Doing good, doing well

TheDeal.com
by Katherine Goncharoff

October 24, 2003

Braemar Energy Ventures is a $50 million venture capital fund that targets energy technology startups it hopes will produce superior returns while helping improve and protect the environment.

Fleet Development Ventures, a $100 million fund, aims to beat average stock market returns by financing technology, media and communications startups founded and managed by minorities and women.

And the Program Venture Experiment, or ProVenEx, a $20 million VC fund operating under the auspices of the Rockefeller Foundation, provides equity financing and loans to businesses that create jobs in low-income communities or advance the fight on AIDS. Its target returns: 6% to 30%.

Three funds make contrasting types of investments, but all have one thing in common. They all categorize themselves as “double bottom line,” or DBL, private equity investors, a category that appears to be gaining in popularity among VC investors.

The concept of socially conscious investing is hardly new. But it took root primarily in the mutual fund world, where the notion was a draw for retail investors. Now some venture funds are making those factors a priority. But while socially conscious mutual funds were often seen as compromising on returns, most of the DBL funds say they have no intention of sacrificing profits for a social purpose.

DBL investing was the focus of a conference this month at Columbia Business School, where Professors Catherine Clark and Josie Taylor Gaillard have been studying the trend. In a report, they identify 59 startup venture capital funds and organizations that make early-stage equity investments in for-profit ventures with the dual intent of making a financial return while reaching a positive social or environmental goal.

“First and foremost, all the DBL funds included in the survey act like traditional VC firms, aiming for financial returns first and foremost and ranking their social missions as secondary goals,” Clark says.

The 59 have more than $2.6 billion under management and more than $1.9 billion of total capital available for companies with social or environmental purposes.

According to the study, the DBL venture investors differentiate themselves from so-called socially responsible investors who do not consider financial success their primary goal and who tend to bar certain kinds of investments.

The DBL investors say profits are a primary consideration, and they emphasize types of investments they seek, rather than defining their strategies by what they won't invest in.

As a result, they actively seek investments in startups where the “personal values or ethics of the entrepreneurs” are in sync with the goals of the fund, or the products and services match the fund's social and environmental goals — say, new technology that can reduce toxic emissions from cars.

DBL is still a pretty broad concept. Much of biotech and many computer technologies arguably are socially beneficial. As, apparently, are yogurt and hiking parkas (see table). So what is the essence of DBL?

Participants at the conference acknowledged that DBL investing is not clearly defined.

In general, DBL funds invest in a wide range of sectors including health, computers, energy, communications, education and food and agriculture.

“Without a doubt, we are very fragmented and diverse investment area,” says George Hibbard, director of Fleet Development Ventures, a unit of FleetBoston Financial Corp. He describes Fleet Development as a profit-oriented fund seeking justice for women and minorities. (Full mission statements for the 59 funds surveyed are posted on a site developed by the Columbia team: www.riseproject.org.)

The survey breaks the funds down into four types:

  • Mainstream venture capital funds that have made a commitment internally to devote some portion of their capital to companies with explicit social or environmental goals. “I would put traditional funds such as Draper Fisher [Jurvetson] and Kleiner Perkins [Caulfield & Byers] in that category,” says Tony Lent of EA Capital LLC, an adviser to the Columbia survey.
  • Industry change-focused VC funds such as Braemar Energy Ventures, RockportCapital Partners LP or the NewSchools Venture Fund that have formed funds that are inherently pro-environment or pro-social.
  • Leadership or development-focused VC funds that invest in businesses owned or managed by particular groups, such such as women or minorities. The Fleet Development Ventures fund employs this model.
  • Nonprofit social investment funds that exist within private foundations and make equity investments that fulfill the nonprofit's mission. ProVenEx falls in this group.

The study found that DBL funds have invested more than $497 million from 1999 through 2001 in 426 deals, of which 343 were in DBL areas. DBL fund investments represented about 6% of the overall VC market in 2002.

Is it really possible to earn top returns while doing good?

It's too early to tell, the Columbia group concluded. Because the DBL category is new, there is no good data on returns to date. But there's no shortage of ambition when it comes to profits.

Forty-two percent said they were aiming for internal rates of return in the 21% to 35% range, and an additional 44% said that they aim for returns over 36% — far above most venture returns in recent years. (Nearly half of the funds in the DBL survey are currently raising money.)

Despite the lack of hard IRR numbers, Robert Bowers, an adviser with Cambridge Associates LLC, a firm that advises pension funds and high-net-worth families on investments, says that his firm is receiving more inquiries about DBL-type investing.

A growing percentage of his clients view DBL investing as a way to address social problems while earning attractive returns.

“The big challenge moving forward will be in determining the balance between goals,” Bowers says.