By Leila B. Boulton
For all the recent hoopla about impact investing, there appears to be some resistance to investing in impact funds. A recent meeting of social investors and impact fund managers in Boulder, Colo. explored some of the reasons why.
For starters, impact investing–which is about making a positive social or environmental difference while earning a profit–takes patience. "If you want a quick return on your money, go to Las Vegas and gamble," said Robert Fenwick-Smith, founder and managing director of Aravaipa Ventures.
Fenwick-Smith spoke at the inaugural Social Impact Fund Showcase, where five innovative Colorado-based funds gave their best elevator pitches to 22 accredited investors. The event, which took place earlier this month, was co-hosted by The Impact Angel Group and HUB Boulder.
Perceived Risks And Misimpressions
Fenwick-Smith told the audience that potential investors in his fund often have a number of inaccurate impressions such as that impact investing necessarily provides lower returns, that all green technologies are high risk and capital intensive, and that Colorado is "too small to matter." Fenwick-Smith's fund has raised $8.75 million to date and is targeting $20 million. The minimum investment is $100,000.
The fund focuses exclusively on Colorado early-stage efficiency technology companies, which Fenwick-Smith said should provide higher returns–with lower risk and less capital–than many other types of green businesses.
One of the fund's portfolio companies was selected to provide the information technology backbone for the Bill & Melinda Gates Foundation. The company has a new way of collecting and analyzing data that will enable the foundation to keep better track of its many undertakings. "Within a year, they will be using the system to manage all their projects. The impact on development around the world will be substantial," said Fenwick-Smith.
Lack of investment opportunities is definitely not a factor for Greenlite Labs. The firm is raising a seed capital fund to establish a TechStars-affiliated accelerator for "cleanweb" startups whose business models leverage digital technologies to increase the adoption or efficiency of clean technologies.
Managing director Duer Reeves told the audience that the accelerator will select eight to 10 promising ventures and put them through a 13-week boot camp to prepare for the rigors of pitching to sophisticated investors who can provide additional capital for the next phase of growth. Reeves said the minimum investment is $25,000, but $50,000 to $75,000 is more typical.
According to Reeves, a main concern of potential investors in his fund is "selection risk"–that is, investors fear that it will be difficult for Greenlite Labs to find great early-stage companies to invest in. He thinks the concern is overblown. "Consumers adopting sustainable lifestyles and primary investment in cleantech are creating myriad opportunities for entrepreneurs in the cleanweb space," he said.
And it's not just private funds like Greenlite Labs and Aravaipa Ventures that have issues with enticing potential investors. Public impact funds appear to face the same headwinds when it comes to attracting capital.
Garvin Jabusch, who serves as chief investment officer at Green Alpha Advisors, managers of the Green Alpha Next Economy Index fund (GANEX), told the audience that investors in his fund's "innovative solutions" companies want to know: "Is this is a legitimate investment strategy or merely tree-huggery?"
Jabusch said his firm seeks out green and cleantech companies in every sector and every industry that offer the most cutting-edge solutions to society's biggest problems, such as global warming, population growth and resource constraints. "Innovation is where wealth and value are always created in this world and always have been, ever since we went from the water wheel to the steam engine," he said.
Problem Solving and Partnerships
Despite the misperceptions that impact funds have to battle, there are opportunities. Potential investors at the showcase heard about some cutting edge funds that are trying to address a number of local and global issues.
Jim Ott, formerly an executive in corporate agriculture, is now at the forefront of coordinating farmers, processors, distributors and retailers to promote local agricultural enterprises to keep healthy food affordable and available for consumers. Ott manages the Localization Partners Enterprise Fund, which is trying to shift the amount of local food that is produced and consumed in Colorado from 2% to 25% by 2020 through raising capital for infrastructure, operations and education to support local food and farming businesses. The goal is to raise $5 million by issuing two-year secured notes that will return 3% interest. The investment minimum is $25,000.
Growing world populations, escalating oil prices, increasingly industrialized food systems and declining numbers of farmers all pose significant risks to local food security. Building local food systems can address these problems while increasing prosperity for the surrounding community. "The economic impact of localization can be a significant tax contributor," Ott said.
According to Ott, the primary difficulty in raising capital is that the fund relies mostly on "word-of-mouth effort," which limits the number of people the fund can contact. Once potential investors hear about the fund, though, many do choose to participate. "The social impact of food security, health and sustainability resonates with most people who are aware of the opportunity," he said.
The top concern for investors in the CHINA-US Cleantech Fund is protection of the intellectual property held by the portfolio companies. The fund is addressing this issue by partnering with the Chinese government. As an investor in the fund, the government will have an incentive to help guard the intellectual property against theft or infringement.
The fund will try to identify the best of U.S. innovation to tap into the trillion-dollar Chinese energy and environment market. The synergies are quite compelling. While the U.S. is still the global leader in innovation, China has the largest demand for cleantech.
The goal is not to get U.S. companies to outsource their manufacturing to China, but to bring U.S. innovation and expertise to Chinese cleantech companies through strategic partnerships. The fund is seeking to raise $50 million, up to half of which will come from China-government sources. The fund is targeting 15% returns. The minimum investment is $500,000.
"We're going to look for great companies here in the U.S. that have proven technologies and products that are already in the market and invest in them to go into China," said the fund's co-manager, Fred Chang. "This is a win-win situation–U.S. innovation and jobs, market growth in China."
