The July issue of the Venture Capital Journal has a great article on the rise of social venture capital funds. These funds, which include Good Capital, TBL Capital, Equilibrium Capital, and New Cycle Capital are growing at an unprecedented rate. According to the article, seven new firms are on track to raise $750 million this year.
I’ve been following these institutions pretty closely for the past year as I’ve flirted with starting a number of blended value organizations that straddle the non-profit-for-profit line. Last year, we invited Kevin Jones, one of the co-founders of Good Capital, to speak at the annual Global Engagement Summit at Northwestern University. In an informal session on social enterprise and social entrepreneurship, Kevin shared his enthusiasm for the emerging class of organizations that blend social and financial benefit creation. Notably, his enthusiasm did not reflect the sometimes arrogant assumption that the answers to the problems of the nonprofit sector are for all nonprofits to become more businesslike. Instead, he was thrilled about the idea that nonprofits – who have, in his estimation, a somewhat different set of constraints and challenges than for-profit organizations – could control their own financial destinies rather than living under the tyranny of grant writing and reporting.
This article is a must-read for those interested in the emergent “blended value” or “double- and triple-bottom line” space. Some of the most interesting points:
- Groups have been flirting with this type of mission-focused venture funding since the late 1980s, but its only in the last few years that the idea has really begun to take hold. Socially responsible investing now makes up 11% of US assets under professional management, and grew 18% between 2005-2007.
- The key actors in the emerging space are wealthy individuals, community-development focused banks, and foundations. According to Professor Greg Dees of Duke’s Fuqua School of Management:
“Social venture funds argue this is a way [for foundations] to kill two birds with one stone,” says Dees. “Instead of making money so you can give money away, here you achieve your mission as you make money.”
- Its clear the mainstreaming of the “sustainability” discussion is helping build momentum for these type of double-bottom line investments. Sustainable food and clean technology and energy are some of the most invested areas.
- Most funds suggest they’re willing to stick with the organizations they invest in for longer than a traditional VC might, but there is debate about whether funds are willing to invest in funds that have higher social impact but return rates slightly lower than market value. Many fund managers assert confidently that they can return at or above market rates, but Jones notes: “Nobody is investing here first for the money.”
- With a paucity of examples to draw from, there are major questions about what makes for a successful investment “exit.” Many of the larger companies in a position to acquire smaller, socially-conscious businesses don’t share the same social goals. Unilever’s acquisition of Ben & Jerry’s ice cream demonstrates the trouble that this can cause.
- There is still a major question, untouched by this article, about how double- and triple-bottom line businesses measure their social benefits. It would seem to me that portfolio managers who are making cost-benefit analysis about which socially-beneficial organizations they wish to invest in will want to have the clearest idea possible of both the economic and social return they’re looking for.
For those interested in the field, Kevin Jones’ Good Capital and a number of their partners will be hosting a conference in October:
Social Capital Markets 2008, focused on “Bringing together the people who are accelerating the flow of capital to good.” The conference will have different tracks focusing on social entrepeneurship, clean technology, microfinance and more.