Impact Investing to Create Better Returns and a Better World

Meet a Venture Capitalist on a Mission

Step into the offices of DBL Investors in San Francisco and it may seem as if you’ve entered a run-of-the-mill venture capital firm. Eight staffers scurry from office to conference room, refining their spreadsheets, pounding out emails, and chatting on cell phones about their portfolio of exciting start-ups and growth companies.

There’s little to suggest that this financially driven hustle and bustle is out of the ordinary. DBL at first glance looks much like any other firm—driven by dollars. VC investing has traditionally focused on financial returns at all costs; it can be a singular, unwavering goal. As the conventional wisdom goes, if you serve more than one master returns will suffer.

But as it turns out, Managing Partner Nancy Pfund and her DBL colleagues are not that kind of venture capitalist. They’re VCs of a different color, ones that—in addition to making money—want to do some good in the world. The firm’s name highlights their emphasis on the double bottom line: yielding top-tier financial returns and delivering social, environmental, and greater economics benefits through its portfolio of investments.

Yet is it possible for a VC firm to deliver strong returns and to create a better world at the same time?

Pfund thinks so. “We believe we can do both, and that one does not suffer because of the other,” she explains. “I don’t see it as a terribly thoughtful position: people saying that any kind of social investing will have inferior returns. If you look more closely, you’ll find great impact investing and not so great, and you’ll find that for any asset class.”

Just consider DBL’s track record—its first fund placed in the top quartile compared to other funds of that vintage.

“Increasingly, there are investors who want more than a financial return,” she says. Pfund is one of them.

In some sense, DBL’s investments do obey the law of financial return, just like their conventional VC counterparts. First and foremost, DBL’s investments “need to meet traditional investment criteria,” says Pfund. “If we fund a bunch of companies that don’t go anywhere, we’re not helping anyone.” What differentiates DBL is what happens next: incorporating the second bottom line value into the investment.

Pfund’s brand of VC, and arguably VC in general, is a story of Davids going up against Goliaths. Small, start-up disruptors go up against large incumbents. Think of the eco-friendly cleaning products company Seventh Generation facing off against the likes Tide and All. Or more recently, consider Tesla Motors and its EVs—part of DBL’s portfolio—going up against the fossil-fuel-burning automotive giants of Detroit.

DBL’s portfolio is a testament to people- and planet-friendly disruptors. In the world of cleantech, the portfolio includes SolarCity, Tesla Motors, eMeter, BrightSource, and PowerLight; in consumer products and services, there are Revolution Foods, Ecologic, Ecoscraps, View, and others. Such companies’ products and services range from energy efficiency software and electrochromic windows to solar PV installers to compost and potting soil made from food waste to providing healthy food and nutrition education in schools.

Those impactful upstarts are finding solid traction in the marketplace. Motor Trend named Tesla’s Model S its 2013 Car of the Year. SolarCity is the number one installer of residential solar in the U.S., and Fast Company named it one of the world’s 50 most innovative companies. BrightSource Energy’s solar thermal system will power ~200,000 homes with clean energy. DBL is seeing consumers swap plastic bottles for Ecologic’s molded paper fiber packaging and purchase EcoScraps’ food waste-based compost rather than the petrochemical alternative.

But it’s about more than businesses that inherently do good via their product or service, in which a positive impact in some sense is the product or service. It’s also about companies that extract secondary or parallel social and environmental angles to their work. “We believe that almost any company can have a double bottom line,” explains Pfund. “Are you born with it? Or can we bring it out and nurture it?”

Witness Pandora, the popular music streaming service and another member of DBL’s portfolio. In 2000, the same year Pandora was founded, unemployment in Oakland, CA was 50 percent higher than Alameda County, of which Oakland is the largest city, according to the county’s public health department. Yet Pandora deliberately sited its HQ in Oakland, a place that would benefit from greater employment opportunities and community revitalization. (Today, Pandora boasts more than 500 employees in Oakland.) Consider it VC as job creation in and for a community vs. VC as siloed wealth creation for a company’s founders and investors. Later, when Pandora learned of a school in a nearby low-income neighborhood that had its music budget cut, Pandora and its employees stepped in to adopt the school and volunteer teaching music classes.

In some sense, this harkens back to an era when businesses invested heavily in their communities, such as sponsoring local little league teams.

But if—with some exceptions—every company can have a double bottom line profile, as Pfund contends, what sets DBL’s flavor of impact investing apart? Is it mere marketing fluff to bolster a company’s reputation? Pfund would argue not. Rather, it’s a matter of tapping into inherent but unrealized potential to do good. Otherwise “green washing” a company does no one any favors.

It’s an inclusive approach, one starkly different from say, socially responsible investing, in which companies are screened according to an established set of criteria and are then either in or out. With DBL Investors, everyone is potentially in. The challenge becomes a matter of cultivating the impact side of the investment. When a business’s purpose is not inherently the social/environmental good, it becomes a more subtle matter to tease it out.

Meanwhile, just as the impact side of a company’s profile can affect the community and greater world, so can such impact affect the company. Here are some ways the company can benefit:

Market Intelligence. Pfund believes that an authentic concern for social values can help companies identify and jump on valuable trends. “If you’re blowing up traditional ways of doing business, the right side of a social trend is a good place to be,” says Pfund. And some trends that point to a better world, such as accelerating concern about combatting climate change, can also lead to expansion for socially responsible products, such as alternative packaging for home cleaning products.

For example, Ecologic—headquartered in an enterprise zone in Oakland, CA—has created and commercialized America’s first molded paper bottle. The innovative bottle consists of an outer shell made with 100 percent recycled cardboard and newspapers, integrated with a thin inner pouch, made with up to 70 percent less plastic than traditional plastic bottles. Post-use, the outer shell can be composted or recycled with paper, and the inner pouch can be recycled with plastic bags. Compared to rigid plastic bottles, the company’s 2.6 million eco.bottles produced to date have diverted 180 tons of plastic from landfills and oceans, avoided 369 metric tons of CO2 emissions, and saved 3.4 million kWh of energy.

Local incentives. DBL works hard to identify and cash in on opportunities for its portfolio companies where a city or county will provide tangible business incentives to attract the companies that will create jobs and revitalize the community. For example, DBL might introduce a company to parties that can help site a new plant in a struggling community, which helps them get a grant for manufacturing, tax waivers, or obtain a low-interest loan for equipment.

Again consider Ecologic. DBL worked hard to help the company site its new manufacturing facility in Manteca, CA, in a low-moderate income area and enterprise zone (the local unemployment rate is over 15% and 16% of residents live in poverty). The DBL team met with San Joaquin and Stanislaus County economic development agencies to identify potential sites and associated financial incentives, such as enterprise zone tax incentives, hiring tax credits, and sales & use tax credits on machinery and machinery parts. Ecologic expects to create more than 100 jobs at the new manufacturing facility over the next five years.

Recruitment and retention. Companies that do some matter of good in the world substantially improve the morale and cohesion of their team. For example, at Revolution Foods—which serves 200,000 healthy meals per day and has created more than 1,000 jobs nationwide, 75% of them entry level—DBL brought financial education to its entry-level employees and provided free tax preparation. Partnering with organizations such as One PacificCoast Foundation, the program positively impacted employee retention in an industry with high turnover rates.

Arguably the most durable employee retention perk a company can offer is a business orientation that acts on values, ones that deeply connect with team members that share those values. Many people with great talent also have great passion to create a better world, so they will stick with a company that allows them to do so.

These effects can be hard to measure, but Pfund is convinced that they are real. Enough so that she puts it to practice at DBL, even when an employee walks in the door with a more traditional focus on the financial side of things. “The desire to have social impact is important,” she explains. “But if you have the interest and the will, those are teachable more so than some of the financial investment skills.” In other words, just as a company can have an explicit social/environmental good, or a more subtle positive impact that requires cultivation, so too can employees come to a company driven by mission, or get swept up in mission once they’re there.

Either way, the investment—in a good company or good employee—is a given. The impact is what remains to be seen. But that’s what Pfund is there for. “Rather than the vanilla version of VC,” she says, “We want to accomplish social good as well. We believe the possibilities are endless.”

This post also appeared on Greenbiz.

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Images courtesy DBL Investors