Over the past two weeks CSRwire’s Talkback has introduced Capital Institute’s Field Guide to Investing in a Resilient Economy series. The Field Guide utilizes the power of narrative to recast the story of our financial system, chronicling the progress of transformative, scalable, real-world investment models that support the creation of a more just and resilient economy. In week one, we featured the first Field Guide study on Grasslands’ LLC, and in week two, we spotlighted Cleveland’s Evergreen Cooperatives.
The final article in the series explores The Patient Capital Collaborative, an impact-investing fund that focuses the collective expertise of a group of angel investors on the nurturing of early-stage companies purpose-built to create positive social and environmental outcomes.
Inspiration at The Investor’s Circle Conference
Sensing something missing in his otherwise successful 20-year career as a private equity fund manager, Sky Lance attended an Investors’ Circle Conference where he observed first hand the nature of the paradigm shift that was taking place in the social investing world.
Twenty years earlier, he noted, “The people who were attracted to starting up companies doing good were people with their hearts in the right place but the quality of companies they established were marginal.” At the IC Conference, the presenting entrepreneurs were clearly people with both strong social values and real management experience.
Although he admired the energy and expertise around the IC, Lance also saw a clear need for a fund to provide structure and follow through for dealmakers who attended the organization’s biannual conferences and the entrepreneurs who presented at it. “The task facing entrepreneurs looking for capital from individuals was daunting,” he reports, “trying to ‘herd the cats’ towards coordinated investor due diligence and, hopefully, the ultimate individual decisions to invest.”
Lance saw this inefficiency of process as eminently fixable.
SustainVC: Bringing Efficiency to Social Impact Investing
And so in 2007, he created SustainVC to become the general partner of the Patient Capital Collaborative (PCC), a series of impact investment partnerships that would house a portfolio of IC companies. In 2010, Tom Balderston, another seasoned advisor and manager of venture capital funds, joined him as Partner.
PCC provides a unique, formal structure that keeps the momentum going for deals to be consummated after IC Conferences when the initial excitement of hearing an entrepreneur’s presentation dissipates.
It also provides a distinct advantage for investors who have an appetite to invest into deals outside their area of expertise. And because the fund has full-time professional management, yet offers a unique “collaborative” approach, investors can step in and out of active engagement as their time and expertise allows.
Ocean Renewable Power Company
For example, when undertaking its due diligence around an investment in Maine-based Ocean Renewable Power Company, a tidal power technology company, PCC was able to call on the expertise of a PCC limited partner who was a trained mechanical engineer and on another who was previously a partner in the power practice of a major consulting firm.
Another PCC LP set up a call with the CEO of a west coast tidal power company that was also looking for funding. Yet another, a retired Fortune 500 CEO, was interested in helping with the due diligence.
“I realized that this is the kind of team that Kleiner Perkins would love to have,” says Lance. “No one of us could be an expert in all these fields, but together we put together a team that was.”
Birthing New Funds: ESG & Risk-adjusted Returns
Unlike a traditional venture capital fund that raises money at one moment in time and then is closed to new investors for 5 years, the PCC raises a new fund about every 18 months. “We invest in the companies that have grown too big for ‘friends and family’ but are too small for the venture world,” says Lance. “This is the most underserved market segment…and hence the area Tom and I feel we can make the greatest impact.”
Structuring the fund to deliver social and environmental impact as well as positive financial return is an art.
“There are all sorts of interpretations of how much to bring the social/ environmental weighting into the equation. We have lively discussions among the limited partners as to how much to incorporate the social mission into the rates of return,” says Lance.
“In general we are managing the portfolio similar to an early stage venture capital portfolio in that you have to have those companies that make three to ten times your money to offset those you write off in order to leave the limited partners with an appropriate risk- adjusted rate of return.”
While PCC’s mission is to help fund and support companies that will contribute to the transition to a more sustainable economy, Lance hopes PCC can itself attract more funds under management in order to be self-sustaining over the longer term.
“What is needed,” he maintains, “is one or two ‘thought leader’ institutions to step up to the plate and put real risk capital out there and say ‘we want to foster this category of investment.’”
Download the full Patient Capital Collaborative Field Guide.