Are there really too many VCs in Impact Investment?

For years I have heard those involved in impact investment moan about the extent to which experienced 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. Antony Ross is a sector heavyweight with Bridges Ventures, and was previously at 3i.  Another 3i alumnus is John Kingston, the driving force behind CAF Venturesome, 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 also are 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.  The debate continues …

First published in Pioneers Post in April 2015.

The French are progressing very well on impact investment

Much is written about the UK’s leadership in the impact investment field – indeed, I have on many occasions mentioned this and spoken of the need to “maintain this lead”, “protect our dominance” and so on. This is not nationalism but self-interest.  As ClearlySo is one of the leading UK-based intermediaries operating solely in impact investment, we have a great deal riding on UK leadership.

Progress in the UK does continue, due largely to government-backed initiatives and the rapid entry of angel investors. To this is added the sometimes grudging/sometimes enthusiastic participation of large corporations and financial institutions.  This all creates progress and growth – about which we are delighted.  On the other hand, I sometimes fear that this leadership verges on arrogance, exacerbated by the fundamental advantage which comes from English being the global language of impact investing.

This linguistic dilemma was again manifest when the G8 Social Investment Taskforce reports were released; both the German and French versions were released and then promptly ignored by many of us Anglo Saxons whose language skills are not up to deciphering these documents.  They were subsequently released with English translations – what is clear is that the French, in particular, have been quietly making enormous progress.

The most eye-catching figure is that the size of the French market is estimated to be approximately €1.8 billion.  This compares with published figures for the UK of a few hundred million pounds.  Even when I adjust for the different approaches in calculating the two figures, there is only one conclusion to reach – the French market is larger.  In terms of structural flexibility and pure innovation, the British market is probably still well ahead, but it is smaller.

Both have a large, state-initiated catalyst – Big Society Capital in the UK and Banque Publique d’Investissements in France (with €500m). The French also have a very large ethical bank, Credit Cooperatif, which unlike the troubled Co-op Bank in the UK, has remained profitable, successful and cooperatively-owned.  But the main difference is the active engagement of the country’s large mainstream financial institutions.

Nearly all have actively-managed impact funds; their sums exceed €300m.  Much of this is due to the widely-known “90/10” funds, where 90% is invested conventionally, and 10% in strictly defined enterprise sociale. Banks are required to offer these products to individual customers and the uptake has been impressive.  Even on the institutional side there has been progress, without state intervention.  AXA Investment Managers created an €200m Impact fund of funds, and reports are that this innovation has generated considerable third party client interest (disclosure: I was on its Board from 2004-2010).

I am not intending to establish the basis for an inferiority complex or pander to nationalistic instincts.  The point is rather that we all have a great deal to learn from other countries.  As each nation develops its own path for creating markets where social impact becomes a third dimension to investing, there is no basis for arrogance.

I am reminded of a trip I made to Ontario for the first “Toronto Social Entrepreneurship Summit”.  One was made to believe the Canadian impact investment market was just about to be created there in the province of Ontario. Later that trip, I journeyed to the province of Quebec and found it had been going on for decades.  They just didn’t talk about it as much and few Anglo Saxons read their French papers on the subject.

First published in Third Sector in April 2015.