Venturing into Growth Industries with High-Impact Capital

23rd in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

How do impact investors spur long-term innovation? Through garage startups, which can also be sexy. That’s where William Hewlett and David Packard originated what’s now known as HP, or Hewlett-Packard (NYSE: HPQ). Google’s Larry Page and Sergey Brin followed in that tradition as well (NASDAQ: GOOG).

Some new ventures are funded by sweat equity (the founder’s time, energy, and sleepless nights) and sometimes financed with credit card debt. High-potential ventures can be funded by third parties; either angels, who fund at the early idea stage, or venture capitalists who typically want to see an early track record of sales, unless the team created a successful firm together previously. Angels put in tens or hundreds of thousands of dollars typically; venture capitalists sometimes put in tens of millions.

Most individual investors do not have access to these deals unless they make $200,000 or more in annual income (or $300,000 if a married couple) or have a net worth of more than a $1 million. The Securities and Exchange Commission refers to these investors as accredited, which also means that these investors are thought to be savvy enough to understand the risks as well as the potential for loss of all their capital. Back in the 1990s, a creative firm called MeVC sought to bring venture capital opportunities to the public, but it closed to new everyday investors after the 2000 stock market crash.

Individual investors seeking early-stage and high-growth ventures usually gather in angel communities like multi-site networks including the Keiretsu Forum or regional meetings such as the Band of Angels in Silicon Valley, California. In the United States, Investors’ Circle, recently merged with SJF Institute, has become a leading community for accredited investors seeking human impact plus profit. Twice yearly, members gather to hear the investment pitches of for-profit companies also delivering socially beneficial or eco-friendly products and solutions. Since 1992, Investors’ Circle members have invested more than $150,830,000 in 235 companies.

In 2007, Investors’ Circle supported the launch of the Patient Capital Collaborative, a venture capital fund seeking human impact and profit. Led by an experienced venture capitalist, Sky Lance, this fund also taps the expertise of its investors, who perform research, investigate risks, and contribute to the decision of how much to invest. The current portfolio is invested in firms seeking impact as well as profit, including nature-based health products, renewable energy, organic food production and green chemistry solutions.

Similar funds like Funk Ventures seek out early-stage ventures that have a quantifiable and valuable social or environmental impact. According to Fran Seegull and Andy Funk, financial returns are closely tied to higher human impact. One of its portfolio companies, Prolacta Bioscience, is a venture that is pioneering human milk fortification in order to better provide nutrition products to critically ill and premature infants. Cow-milk based formulas are not as effective on premature babies, which can lead to longer stays in the neonatal intensive care units (NICU). This, in turn, increases health system costs. Prolacta’s products can reduce the recovery of NICU babies, aligning the impact of improving infant health, reducing the cost burden on the health care system, and generating revenues for the company.

Other venture firms actively seeking human impact and profit are appropriately named: Triple Bottom Line Capital, seeking positive returns of people, planet and profit, founded by Mark Finser and managed by Joe Glorfield; Double Bottom Line Investors, which emerged from a JP Morgan Chase pilot fund, which is led by Nancy Pfund; and Good Capital, which also organizes the annual Social Capital Markets conferences.

Creative partnerships have been forged among venture investors and corporations too. Wil Rosenzweig, a co-founder of Republic of Tea, created a $30 million early-stage investment firm called Physic Ventures. With Rosenzweig’s focus on wellness solutions, as well as healthier consumer food and beverages, he discovered a unique partner. Global consumer products conglomerate Unilever (NYSE: UL), which also owns Ben and Jerry’s Ice Cream, was seeking to invest in these high-growth markets. Unilever offered to become an anchor investor, including sharing corporate experts in these markets, resulting in a $159 million venture fund. Physic’s portfolio prioritizes firms pursuing the four “P”s: “prevention, prediction, personalization, or performance.”

Silicon Valley legends are also investors in firms that aim to be HIP. Vinod Khosla, who cofounded Sun Microsystems, has focused on technologies and solutions that reduce energy, carbon, and emissions. Khosla Ventures invests $100,000 to $20 million in ventures where they see “innovative bottom up methods solving problems that now seem intractable: from energy to poverty to disease. Science and technology, powered by the fuel of entrepreneurial energy, are the largest multipliers of resources we have to solve our many social problems.” Khosla Ventures’ Web site also lists white papers like “Breaking the Climate Deadlock: Scalable Electric Power from Solar Energy” and “Think Outside the (Coal) Pits”.

John Doerr is a managing partner at the legendary venture firm Kleiner Perkins Caufield Byers, which funded Google, Amazon, and Intuit. KPCB established a $500 million Green Growth Fund to fund growth-phase companies in green technologies, information technology, and life sciences. “We urgently need to advance our green-tech industry at a speed and scale commensurate with the challenges we face,” said Doerr in 2008. “We believe green technologies are both the key to solving our energy crisis and a tremendous business opportunity.” Former U.S. Vice President Al Gore is also a partner at Kleiner Perkins, and his Generation Investment Management firm exchanged $100 million into the Kleiner Perkins fund, while the venture firm invested in Generation’s public equity fund.

In our next feature, we will continue to profile all asset classes for impact investing, and learn about sustainable real estate, including forestry.

To navigate this series, please use this table of contents.

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HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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