Traditional VCs Get Big Returns from Positive Social Impact Investments

Can you stand to invest in ways that make the world worse? Mitch Kapor of Kapor Capital and a founder of several household names including Lotus and Mozilla asked this question of an audience of revered angel investors at HUB Venture’s Angel Squared event on May 13th. According to Kapor, nearly all investors have made deals that make them guilty as charged. Even most foundations – the very institutions that are established to do good with our money – “invest 95 percent of their endowments [with professional money managers] to help create problems that the remaining 5 percent [given to program officers] are trying to fix.”

It’s not easy to accept that we may in fact be contributing to behavior that has a negative effect on people and the planet. Yet by simply handing over our money to the stock market or a popular mutual fund, we join the herds to help perpetuate a system that traditionally rewards companies that yield the highest and quickest return. The fact is that many of us who strive to fight climate change and promote values like human health and ethical business are funding big oil, tobacco companies and casinos. Even so, isn’t this a small price to pay for a functioning economic system that provides us with jobs and rewards our investment risks with acceptable returns? After all, what would come of our world if we shifted the focus of our investments from profit to impact?

Tabreez Verjee of Uprising offered the Angel Squared crowd a glimpse into the potential for such a world. Hang onto your hats and turn a minute of your attention to findings from Verjee’s study assessing the performance of recent venture capital investments in companies that are creating positive social impact.

The study looked at the top 100 VCs which had altogether invested in 7,061 companies. Of those companies, 362 (or 5 percent) met criteria which qualified as Impact companies. Verjee compared the overall performance of these 5 percent with the remaining 95 percent of the sample pool. While his method for qualifying an impact company was not the most scientific (Verjee’s analysis was based on his self-dubbed “Goosebumps Factor”), the data is quite compelling:

• These Impact Companies (5 percent) were responsible for generating 10 percent of the overall revenue of the sample pool


• Over 6 years, their collective revenue grew by an impressive 146 percent, from $47 Million to $139 Million


• The impact companies also registered 21 percent higher revenue per employee than the non-impact companies

What’s more, they attracted 3.7 times the number of Twitter followers per capita as non-impact companies – a powerful indication that public interest and support lean heavily in favor of companies that generate positive social and environmental impact.

Keep in mind that the impact companies researched represent the top of the pyramid in terms of financial performance. So how did they do it? Often, there is a genuinely brilliant model that inherently produces both high impact and high profitability. Still, this does not explain how impact companies manage to outperform models specifically designed to maximize profit. As Mark Straub of Khosla Ventures explained, it’s often much less about the business plan and much more about the extraordinary people who are driven to maximize impact through a business model that happens to generate profitable return.

Take the example of Organic Girl, the fastest growing salad brand in the US: Prioritizing sustainability over profit at the core of their business model, the company’s bold and passionate founders skipped right past smaller retailers to knock on the front doors of behemoths like Walmart and Safeway. How about Plaza Familia, an online platform for engaging multilingual families around youth education: on paper, the company’s founders may not strike you as the quintessential celebrity entrepreneurs who grace the pages of Fast Company. Yet, because of their background, having been born and bred in bilingual Latino communities, they succeeded in building a successful product that serves to educate youth who face similar challenges.

Somehow, companies like Organic Girl and Plaza Familia are increasingly outperforming their profit-maximizing competitors both in society and financial markets. This begs the question, could social impact become necessary criteria for money-hungry venture capitalists of the future?

[Image: Creative Commons]

[Image: Organic Girl]