We are a double bottom line fund. This means that we target excellent financial returns (first bottom line) and measurable positive social impact (second bottom line). When most people learn this, they assume we are a no-bottom line fund. I’d like to explain why this is an entirely reasonable misperception, and then our theory and practice of Impact Advantage.
Deeply ingrained in our culture is the idea that we make our money first and foremost – to increase our financial freedom – and then many of us think about giving back. We do well and do good in serial – one after the other. Rockefeller did this. Whitney did this. Vanderbilt did this. Soros did this. Gates is doing this. It is a well established and time tested pattern. It also follows the very sound logic that it is actually hard work to do either (making money and making social impact), so confounding one with the other is probably a recipe for disaster. If you can’t push the boundaries of your capability and what is legal, by imposing constraints like serving your communities, decreasing your carbon footprint, hiring more women and minorities, creating jobs for low-income people, and reversing other social and environmental injustices, you are clipping the wings of your profit potential. Like it or not, this is true.
This view, of doing well and good in serial, may have tremendous precedence and indefatigable logic, but it is not the only way. We reject the idea that you have to do one and then the other in order to do either well. Of course, we’re not the only ones who believe this. In fact, there is a cottage industry of double-bottom line, or impact investors. They believe you can do well and good in parallel, at the same time. Impact investors come in all stripes and colors, have been around for ages and should probably all take offense at the simplification of being plotted on the following continuum:
Missionary < ———————— > Mercenary
Folks on the missionary side will care more about social or environmental impact and less about financial return. In their terms of art, they will “discount” financial returns in favor of greater social “returns.” For obvious reasons, a majority of impact investors tip to the missionary side. RSF in San Francisco is a great example. So is Nobel laureate’s Yunus’ Grameen America. So are most “community development venture capital” funds.
Labeled mercenary for effect, really, folks on the other side care more about financial returns and give lip-service to social impact. No one who calls themselves impact investors would want to be here, but the reality is there are plenty. It could be a mutual fund which invests in the S&P 500 minus “sin companies” (like tobacco, gambling, arms, etc). It could be a bank or pension fund which makes token amount of impact investments to order to cast themselves in a more positive light. Perfectly legit. Very common. I won’t mention any names.
So where do we sit on this continuum? We don’t believe venture capital makes much sense on the missionary side. Based on high risk and high return, the reality of venture capital returns fluctuates so wildly (from negative returns to 20%+ IRR) that “discounting” those returns by some fixed amount in favor of greater social returns strikes me as either meaningless or disingenuous. It would result in returns between even-more-negative to 10%+ IRR but with equally high risk associated. Why not take out a loan that offers some kind of impact for a certain 5-10%? You’d have plenty of options to pick from and much lower risk. A recent candidate for our senior associate position (we’re hiring) made the reflexive mistake to assume we would be happy with a 3x return on a company, vs a 10x expected by a “normal” VC. Not invited back.
We don’t see ourselves on the mercenary side, favoring financial returns and income maximization over some degree of social impact. We take social impact very seriously. We analyze it, we measure it, we underwrite against it, we are activists for it, we are evaluated for it, and we have tied part of our compensation against it. It’s my purpose that gets me up in the morning and my passion to use the efficiency of free markets to address tough social problems. Impact is not an after thought.
We’re also not in the middle, where arguably both bottom lines get equal weight. The reason for this relates to why people hear “no bottom line” when we say “double bottom line.” I believe that simply giving equal weight to returns and impact in reality means that the impact requirement will limit the return potential. I’ll call this the Impact Disadvantage. This is why limited partners who consider an impact fund will consider it a false choice intuitively: “how can you do both well?” “are you really going to do good or make money?” We got these questions frequently when raising our fund.
Instead, we aspire for a third axis: Impact Advantage. If our focus was semi-conductors or medical devices or precious metals or defense, this would limit the universe of deals significantly, but it would also give us the perceived advantage of expertise. Fewer deals, but better choices, assuming we’re any good. When your focus is social impact, however, it will limit the universe of deals and offer the additional perceived disadvantage of lower returns (as a result of assumed Impact Disadvantage). Limited profit minus charity. Double governor, double bad.
Our investment thesis is not to invest in high impact businesses because it feels good, but because impact adds enterprise value. When social impact aligns with economic returns you’ve got a recipe for above market returns. Let’s call this Impact Advantage. Harvard’s Michael Porter calls this, more generally, shared value. It is a powerful idea.
When TIO Networks, for example, shifts from a transactional model of doing walk-in bill-pay to an account-based model, they are increasing impact by moving a cash preferred customer to relationship product which is more like a bank account and able to build some kind of credit. It also decreases churn, increases up-sell, cross-sell and inter-channel (kiosk, POS, mobile and web) access. Impact Advantage.
In our space – financial services for the unbanked and underbanked – we’re basically betting that better use of technology can dramatically increase efficiencies, offer customers better prices and industry better margins. We’re also betting that establishing a new style of long-term relationship is not just possible, but good for people and good for business. Our portfolio company, SavvyMoney, is providing an alternative to instant gratification, which got many of us up to our ears in debt, in a long-term relationship that offers hope and the practical tools to not just eliminate debt as quickly and cheaply as possible, but to instill the idea of paying yourself first, which includes saving for a rainy day or an important goal, not just getting out of debt.