Thursday, October 16, 2008

Good Capital: A new model in Venture Capital/Venture Philanthropy

Andrew Wolk brought in Jackie VanderBrug and Mari Brennan Barrera, Vice President of the EOS Foundation and formerly Executive Director of Highland Street Foundation for an interesting talk about social capital. Mari represented the grant side, while Jackie talked about the Good Capital venture philanthropy fund, which is structured like a VC. I’ll focus this post around Good Capital as they have a pretty unique operating model.

Good Capital looks at risk, return and impact in its investment process. They tell their customers to expect mid-to-high single digit returns, with sustainable enterprises creating social benefits on top of the financial return.

Thus far, Good Capital has made two investments. Good Capital funded Better World Books (helping them scale their model of selling and re-using donated books to keep them out of landfills and put them to good use. They are also an investor in Adina, a fair-trade beverages (one of the founders of Odwalla is involved). Jackie thinks this one both has a positive cause and has the potential for big returns. Good put in $1 million into this deal, while Sherbrooke Capital, which does health and wellness investments, contributed $10 million. Adina wanted Good at the table for their network, positive image and their model of providing highly beneficial consulting services (through their relationship with sister company Criterion Ventures).

The fund is an interesting sell. Because of its small size and involved approach, fees are 2.85% plus 20% of carry. That’s toward the high end for any fund. Is this better than philanthropy? For me, if I were a high-net-worth individual, it would be, even with the fees. Low digit returns or even just getting your money back mean sustainable social enterprises are being launched. Then you get the money back (assuming they deliver on their promises) to be re-used. This is different from Acumen, which is more like philanthropy – you give the money to them up front, and they invest it in socially oriented projects and expect your return in impact.

The financial return is a big thing to consider, of course. Typical venture capital investing will see 6 busts, 2 singles/doubles and 2 home runs in a portfolio of 10 companies. In investing in social enterprise, VandenBurg expects more singles and doubles, fewer home runs, but fewer strikeouts. That’s interesting. Deals are typically less risky but will offer lower financial returns. I wonder if their social angle will give them access to deals small VCs normally wouldn’t get into. Adina is a fine example of this, and has the profile of something that could be a 10x. If one of these new funds that's being launched could really blow the doors off on the financial returns side, that would be huge for the industry.


Jake de Grazia said...

I agree that a big payday for investors in a social enterprise (loosely defined) would be huge, and, at the same time, I think it's smart of Good Capital to keep the home run expectations low.

But justifying those modest expectations by saying that their fund will be less risky?

Less risky would make total sense to me if Good Capital was investing in microfinance or contributing private money to government supported infrastructure projects (electrical transmission and distribution, for example), but what makes Better World Books or Adina any less risky than other startup projects?

Ted Chan said...

In some ways, the fund is less of an early stage capital fund, but risk capital for for-profit social enterprise looking to scale (a little bit later stage). And I think that is how they are justifying the lower risk statement. These organizations (both Adina and BWB) have a bit of traction and taking equity stakes in them likely won't turn into doughnuts like many early stage venture investments do.