Investing for good has VC doing well, thanks
Monday, October 24, 2005
’Social investing’ is getting second looks.
Priya Haji has a vision. And it’s big.
At one level, she is building a bags-and-bangles business to compete in the $55 billion American gift market. On another, she sees a world where every consumer product is made by someone who is treated fairly. And she’s creating the technology to measure that.
The serial entrepreneur and 2003 graduate of the Haas School of Business at the University of California, Berkeley, launched a company last year called World of Good, which sells handbags and other gift items made by women in developing countries. What makes the enterprise unusual is its very keen focus on an already profitable bottom line, accompanied by a social mission.
That includes treating every craftswoman fairly, while also creating a nonprofit subsidiary that returns 10 percent of all profits to the communities in which it works. World of Good is also testing a Fair Trade Pricing Calculator to help companies assess whether their products meet fair trade practices.
And it is educating American consumers about those practices.
“Consumers are trying to choose products that underlie their values,” Haji said. “People want to know when they wear something or give something as a gift, that there’s more value to it than just the bag itself.”
Just as Haji has found with consumers, investors are taking a second look at the second bottom line of the companies they fund. While the numbers are still small, so-called social investing has leaped in the past few years from the realm of a few do-gooders and mavericks to a new level of visibility and emergent legitimacy in the world of investing.
For some, that means creating a company that gives back to its employees. Others use it to support communities overseas. Still others would put green technology in the same pot.
Whichever the definition, this goes far beyond responsible business.
“It’s about businesses that define their success in terms of not just one bottom line, but also social and environmental impact,” said Amber Nystrom, founder and executive director of Social Fusion, a business incubator dedicated to growing the number and quality of social entrepreneurs globally. “It’s about having your heart, head and wallet all headed in the same direction.”
And, she says, there’s nowhere in the planet that’s more exciting in this field right now than the Bay Area.
Anathema to venture capital
It’s also happening fast.
Two years ago, Nystrom realized that the businesses in her incubator were having trouble raising capital, regardless of the merit of their business models. Falling outside the purview of most angel investors as well as most charitable donors, social entrepreneurs were stuck for funds.
So she approached Lucy Reckseit, an attorney who is in-house counsel to the VC Task Force in Santa Clara and has been serving as part-time legal counsel to venture-backed companies since 1998. She hoped Reckseit could help connect them to the money.
But Reckseit, who is now deeply involved in this area, said that connection just wasn’t possible then: “It was so anathema to what (VCs) were doing.”
A lot has changed in those two years.
Today, several venture funds are investing in these companies. Business schools, which have been supporting the concept for many years, have launched awards that are starting to get some financial teeth. And the success of some of the early leaders in the field is helping prove the model can work.
Nystrom said the infrastructure, too, is starting to come together.
She pointed to CRF 17, the first community investment fund that Moody’s rated recently after saying for years that it could not provide such a rating. The top half of those companies are triple-A rated — as Nystrom pointed out, these companies are “doing good” but they’re also great investments.
There are also coincidental investments like the $30 million California Clean Energy Fund (CalCEF), which was formed last year as part of the Pacific Gas & Electric Corp. bankruptcy settlement. CalCEF announced in March that it had allocated $8.5 million apiece to three venture firms for clean energy investments: Draper Fisher Jurvetson, Vanishing Point and Nth Power.
Add to that the fact that venture capital has, for years, been racing to keep up with all the new business plans in both technology and biotech, especially in the Bay Area. Now that fever pitch has cooled slightly, leaving room for venture leaders to look in other, emergent areas.
“Where we are now and where we were two years ago is significantly different,” Nystrom said. “But it’s not nearly where we need to go.”
One brick in the wall
“It’s a very, very tiny portion of the venture world that does this,” said Mike Dorsey, a managing director at J.P. Morgan in San Francisco, who is also a judge for the Haas School of Business Global Social Ventures competition.
Dorsey and Nancy Pfund co-manage the J.P. Morgan’s Bay Area Equity Fund. While a number of other firms are also investing in social entrepreneurs, among them Pacific Community Ventures, Dorsey said J.P. Morgan’s remains the largest social investment fund in venture capital, valued at a meager $75 million.
“We only invest in companies where we believe we can make a market rate of return and impact society at the same time,” Dorsey said.
That in itself is a radical concept.
“Big institutional investors (who invest in venture funds) are charged with maximizing their rate of return,” he said. “Most venture capitalists believe that if you try to benefit society at the same time, you won’t make market rates.”
Making it work
For Haji, World of Good came from a mission, but her goal was always to make it a strong investment. In grad school, Haji studied the fair trade concept, which calls for ensuring producers in poor countries get deals that cover the cost of production and guarantee a living income, among other things.
During a year of travel, she found that the producer’s side is in good shape, due to efforts by the Peace Corps, UNDP, World Bank and church groups that are creating cottage industries throughout the world.
The gap was in getting those goods to consumers.
Haji and her business partners, former Haas classmates Siddharth Sanghvi and David Guendelman, created a business model in which they would set up independent “fair trade kiosks” in sites that appeal to conscious consumers: organic grocery stores, bookstores and spas.
World of Good stocks those kiosks, then gives the host stores 100 percent markup on the products. That makes it enticing to retailers.
Each gift also bears a card explaining who made the product and how buying the product helps the community. That’s what appeals to the consumers.
“People really got it,” Haji said, explaining the enterprise’s initial success. “It just worked.”
In the past year, World of Good has grown to a staff of 16 nationwide, with products in more than 200 stores. More than half of those are in Northern California, including Whole Foods markets, Rainbow Grocery and the Academy of Sciences, as well as other food, book and spa stores.
In five years, Haji is aiming for 5,000 points of distribution, with three to 10 major partners and artisan suppliers in 1,000 communities.
But there’s more to it “just working” than a good business model.
“Priya Haji makes it happen,” said Tamara Williamson, program manager for student activities at Haas, where World of Good won the Global Social Venture competition and a $25,000 first prize this year. Haji also took first place in the Draper Fisher Jurvetson business plan competition.
“You hear in her voice that nothing is going to stop this woman from making it happen,” Williamson said, contrasting the business plan on paper, which won few remarks from the panel of judges, and the final wowing presentation. “When she gave her presentation, she sold a lot of hard-core, technology investors that this was a good idea.”