Crunchbase News, 2 Feb 2018: https://goo.gl/i57ddu
Traditionally, impact investment has not been the cool kid in venture capital. But that’s slowly changing. More investors recognise that making money and making a positive impact on the world doesn’t have to be mutually exclusive.
Part of the reason for that is millennials have grown up with a more socially responsible mindset than previous generations. As such, the businesses they are starting, and want to work for, tend to fall into the category of making a social impact.
Intrigued by the concept of impact investing, we set about trying to identify venture capital funds focused exclusively, or almost exclusively, on this type of investing. We looked to the East Coast, West Coast, and in between for examples of these types of firms.
Here’s what you need to know about these firms and why they believe impactful startups will outperform traditional venture investments.
The ROI On Funding A Cause
Last year, Bain Capital launched a $390 million double impact fund. Also in 2017, private equity firm TPG closed on its $2 billion “The Rise Fund.” Michael Baldinger, who joined UBS Asset Management as head of sustainable and impact investing in 2016, told CNN Money that impact investing is “a $250 billion market” that is “growing fast.”
“It might really be a game-changer for the finance industry,” he said.
There’s also the fact that impact investing may be as, or even more, lucrative than traditional investments. Cambridge Associates in 2015 published its first impact investing benchmark.
The study found that returns of impact investing funds are comparable to those of conventional funds. And, in some instances, investment performance has been even stronger than returns experienced by other funds.
And following are the funds chasing high returns by funding impactful companies.
Impact In The Midwest: The Impact Engine
People are becoming increasingly concerned with whether the dollars they invest in or spend have impacts that might be positive or negative.
Chicago-based The Impact Engine started as an accelerator fund in 2012 and was founded by Linda Darragh and Jamie Jones. By 2015, it had transitioned to become a venture firm focused on putting seed and Series A dollars into supporting companies that are making a positive impact.
“We see a lot of need and opportunity focused on impact companies but some challenges in getting dollars flowing into impact investment vehicles and companies,” said Impact Engine Partner Tasha Seitz. “Our broader mission is to figure out how to connect capital to opportunities.”
The Impact Engine closed a $10 million fund in 2015 and is approaching making the last couple of investments from that fund. It has 19 companies in its portfolio, and the fund has a particular focus on education and healthcare. OpenTable Founder Chuck Templeton serves as the firm’s chairman.
“We’re looking for companies where the product or service the company provides directly creates impact,” Seitz told Crunchbase News. “We really want there to be as much as alignment as possible between revenue and the impact that is created. We’re very much digging into what a product does and the benefits it has for customers.”
Portfolio companies include New York-based First Access, a fintech company offering a smart data platform for financial institutions in emerging markets, and North Hollywood, Calif.-based ConsejoSano, which provides healthcare navigation services for native Spanish speakers.
The firm doesn’t stack rank social impacts because the sectors it invests in are “very diverse,” according to Seitz.
“It’s difficult to compare one to the other,” she said. “But we do ask ourselves if we think their impact is meaningful, and we do look for companies that are serving more low and middle-income communities.”
The premise behind the latter, Seitz added, is that an edtech company that is only selling to more affluent suburban schools, for example, is only exacerbating a gap between wealthy and poor students rather than closing it.
“We’re very mindful of that,” she said.
The Impact Engine also believes that companies that are mindful of impact are going to be long-term outperformers for investors.
“Customers are going to make purchase decisions based on the impact companies have,” Seitz said. “And investors are starting to care about that too. I think that’s partly driven by demographic shifts in the market and around talent in particular, as people are becoming increasingly concerned with whether the dollars they invest in or spend have impacts that might be positive or negative.”
Impact On The East Coast: Social Impact Capital
We think it’s the golden age of impact VC deals
New York-based Social Impact Capital specializes in investments that can deliver what it describes as “top decile returns” in addition to a positive social impact. The firm focuses on the “essentials of human need” such as energy, water, food, health, environment, education, housing, access to capital, and social justice.
Founded in 2016, Social Impact Capital works with family offices, high net worth (HNW) individuals, endowments (university and foundation), and funds (pension and sovereign wealth) by helping them make direct investments in fast-growing companies. The firm is not able to comment on any potential fundraising at this time.
But Sarah Cone, the firm’s managing partner, told Crunchbase News that Social Impact Capital wants to change the metrics that an entrepreneur actually uses to run their company.
“One way I test for this before investing is to ask myself, ‘What if the most evil company in the world acquired this company? Could they end the social good component without killing the business entirely?’ If the answer is yes, then we wouldn’t invest. We’re looking for companies where the social good is inherent to the business model,” she said.
While Social Impact Capital does think about unintended consequences, it doesn’t exactly stack-rank various social impacts.
“There’s a lot of good to do in the world,” Cone said. “In general, we’re looking to invest in companies that will enable structural change in the broken systems that cause various social and environmental problems.”
Despite being active in the field of social impact, the firm tends to be cynical about social impact measurement, according to Cone.
So it invested in a company called iPar, which offers SaaS for social impact reporting that Social Impact Capital hopes all VC funds will begin to use.
San Francisco-based Ligandal is also one of Social Impact Capital’s portfolio companies. Its goal is to lower the cost of developing human genetic therapies to $100 (currently it is around $100,000, according to Cone) while also reducing the time to create a personalised genetic therapy to days, as opposed to months.
“As an investment space, we’re very focused on technology and infrastructure to bring the cost of healthcare down,” she said. “In general, we think it’s the golden age of impact VC deals. The deal flow is incredibly robust and exciting, and there are relatively few VC firms investing in the space.”
Impact In The West: Better Ventures
Mission-driven companies have a greater ability to attract and retain talent
For a long time, he said, the general perception of impact investing was something that necessitated underperforming or below market returns.
“You used to get funny looks when you mentioned impact, or mission-driven,” Selke told Crunchbase News. “Like ‘Whoa, that’s nonprofit or treehugger land.’”
But these days, a growing number of investors are realising you can invest in and make money off of for-profit businesses that are solving social problems.
Better Ventures was originally founded in 2011 by Selke and Rick Moss. Like The Impact Engine, it started as an accelerator program but turned into a venture firm by 2014. The firm raised $21 million in its first fund, investing in 18 companies so far. It plans to launch another fund this year with a target of $35 million.
“Our thesis is that mission-driven companies outperform the market,” he said. “We’re backing entrepreneurs that are intrinsically motivated to succeed in ways besides making money. Millennials want to invest in and work for these kinds of companies. And mission-driven companies have a greater ability to attract and retain talent.”
Better Ventures investments fall under three themes: opportunity—which is inclusive of education technology, gender equality, and future of work—health, and sustainability.
Portfolio companies include BookNook, an Oakland-based startup focused on combining technology and educational expertise to improve literacy for students. K4 Connect, a Raleigh, N.C. company serving older adults and those living with disabilities via its integrated Technology Delivery Platform, is also a part of the Better Ventures portfolio.
Better Ventures has promised its LPs to report metrics on a quarterly basis, and it works with its companies to develop metrics on a company by company basis.
Selke admits having such narrow investment criteria limits his firm’s options.
“But it’s a good restricting of options,” he said. “There’s never been a better time to back these kinds of companies. People seek us out because they want to work with a fund that cares about their social metrics. That gives us a competitive advantage over traditional investors.”
Selke also believes the fact that so many mainstream firms such as UBS, Bain, and TPG are entering the space indicates that impact venture firms are on to something.
“Those mainstream companies would not be getting into the space if they didn’t see an opportunity to make money,” he said.
Impact In Texas: Notley Ventures
You can invest dollars to create a machine for good
Dan Graham and his wife, Lisa, started Austin-based Notley Ventures with the notion of providing financial, human and educational resources for organisations that are trying to solve social problems at scale.
While some foundations have been doing it for some time, Graham believes the category of venture impact investing is relatively new but growing.
“It’s the difference between giving a man a fish and teaching him how to fish,” he said. “You can invest dollars to create a machine for good that has a better return than just putting a Band-Aid on a problem.”
To Graham, the ROI on a venture impact investment “will go so much farther” than a straight-up philanthropic investment or for-profit investment in a company with no social impact mission.
Rather than raise money through a fund, Notley Ventures operates by pulling funds together when it finds opportunities in which it wants to invest. It has also invested in other funds focused on impact investing, such as in Washington, D.C.-based Village Capital, which finds, trains, and invests in entrepreneurs solving specific social problems from energy efficiency to the health-wealth gap.
Other portfolio companies include Austin-based Verb. The startup runs social entrepreneurship competitions to accelerate thousands of ventures around the world with funding. At the same time, Salt Lake City, Utah-based Recursion Pharmaceuticals is creating a tech-first life sciences company.
Notley doesn’t just exclusively invest in impact companies. Out of its 60 total investments, 25 have been in companies with a social impact mission.
“As the space matures and there are more opportunities, we are interested in moving more dollars that way,” Graham said. “Whenever we have an opportunity to make a decision of impact versus non-impact investing, we always pick impact. But we’re also looking to maximize our potential impact investment, so we’re open to other opportunities.”
Looking ahead, Graham envisions more investors will shift their money to impact investments.
“While we still have a long way to go to develop a mature ecosystem around this,” he said, “I do think there are clearly benefits on lots of different angles. And more entrepreneurs are just starting to realise there are these pools of capital out there for them.”
Making the world a better place and making money can go together, as these firms are proving. Assuming millennials continue to make social responsibility a priority when it comes to where they work, what they buy, and who they support, it’s safe to say that this fledgling investment space has the potential to grow in a big way.