Since 2001, impact VC firms have raised $13 billion to invest in companies that provide a social or environmental benefit as part of running their for-large-profit business. Indeed, $10 billion of that has been raised since 2010 alone. Impact VCs are VCs first that intend to generate market-beating financial returns because of, not in spite of, an impact-oriented investment thesis.
To date, these impact VC funds have yet to be categorized as a venture trend. Too often they are mistakenly lumped in the general impact investing category, a very broad space of investors — from foundations to private equity to wealth management — that seek social or environmental impact, but for near-market, sub-market or even net-zero financial returns. Impact VCs focus on early-stage and mid-stage private businesses and most have institutional LPs that are expecting 3x or higher returns on their investments.
Similarly, the for-large-profit businesses in which they invest, which have been identified as a trend, do not have a consistent moniker that encompasses the whole sector. In the last 30 years, these companies have been called double-bottom line, triple-bottom line, ESG, social enterprise, benefit corporations, B Corps, profit-from-purpose and more, which are all relevant, but don’t cover the whole category.
Of those, I prefer profit-from-purpose, as it makes clear there is a higher purpose to the company, but profit always comes first. However, if I could wave my wand and assign the sector a catch-name akin to fintech and SaaS, I would assign the name GoodBusiness to the sector of for-large-profit businesses that also provide a social or environmental benefit.
15 years of impact VC fundraises
I’ve prepared what I believe is the first comparison of all impact VC funds. It includes data on fund size, fund count and age, GPs, LPs, relevant investments and exits and the firms’ mission statements. I include only funds investing in startups (seed to late-stage) for top-quartile returns that explicitly state their profit-from-purpose investing strategy and have a portfolio that is at least 50 percent invested in GoodBusiness.
Impact venture capital will not be overlooked or misunderstood for long.
While many traditional funds invest in businesses with social or environmental missions, if backing GoodBusiness companies is not their primary mission, I did not include them. Likewise, I did not include family funds, even those dedicated to impact, if it was not possible to extract what percent of the fund is dedicated to direct startup investments.
Impact venture capital will not be overlooked or misunderstood for long. DBL Partners (as in double-bottom line) created one of the earliest traditional impact VC funds in 2004, and has had big exits in Tesla, SolarCity, eMeter and OPX Bio, among others. Other investors have had healthy exits with 7th Generation, FLS Energy, Nest Labs, SolarBridge, 2U, Chariot, SKS Microfinance, Ujjivan Financial Services and more. This investment sector is also growing quickly; $3 billion in new funds (TPG Rise and Breakthrough Energy) were announced recently.
Broad-focus impact VC funds
Jeffrey Skoll’s six-year-old Capricorn Investment Group is currently the sector behemoth, with more than $5 billion raised in 24 funds. Al Gore and David Blood’s roughly $2 billion Generation Investment Management fund is very active in later-stage deals as part of their $12 billion private equity fund. Both are very broadly invested and have had some notable exits. Capricorn, notably, is a certified B Corp itself, making it, I believe, the financially largest B Corp in the world.
The sector started taking form, however, with the launch of a number of traditional VC-style firms whose total fund raises range between $100 and $900 million. Elevar Equity, LeapFrog Investments, Collaborative Fund, Obvious Ventures and Renewal Funds all invest broadly in GoodBusiness.
These funds invest from seed to late stage, and are standing in to back businesses much earlier in their trajectories than Capricorn or Generation. We should expect more fundraises and aggressive investing from this group, though some are still waiting on their first GoodBusiness exits. In the sub-$100 million category, City Light Capital, Vast Ventures, Better Ventures, Radicle Impact, Fifty Years and Pi Investments (part of a family fund) also are making broad sector investments.
The hardest impact VC to pin down is where the founders are the sole LPs. They tend to be discreet about fund totals, are unrestricted in how they use their money and are unconcerned about future fundraisers.
Omidyar Network is the oldest and most well-known. They allocate their funds for a spectrum of financial returns, ranging from commercial (VC returns) to sub-commercial (impact investing) to outright charitable donations. The Chan Zuckerberg Initiative will be doing the same, but is expected to eventually have $45 billion in funds, enough to possible transform entire ecosystems.
Millennial and modern shoppers have high expectations for the companies they patronize.
Laurene Powell Jobs’ new Emerson Collective hasn’t exposed how they’ll be using her $20 billion net worth (so they’re not included in my analysis), but have stated commitments to supporting entrepreneurs creating positive social change. Kapor Capital is a dedicated VC fund that works closely with their Kapor Center for Social Impact. Freada Kapor Klein is very clear about how they leverage the Kapor Center to guide the Kapor Capital investment team to determine which potential investments targeting America’s underrepresented STEM students and entrepreneurs will have the most commercial potential.
The enhanced VC opportunity for these funds is that if you can catalyze change on first-order problems using donation dollars, you’re ideally positioned to reap financial returns by backing the entrepreneurs and businesses that will best serve newly opened marketplaces.
Impact VC sub-sectors
The largest industry sub-sector centers around protecting the earth’s environment. Reducing or reversing climate change, alternative energy and resources, improving water quality and access, decreasing waste and improving the food system are embraced by many funds. Breakthrough Energy, a new billion-dollar fund backed by a who’s who of tech billionaires, is focused exclusively on alternative energy solutions. Another estimated $300+ million has been raised by Closed Loop Fund (recycling), Prelude Ventures (climate change), EFW Partners (energy, food, water) and Closed Loop Capital (food and agriculture).
Another $1.25 billion is dedicated for businesses serving the billion people forecast to enter the middle class in emerging markets this decade. LeapFrog Ventures, Elevar Equity, Gray Ghost Ventures and Khosla Impact are focused on large frontier markets opportunities. For two years I served as COO of Tala, a rapidly growing mobile-based financial service provider targeting the underserved in emerging markets. I experienced firsthand how fast a business can grow by smartly offering fair and convenient services to people who have been mistreated or ignored entirely by existing providers. This sector will achieve exceptional returns because of the combination of massive markets and a relative dearth of investment capital.
There’s also a growing sub-sector of businesses providing high-value products in Western economies. These funds are confident that millennial and modern shoppers have high expectations for the companies they patronize. They want to know management is ethical, employees are treated well, supply chains are clean of exploitation and that the environment is respected in the creation of their product.
Patagonia, 7th Generation, Ben & Jerry’s and Dansko are all showing, it pays to be a B Corp. Both TOMS Social Entrepreneurship Fund and Patagonia’s Tin Shed Ventures have grown out of ethically minded B Corps and invest in early- and mid-stage GoodBusiness consumer-focused startups. Core Innovation Capital is focused on providing fair and trustworthy financial services, a sector historically known for deceptive pricing, unethical management and bad customer service. Fledge is the first B Corp-oriented accelerator.
The newest and smallest sub-sector is focused on good governance and supporting unrepresented founders and entrepreneurs. Village Capital, Impact America Fund and Backstage Capital are all seeking out and supporting businesses that are often overlooked by traditional VC. From their perspective, their investing is the impact. They seek to jump-start new classes of business people that will transform society by opening new opportunities for more unrepresented business leaders in the years to come.
The concurrent global trends of handheld internet connectivity, digital money and wallets, socio-economic turmoil as we exit the Industrial Age, global climate change, rapid population growth, broadening financial inequality and the rise of the global middle class will continue to expose social and environmental problems and opportunities that will allow for different types of businesses than industrial capitalism created. Elon Musk is the most admired leader in technology. Unilever is rumored to become the world’s largest publicly traded B Corp. The Chan Zuckerberg Initiative shows that investing LLCs, not charitable foundations, are how billionaires will give back.
Even Dick Cheney can see the relentless innovation in alternative energies is going to swamp carbon-based industrial in our lifetimes. And even a factory worker can see that robotics, automation and AI are going to decimate a once-reliable job sector, while climate change may affect many others.
Funds that back the alternative energy trends, alternatives to natural resource extraction and improved agriculture will all do well. Funds that back products and services for the large underserved classes will do well. Funds that focus on creating the job sectors of the future will do very well.
While I expect many of the above impact VC funds to expand and raise more funds, and I expect more funds to arrive globally, I expect dedicated sector expansion will slow in 10-15 years. The change will come when traditional VC funds expand their investment theses to include GoodBusiness, and raise funds and bring on partners to focus just on that.
While President Trump’s buy-American, pro-fossil fuel, pro-heavy industry, anti-science and climate-denial platform will get the short-term attention, there is no stopping the global trends I listed above. Now’s the time to invest in the long game.Featured Image: Gonzalo Aragon/Shutterstock