NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, October 27, 2011

23rd in a series of excerpts from the book “The HIP Investor” (John Wiley & Sons, 2010). See other published articles in the series here (bit.ly/gSJMtU).

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 $146 million in 235 companies (www.investorscircle.net).