provide
"patient" capital, says Mark Finser, general partner at TBL Capital, who
raised the $50 million fund in 2007. "The highest tolerance is in their
time horizon," Finser says. His fund, mostly raised from high-net worth
individuals, invests in "companies that will be game-changers in that
particular industry," he says.
Investors and
entrepreneurs are still trying to resolve big questions about how to
apply the venture capital model to social enterprise. For one, there is
no clear way to quantify social and environmental impact so investors
can measure their nonfinancial returns, though such tools as the Acumen
Fund's Portfolio Data Management System and consulting firms such as
Social Venture Technology Group attempt to do so. Another question for
social VCs is what constitutes a socially responsible exit—that is, how
can a portfolio company retain its social mission through an acquisition
or public stock offering? "This is an experimental phase right now,"
says Meredith Walters, senior associate at social venture firm Good
Capital in San Francisco. "People are trying different things. There's
no accepted way to do it."
But it's clear that
venture investors are becoming more interested in social
entrepreneurs—not just in their products but also in their missions.
Some industries in particular, where investors see potential for big
profits and big impact, have received more attention than others: clean
energy and green, organic, or natural foods and consumer products are
especially in vogue. "There's more attention in this space, and with
attention, more investors want to participate," says Deb Parsons,
business development director at Investors' Circle, a network of angel
investors, VCs, and foundations involved in socially responsible
investing. "It becomes less a fringe and more acceptable. In a few years
it'll be closer to mainstream."
