The 3 S’s of Impact Venture Capital — Speed, Scale and Substance
I recently put these thoughts together for an event called “Clean Portfolio Project: Bay Area Convening” hosted by Josh Humphreys and the Croatan Institute. The attendees examined the current state of the divest:invest movement, particularly in the context presented by Croatan in their September 2016 paper “Divest-Invest Clean Fifteen”, the strengths and weaknesses of current investment options and the role various asset classes play in Impact Investing. These are my thoughts on the role of Venture Capital.
Venture capital brings three critical features to the impact investing toolkit — scale, speed and substance.
A simple way to define the role of venture capital is that it provides capital to startup companies that might otherwise be difficult to fund. Often these are companies that are too risky for banks, but require more capital than friends & family or an angel syndicate can provide. Successful venture investors also provide guidance and resources.
Venture investors are looking for startup companies that can grow very quickly and get very big. These investors are sometimes criticized for pushing young companies to grow too quickly. The reason for this push is simple — startup investing is the riskiest asset class and many startups will fail. This means that a venture firm needs the winners to offset the losers. If a handful of portfolio companies fail, then the others must return 10x, 20x, 50x the original investment, usually within 10 years, for the fund to satisfy investors’ needs.
Speed and scale are baked into this asset class. When a startup first receives venture funding the teams are small, the ideas are enormous, the path to market may or may not be clear and, generally, the founders are not experienced in running large companies. The venture investor must understand speed and scale even if the founders do not. This is a difficult task, but when there is a confluence of smart and driven people, a brilliant idea and sufficient capital, anything is possible.
Possibilities are exactly what we need right now. The spectrum of environmental issues we are facing is large, the problems are difficult and time is limited. Greenhouse emissions need to be massively reduced right now. Fluorinated chemicals need to stop being made now, aquifer depletion is out of control, oceans are filling with plastic and so on and so on. We will hit tipping points in each area and there will be no turning back. It’s possible to avoid these tipping points if we address the issues with speed and scale.
The final ‘S’ is substance and this is where Impact enters the investment equation. Impact investors demand tangible results which extend beyond returns. I once heard a great statement from impact investing thought leader Lisa Kleissner. She said that you can recognize an impact company because, to paraphrase, ‘if you take the impact out of the business, the business doesn’t exist.’ This is the substance.
Impact Venture Capital brings substantive results with the speed and scale. The capital put to work grows by preventing billions of tons of CO2 emissions, cutting ocean plastic flows in half, preventing algae blooms, etc. and getting it done now. Venture Capital is inherently risky and should be considered in the context of proper portfolio management, but the impact of this growing field has the potential to be tremendous.