More 'Patient Capital' for Social Ventures

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Joshua Humphreys, director of the Boston's Center for Social Philanthropy, has tracked at least $7.3 billion invested in 100 socially responsible alternative asset funds, which include venture capital, other types of private equity, and hedge funds. Of that, he estimates that $5 billion 10 $6 billion is venture capital. That's still a small chunk of the VC world, which invested more than $28 billion in 2008 alone. But it includes funds from such marquee VC firms as Kleiner Perkins Caufield & Byers, a firm that backed Google (GOOG), Amazon (AMZN), and Intuit (INTU), and now counts Al Gore as a partner. "The brand-name, top quartile funds are investing in the very space we're investing in," says SJF Ventures' Kirkpatrick.

No Need for a Tradeoff

While some social VCs concede that they will accept lower financial returns for social benefits—particularly those who back nonprofit ventures as well as for-profits—others don't see the need for a tradeoff. Kirkpatrick says SJF Ventures has the same investment expectations as traditional VC firms, because his firm backs companies that have social and environmental benefits "fully baked into a sustainable business model," rather than as an add-on that they have to balance against making money. "SJF's focus is no compromise, financial or mission," he says.

The key difference between social VCs and those purely seeking profits is that mission-driven investors provide "patient" capital, says Mark Finser, general partner at TBL Capital, who raised the $50 million fund in 2007. "The highest tolerance is in their time horizon," Finser says. His fund, mostly raised from high-net worth individuals, invests in "companies that will be game-changers in that particular industry," he says.

Investors and entrepreneurs are still trying to resolve big questions about how to apply the venture capital model to social enterprise. For one, there is no clear way to quantify social and environmental impact so investors can measure their nonfinancial returns, though such tools as the Acumen Fund's Portfolio Data Management System and consulting firms such as Social Venture Technology Group attempt to do so. Another question for social VCs is what constitutes a socially responsible exit—that is, how can a portfolio company retain its social mission through an acquisition or public stock offering? "This is an experimental phase right now," says Meredith Walters, senior associate at social venture firm Good Capital in San Francisco. "People are trying different things. There's no accepted way to do it."

But it's clear that venture investors are becoming more interested in social entrepreneurs—not just in their products but also in their missions. Some industries in particular, where investors see potential for big profits and big impact, have received more attention than others: clean energy and green, organic, or natural foods and consumer products are especially in vogue. "There's more attention in this space, and with attention, more investors want to participate," says Deb Parsons, business development director at Investors' Circle, a network of angel investors, VCs, and foundations involved in socially responsible investing. "It becomes less a fringe and more acceptable. In a few years it'll be closer to mainstream."

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Tozzi covers small business for BusinessWeek.com.

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