New rules for venture capital?

Evolving to impact: A trend to watch among VC firms this decade
by Tim Turpin, Executive Vice President | Venture Capital and Emerging Technologies Practice

Times are changing, for the better, in the world of venture capital. As my article in September 2017 highlighted, the old adage that VCs chase only financial returns doesn’t hold true anymore. Since then, the level of engagement of VCs in higher responsibility businesses has grown significantly as they now invest more and more frequently in “true north” values. The gist is that VC firms increasingly measure themselves by both financial and social returns. Yes, it’s true that limited partners (LPs) are still on the hunt for top decile funds, but many firms are measuring themselves more broadly.

The larger business community as a whole is on a similar path—from the Business Roundtable to the leaders of the World Economic Forum. It’s a trend I and others are glad to see, and I’d like to continue building on my earlier writing by sharing observations of this development and others in the VC field. In this, the first in a quarterly series, I’ll talk about how enterprising VCs have evolved their model to have greater impact.

A New Playbook for Venture Capital?

Examples are varied, but I’d like to highlight three that are evolving the model to have greater social and/or environmental impact.

World Innovation Lab, a US and Japan-based VC firm, views itself as a conduit for entrepreneurs to benefit from corporate resources. The investors in the firm also ‘give back’ to students and aspiring entrepreneurs in Japan—the home country of General Partner & CEO Gen Isayama—via pro bono courses on how to think like an entrepreneur, Silicon Valley style. It also helps US startups expand to Japan and Asia, and Japanese startups to expand globally. Thirty multinational corporations back it, including Sony, NTT, Nissan, Fujitsu and others, meaning WiL connects the dots between the priorities of numerous corporate strategic partners in several countries with the business expansion plans of dozens of startups. In June 2018, this collective raised $521 million, building on $353.5 in January 2015.

In real estate, venture firm Fifth Wall counts companies such as real estate investment trusts Hudson Pacific and Prologis among its investors, as well as commercial real estate firm Cushman & Wakefield. One core part of the firm’s strategy is to invest in startups whose products can help their LPs. In line with that goal, the VC firm is preparing to launch a roughly $200 million sustainability venture fund, called the Carbon Impact Fund; the idea arose following recent legislation that requires buildings in New York and Los Angeles to reduce carbon emissions. It’s also preparing to launch consulting services that will help major owners of real estate ensure they’re more environmentally responsible.

National Grid Partners is my final example. The firm launched in 2018 to up the ante in the intersection of energy and information technology (IT) investment at a time when investing in the environment is growing in importance. Led by former Intel Capital investor Lisa Lambert, NGP’s mantra is to help its parent company, National Grid, ‘disrupt ourselves before we are disrupted.’ Most Silicon Valley firms are still slow to return to energy investing after a difficult run 10 years ago, but with firms like Fifth Wall and NGP leading the way, that is likely to change.

For these firms, and others, investments have become about more than money—they’re about change and intellectual economies of scale that come from the power of consortium. Rather than practicing generalist, traditional, VC investing, these three are working hard to create value and opportunities for corporations, startups, and financial investors, as well as benefiting their given ecosystems.

ESG; Environmental, Social, and Governance

The “all ships rise” ethos brings me to the hot-button topic of ESG. ESG—environmental, social, and governance—is to some a call to action, to others an unjustifiable cost. It has become shorthand for investment methodologies that incorporate sustainability factors in order to identify impactful business models. There is growing evidence that indicates that integrating ESG factors into portfolios may give long-term performance advantages.

Fifth Wall’s Carbon Impact Fund, mentioned above, is a perfect example of ESG. While the impetus for the fund is indeed a reaction to the needs of its LPs, its purpose is broader and altruistic.

In a January 29th post on the firm’s official blog, Fifth Wall INSIGHTS, partner Tyson Woeste explains: “Why are we doing this? To state it simply: We believe the real estate industry is the world’s largest contributor to the climate crisis.” Their fund is a call to action for the real estate sector.

It appears to be working. At the company level, Microsoft recently announced that, as tenants, they will be carbon neutral by 2030, and Alphabet, which happens to be one of the largest tenants in New York City, is also working toward the goal of carbon neutrality for its offices.

New paradigm?

While the tried and true traditional VC model will continue for proven firms, the innovative firms discussed earlier are rewriting the playbook on their own terms. Day to day, these firms are engaged with investors and startups in different ways than before. They’re incubating businesses that contribute to a broader goal, whether it’s collaboration, cleantech, or carbon neutrality. As these processes evolve, in varied ways these firms are beginning to resemble a hybrid of a VC firm, an investment bank, and an incubator/accelerator.

Money may still be widely available, but the best entrepreneurs now look for more than money from investors – because they are on a mission as well.

Next in this series, I’ll explore the rise of another emerging model in venture capital – the Virtual CVC. Who’s doing it, how is it working, and why now?

Tim Turpin has been Sparkpr’s venture capital practice group leader since 2007. He has 20 years’ experience in developing public relations and integrated marketing programs for venture capital firms and technology companies.