More 'Patient Capital' for Social Ventures

An increasing number of venture investors are hunting for small companies that could yield social benefits as well as high profits

By John Tozzi

Gaia Herbs sounds like an unlikely candidate for venture capital. Ric Scalzo, a medical herbalist, founded Gaia in 1986 to produce, distribute, and sell organic supplements. The $16 million, 125-employee firm prides itself on its commitments to improving society, including funding education in the South Pacific islands and Sumatra, where the company sources some of its herbs. The alignment might sour most VCs, who train a strict eye on bottom-line benchmarks. Nonetheless, Gaia, in Brevard, N.C., received a $3 million venture investment in July to develop new products and expand its reach in the fast-growing natural products market—and for Gaia's new investors, Scalzo's social mission was a selling point.

"They have such an aligned vision with the growth and development of Gaia," Scalzo says of his new partners at TBL Capital, a venture firm in Sausalio, Calif., dedicated to funding companies with social missions. Venture capital fueled the companies that revolutionized such industries as semiconductors, biotechnology, and the Internet. Now venture capitalists want to use the same combination of financial might and business savvy to stem global warming, create jobs, and alleviate poverty. The idea of putting VC-style investing to work on social problems has been around for the better part of 20 years. What's changing, VCs say, is how much interest in social enterprises has grown—among both investors and consumers.

Indeed, a growing number of venture investors want to back companies that, in addition to financial returns, will also yield environmental or social benefits—a model called the double- or triple-bottom line. "The market has moved in our direction," says David Kirkpatrick, co-founder and managing director of SJF Ventures in Durham, N.C. He says the 10-year-old firm, with $45 million under management in two funds, has been investing in growth-stage companies that create jobs in low-income areas as well as such industries as clean technology "before it was cool."

Potential Social Impact

No one can say exactly how much social venture capital has been invested, partly because exactly what constitutes a social venture is hard to define. Many VCs who are agnostic about portfolio companies' social missions have nonetheless poured millions into ventures with other benefits—clean-energy companies, for example—because they see market opportunity.

On the other end of the spectrum, nonprofit funds such as the Acumen Fund make loans and investments based more on their social impact than on financial return. For example, Acumen has backed A to Z Textile Mills, a Tanzanian manufacturer of antimalarial mosquito nets, which now produces more than 16 million of the lifesaving nets each year at a final cost of about $5 per net. But even the line between Acumen-style enterprises and for-profit ventures is blurring, as entrepreneurs seek new markets in what University of Michigan professor C.K. Prahalad famously called "the fortune at the bottom of the pyramid." Investors have formed entire VC funds, such as the Monterrey, Mexico-based IGNIA, to back for-profit companies serving these markets.