We were pleased, but not surprised, that the “Introducing the Impact Investing Benchmark” report shows that private equity and venture capital impact funds produce returns in line with conventional investment funds. Despite a small sample size, the report is important because it is the first comprehensive study of the financial performance of market rate impact funds. The results of the report should help the impact investing field move beyond the early adopters and begin to attract more mainstream investors.
At SJF Ventures, we’ve spent more than 16 years honing our strategy as a venture capital fund with a “high growth, positive impact” mission. Our first fund, Sustainable Jobs Fund, raised $17 million in 1999. It was launched as a community impact fund with reasonable, but not market rate, returns. Within two years we realized that we needed to pivot to a market rate strategy in order to scale up. We focused the fund on sectors that had the potential for positive social impact—cleantech, health and wellness, and edtech—and sought out the fastest growing, mission-aligned companies we could find. Our second fund, SJF Ventures II, was capitalized at $28 million. It performed at the top of conventional venture capital benchmarks. That strong financial and social impact performance allowed us to raise $90 million in an oversubscribed third fund two years ago.
We know from these three funds that it’s possible to achieve a blended value of impact and financial returns in generating quality deal flow, conducting diligence, and negotiating deal terms. It’s feasible to sit on a board and advise on how positive impact strategies can accelerate growth. And you can achieve exits that preserve the mission of the company while providing liquidity to founders and investors. What makes the Impact Investing Benchmark exciting is that it shows that even in its early stage of development, the impact investing field is not only proving it possible for a few funds to achieve solid financial returns but it is doing so at an industry benchmark level.
When we were raising our third fund we assumed that our track record of performance would speak for itself, yet we continued to hear from the skeptics:
- “Impact funds have inherently limited deal flow since they impose such restrictive screens.”
“Social entrepreneurs are unable to focus on profitability as they’re always distracted by their mission.”
“Acquirers only care about one bottom line and will destroy the mission of the portfolio company.”
“Impact fund managers are likely to underperform conventional funds since they are not laser focused on returns.”
Contrary to what the skeptics believed, mission-driven companies can be excellent investments precisely because they focus on creating social and environmental value. For example, one of our portfolio companies, CleanScapes, a Seattle-based municipal recycling company, grew rapidly because of its pioneering environmental and civic strategies to clean up and strengthen urban neighborhoods and to provide excellent employment opportunities. Three years after we invested, CleanScapes was bought by Recology, the largest US employee-owned waste management and recycling company; the two companies share a similar employee engagement culture and a commitment to helping communities reach zero waste.
Austin, Texas-based Vital Farms, another one of our portfolio companies, has become the nation’s largest provider of pasture-raised egg and poultry products by working with small family farms to introduce humane standards in chicken farming. Its eggs are healthier for consumers and better for the environment. The company ranked #1 or #2 among Inc.’s fastest growing food and beverage companies the past two years because of—not despite of—its impact model. Our portfolio is full of many other companies where employee engagement, sustainable products and services, and values-based management are driving outsized growth.
Venture capital investments are inherently risky, but there is nothing fundamentally riskier about impact driven companies than conventional firms. When our portfolio companies struggle, they do so for the same reasons other companies do—market dynamics, management weaknesses, lack of a sustainable competitive advantage, or business model flaws. But when a mission-driven company faces tough times, management, employees, customers, suppliers, and investors tend to hang in because they are motivated by more than making money. Last year, for example, one of our portfolio companies, Rustic Crust, had a catastrophic fire that burned down its only production facility in New Hampshire. The local community and all of its stakeholders pulled together to quickly restore production offsite and then build a new facility.
It is also important to remember that just as conventional venture capital is only appropriate for a small number of companies with rapid growth potential, the same is true for impact venture capital. For many companies, other financing sources—such as debt, more patient equity or sub-debt capital, internal earnings, and even grants—may be a better match. These other opportunities for impact can be an important part of a blended value portfolio mix.
The challenges we face in the United States and globally to build a more sustainable society and planet are daunting—and sadly seem even more severe than when we started SJF Ventures 16 years ago. We are gratified that so many more institutional and individual investors are recognizing that they can address these pressing social challenges while earning market rate returns. Some investors, like our limited partner the F.B. Heron Foundation, are moving all of their assets into impact investing. The work of leaders, like F. B. Heron, the GIIN, and other early adopters, helped SJF Ventures attract more aligned investors to our third fund. This study should help attract even more investors to impact investing and help impact fund managers spend less time fundraising and more time focusing on the good work of supporting the entrepreneurs who are changing the world for the better.