“Is Impact Investing the New Venture Capital?”: a Silicon Valley perspective.
In September 2018, Jeff Bezos and his wife launched a $2bn fund to help the homeless and to create a network of nonprofit preschools in low-income communities.
Details were few, but with this announcement Amazon’s CEO entered the world of philanthropy and joined the ranks of billionaires who are giving away their wealth (e.g., Bill Gates, Warren Buffett, Mark Zuckerberg).
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
For example, improving diversity can be one way to have a positive impact. According to the Global Impact Investing Network (GIIN), about 70% of impact investors apply a gender lens to their investment process.
I am sharing the outputs of a panel discussion with the Hewlett Foundation, Omidyar Network, Emerson Collective, Lime, and UpChoose.
In October 2018, I hosted and organized an event on Impact Investing at Holberton School in San Francisco for a business club that I co-founded and that gathers alumni from over 15 business schools from Europe and the U.S. (including my alma mater: HEC Paris).
Impact Investing is not new: the Rockefeller Foundation coined the term in 2007. However, a growing number of megadonors and traditional organizations (incl. banks and venture capitalists) are looking to make investments with a purpose so I decided to dedicate our next event to the topic. Also, as a venture capitalist, I believe it is important to stay up to date with the latest trends in the industry.
Thank you to Sarah Pinto, Megan Colford, Ashley Beckner, Ali El Idrissi, and Marilyn Waite for participating to the panel!
In this post, I am sharing my personal takeaway and presenting detailed information about impact investing.
The panel discussion was centered around: “is impact investing the new venture capital”?
This question came from an article by Harvard Business Review entitled Social Impact Investing Will Be the New Venture Capital, published on January 2013.
The HBR authors drew an analogy between impact investing and venture capital: just like venture capital fueled innovation in the 70s, impact investing would leverage entrepreneurship and capital markets to drive social change. They also predicted that things (in the social sector) would “change rapidly over the next five to ten years”.
Five years later and here we are in 2018. It is the perfect time to look at the progress in the impact investing space and share the 5 year trends.
My personal takeaway: it is everyone’s responsibility to drive positive change, including customers and venture capitalists.
Impact investing is not limited to venture capital as impact organizations invest across different assets, while venture capitalists make equity investments in private companies. As we can see below, private debt is the most common instrument according to the GIIN, followed by private equity, public equity, real assets, and public debt.
Interestingly, impact is not only a top concern for social organizations, but also for companies looking to attract customers and talent.
- Indeed, consumers are increasingly looking for sustainable products. A study by Unilever reveals that 33% of consumers are now choosing to buy from brands they believe are doing social or environmental good.
- Also, 88% of millennials want workplaces with social purpose according to a study by pwc (FYI: it is significant as millennials will comprise 75% of the global workforce by 2025).
These trends can be explained by the growing awareness among customers that lifestyle can make a big difference. In October 2018, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) released its latest scientific report calling on individuals and governments to take action to avoid disastrous levels of global warming. The IPCC’s models emphasize the need for people to change their lifestyle and consumption patterns to more sustainable alternatives.
As consumers, we have the power to set consumption trends. It starts by being more aware and mindful of our consumption habits.
During the panel, Ali shared his vision for UpChoose: powering a new circular consumption model by activating consumers’ role in transitioning to a sustainable future. You can find more in his Medium post: imagining a better consumption model is key to a good future.
UpChoose is re-thinking consumption through important life moments starting with birth. The company offers curated sets of baby clothes delivered to your door. You pick each set according to season and age. After your baby has outgrown its set of clothes, UpChoose connects with the next family ready to purchase your bag. You make money back while they get a slightly discounted used set.
The vision of UpChoose is to replicate this model for other life and consumption moments. It is a good example of new business models that are enabling customers to have a more thoughtful consumption: sharing, trading, renting, and borrowing, instead of buying new.
As consumers, we can also decide how our savings are invested and where our money spends the night. A growing number of banks are offering options for value-based and sustainable investments.
For example, Amalgamated acquired New Resource Bank in April 2018 before going public on the NASDAQ on August 2018. These two banks are B corps (learn more about B corps here), meaning they are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.
Following the acquisition, Amalgamated Bank committed to double the amount of assets dedicated to financing socially responsible businesses over the next two years, moving from its current commitment of $350 million to at least $700 million by 2020.
Marilyn invited us to look at sustainable banking options and align our banking with out values. You can find a shortlist per geography on her personal blog here.
Also, I strongly believe that venture capitalists have a role to play in driving positive change.
As venture capitalists, we get to decide which founders we want to work with and what companies we want to back. Before investing, the personality and ethic of the founder are key investment criteria. Not only because they are going to be key success factors for the company on the long-term, but also because we want to support the company’s values and culture. After investing, as investors and members of the Board we also play a role in promoting managerial best practices.
Let’s take the example of diversity. In January 2018, McKinsey published a study of diversity in the workplace: Delivering through diversity — with diversity being defined as a greater proportion of women and a more mixed ethnic and cultural composition in the leadership of large companies. They came to the conclusion that diversity leads to better performing organizations.
As investors, I believe it’s up to us to raise awareness among the founders of our portfolio companies. We need to make sure that diversity is part of their company culture and on top of their mind from day 0.
I am convinced that traditional venture capitalists will increasingly integrate the dimension of impact (diversity being one aspect) into their evaluation process of companies and relationship with founders. It will be key to help create successful and high-performing organizations on the long-term.
#More details on industry trend. Impact investing is a rapidly growing industry powered by investors who are looking for social and/or environmental impact as well as financial returns.
According to the GIIN’s latest figures:
- Impact investors manage over $228 billion in impact investing assets
- Impact investors invested $35.5 billion into 11,136 deals in 2017
Note: The GIIN’s report captures data from 229 impact investors collected via a survey distributed during January and February 2018. It aims to provide a snapshot of global impact investing activity.
Data show momentum in the impact investing industry: assets under management have been growing (13% CAGR) along with the number of organizations (+5%) over the last 5 years.
Assets and invested amounts
- Trend in assets: impact investing organizations who already provided data to the GIIN in 2013 grew their AUM (Assets Under Management) from $30.8 billion in 2013 to $50.8 billion in 2017, a 13% CAGR.
- Trend in invested amounts: impact investing organizations plan to invest $38.5 billion into over 11,700 investments in 2018, an 8% planned increase in the amount of capital and 5% increase in the number of deals.
Number of organizations
Let’s underline that impact investing is not new. According to the GIIN, 16% of organizations have been making impact investments for over 20 years. However, a growing number of new organizations have joined the ranks and made their first impact investment over the last 10 years.
#More details on the profiles of impact investors. Impact investors include not only philanthropists but also: investment banks, private equity firms, and venture capital funds.
Impact investing has attracted a wide variety of investors, both individual and institutional. Our panel discussion was an opportunity to learn more about the activities of 3 key institutions in the impact investing space:
- Emerson Collective: Laurene Powell Jobs (Steve Jobs’s widow) started Emerson Collective in 2004. Emerson Collective is an organization focused on social change. They leverage different tools, including philanthropy, arts, activism, media, and venture capital. In 2017, the organization made some interesting moves. Among others: 1. They purchased a majority stake in The Atlantic, a 161-year-old pillar of the journalistic establishment; 2. They partnered with the French artist JR to create two pieces of guerrilla art on either side of the U.S.-Mexico border. Emerson Collective is active in Education, Immigration, Sports, and Media. Laurene Powell Jobs’ fortune has been estimated at $20 billion.
I was delighted to have Sarah Pinto tell us more about Emerson Collective as the organization tends to stay out of the spotlight and operate anonymously.
- Omidyar Network: Omidyar Network is a philanthropic investment firm that invests in and helps scale innovative organizations to catalyze economic and social change. Established in 2004 by eBay founder Pierre Omidyar and his wife Pam, the organization has committed more than $1.3 billion to for-profit companies and nonprofit organizations across multiple initiatives, including: Digital Identity, Education, Emerging Tech, Financial Inclusion, Governance & Citizen Engagement, and Property Rights.
Ashley Becker is a venture partner in Omidyar Network’s Education initiative, making grants and venture investments, with a focus on early childhood and higher education and workforce development for parents.
- The Hewlett Foundation: Hewlett-Packard cofounder William Redington Hewlett and his wife Flora Lamson Hewlett established the Hewlett Foundation in 1966. Today, it is one of the largest philanthropic institutions in the United States, awarding over $400 million in grants in 2017 to organizations across the globe. The Foundation has programs that focus on education, environment, global development and population, performing arts, and effective philanthropy, as well as support for disadvantaged communities in the San Francisco Bay Area. In 2017, the Foundation committed $600m to its Environment Program, a five-year initiative committed to addressing climate change.
Marilyn Waite presented her role as Program Officer for Climate Finance. She leads the climate and clean energy finance portfolio and is responsible for allocating a part of the $600m budget, the Foundation’s single largest commitment to date in any area of its philanthropic work.
Beyond wealthy individuals, more traditional institutions have launched impact investing activities as well: TPG, Bain Capital, J.P. Morgan, UBS.
#More details on the variety of impact investments. Impact investments are not limited to a specific asset class or sector, and can also be the target of traditional investors.
Impact investors are challenging the assumption that development is to be reached by philanthropy only. They aim to prove that their investments can achieve both a financial return and a positive impact.
Holberton School hosted the event and is also a portfolio company of the Omidyar Network. It is a project-based alternative to college for the next generation of software engineers. No up-front tuition is required, and graduates aren’t asked to pay back until they land a high-paying job (>$40,000) at a tech company. In April 2018, the 2 co-founders Julien Barbier and Sylvain Kalache raised $8.2m of Series A venture funding to open a new school in New Haven and expand their operations.
Omidyar Network participated in the round, along with venture capital investors like AME Cloud Ventures, Partech Ventures, and Reach Capital. Holberton School is a good example of how impact investors can back the same companies as venture capitalists (or venture capitalists can back the same companies as impact investors).
Impact investments can also set trends and attract capital to areas where traditional investors would usually not invest. For example, Ali El Idrissi of UpChoose shared his previous experience at J.P. Morgan when he invested in LeapFrog Investments, a private investment firm that invests in high-growth financial services and healthcare companies in both Africa and emerging Asia. J.P. Morgan was the first institutional investor to back LeapFrog. Today, a few more companies have decided to invest as well.
This leads us to the question of financial returns. According to the GIIN, impact investors target a range of financial returns, from a concessionary return of capital to competitive market rates. They show that target returns vary according to the investor’s organizational structure, investment strategy, and impact strategy. Interestingly, most for-profit fund managers target market rates of return.
#More details on impact assessment. Evaluating impact matters, and most investors set social and environmental impact targets, however it represents a challenge for the space.
Understanding and evaluating the impact of portfolio companies is a priority for impact organizations, however it comes with its own challenges.
The first reason for this is that impact investors are working with companies that are building the future of their industry. Therefore, it can be challenging to envision impact, its scale, and the best way to measure it. Investors have to rely on their hypothesis about what the company is going to look like in the future.
The second reason is availability and access to data. For example, Lime aims to change the way people move around in cities. To be able to operate, mobility service operators need to be able to show to cities what their contribution to the local transportation ecosystem is going to be: reduction of traffic, facilitated access to public transit, reduction of pollution... One can quickly fall into a chicken and egg problem: to show value, you need data; to have data, you need to operate a service. I conducted research on public-private partnerships at UC Berkeley and have seen this challenge with the launch of carsharing services in cities. You can read more about the findings here.
Megan Colford shared with us the importance of gathering data and working collaboratively with cities to advance regulation. Indeed, scooters are new and cities want to be part of the conversation. Lime’s objective is to improve mobility and help cities achieve their targets: serve low-income areas, improve access to public transit. In July 2018, Lime published their one-year report to better explain the impact that scooter and bike sharing services are having across the U.S. and Europe.
The GIIN found in its 2018 Impact Investor Survey that impact investors demonstrate a strong commitment to measuring and managing impact: most of them set impact targets for their investments. Their report also highlights that impact investors are using proprietary metrics and/or frameworks that are not aligned to external methodologies.
As mentioned, impact investing can’t be limited to venture capital as impact organizations invest across a variety of assets, while venture capitalists make equity investments in private companies. However, I believe that venture capitalists will be increasingly integrating the dimension of impact in their practice (e.g., diversity).
I hope you found in this article food for thought and practical advise on how to have a positive impact, starting with your daily consumption choices. Please let me know if you decided to change your bank or take any other concrete action, and feel free to share your opinion by commenting below.
Clara is an Investment Professional at Hewlett Packard Ventures where she leads Internet of Things and Edge Computing investments. She is based in San Francisco, CA.
