Are there really too many venture capitalists in impact investment?
Attempts to "stem the flow" of VCs into impact investment will only serve to damage the sector, writes CEO of ClearlySo Rodney Schwartz.
Venture capitalist (VC): An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. By investing in such companies, VCs can earn massive returns if the company is successful, but are also at risk of experiencing major losses.
For years I have heard those involved in impact investment moan about the extent to which experienced venture capitalists (VCs) are “taking over”: bringing values which will destroy the very essence of the movement.
As someone who spent the better part of ten years as a conventional VC, perhaps I am being a little sensitive and taking this criticism too personally, but recent developments have brought me to reflect on the reality of this situation and its consequences.
One of ClearlySo’s Non-Executive Directors (NXD), Tim Farazmand, has just stepped down as Chair of the British Venture Capital Association (BVCA). Tim made impact a central pillar of his tenure at the BVCA and has been interested in this sector since I first met him around 2000. Significantly, Tim’s first new role since stepping down from his post at the BVCA is as NXD of the Ethical Property Company, a leading enterprise generating substantial social impact and a pioneer in using UK investors to raise tradable share capital. One imagines that there may have been quite a few options for such a person – the fact that he chose a values-led business is very significant.
This migration of VCs into impact investing is a well-trodden path. An old friend, Stephen Dawson, was one of the founders (together with Nat Sloane) of Impetus (now Impetus PEF), the venture philanthropy investor. Partner and head of social sector funds at Bridges Ventures Antony Ross is a sector heavyweight. He was previously at 3i, along with another 3i alumnus John Kingston – the driving force behind CAF Venturesome, and an early pioneer in impact investment. Doug Miller, who used to raise money as a placement agent in private equity went on to found the European Venture Philanthropy Association.
Of course, the best known ex-VC in the field is Ronnie Cohen, a previous chair of BVCA and also chair of the original Social Investment Task Force (SITF), as well as the founder of several impact firms including Bridges Ventures and Social Finance. Ronnie has been a leading advocate for the sector, the first chair of Big Society Capital and was most recently chair of the G8 SITF. His influence within UK governments of all colours and with decision makers across the western world has been an important factor in UK pre-eminence in this space.
Some may not approve of the influence of these ex-VCs, but it is worth exploring why such individuals gravitate towards this field and what they are able to contribute.
Firstly, VCs understand, better than most, the ability of capital to effect transformation – they do this for a living. Successful VCs understand how to grow entrepreneurial businesses and in many cases these are highly disruptive. Their experience in generating growth can be useful in scaling organisations with the potential for sizable social impact.
VCs are also very experienced in raising capital. They are forced to do this from time to time when they raise new funds, but any successful VC also knows that companies, especially the successful ones, require many rounds of funding before they achieve exit. They are therefore resourceful when it comes to finding co-investors and other partners to work with during the life cycle of a business.
I believe that these are skills that are invaluable for the sorts of enterprises we work with, those that generate substantial social impact. Others somehow feel that the influence of such thinking and experience will “damage the sector” or “destroy its soul”. Frankly, I find this baffling. We need people who understand rapid growth and have experience in achieving it. We need people who understand how to galvanise capital. And we really need people who understand disruption, which is the essence of what this is all about.
I think that any attempt to stem the flow of VCs into impact investment will actually harm the growth of the sector and will ultimately constrain the flow of funds into impact investment and thereby bring about less impact. Encouraging trade bodies like the BVCA to get involved is enormously useful, particularly when one considers the scale of today’s societal problems.
There are still those who maintain that VCs undermine “the sector” and the purity of its purpose. I do not believe that any single person can define for others how the field should operate and what constitutes purity, or have a unique insight into its soul. Each of us contributes our skills, our experience, our views and our influence – and sometimes our capital. If there are those who feel a less financially-oriented marketplace, with a greater orientation towards impact is more desirable, there is ample opportunity to bring this about. There is also a great irony; the field was created by many of these same VCs whose views are deemed to threaten its future.
Photo credit: Ståle Grut