Wednesday, November 26, 2008

Starting A Venture Gapital Fund

Yesterday, I had a fun meeting with Sloan Entrepreneurs for International Development. My host, Jenny Kwan, asked me to come up with a topic to brainstorm with this group. So we spent an hour discussing what it would take to start a venture fund for enterprises in the BOP. What would be the same? what would be different?

We currently have a bifurcated market. On the one hand, traditional venture capital funds (VCs) look for deals that have the potential to return 30%+ on multi-million dollar investments. On the other hand, foundations and groups like Ashoka "invest" in social entrepreneurs without an expectation of even a return of principal. Kiva provides a return of principal, as do the "social businesses" advocated by Muhammad Yunus. So the question was whether a fund would work to fill this "gap" for BOP businesses that can generate a positive return, but would not attract VC due to a number of factors (smaller deal size, unfamiliar markets, lower ROI).

Here are a few ideas we kicked around as "venture gapitalists":

Fund size: I poked at the idea of "go big or go home" with a $100 million+ fund, but the general sense of the group was that this would need to be a relatively small fund ($15-25 million).

Deal flow: Fund size was driven by concern about deal flow in this sector. There was a good discussion about whether the fund will pick sectors (such as Acumen Fund) or instead invest in emerging businesses (such as those assisted by Endeavor). One idea that emerged was that it might be possible to carve up the General Partners' carried interest to those that helped with deal flow. We also discussed that others were doing due diligence on BOP firms for awards, etc, and it might be possible to take advantage of this starting point to help with deal flow. Several people also were concerned about investing in social entrepreneurs- they wanted to invest in profit maximizing entrepreneurs who would be pursuing liquidity for investors.

Team: Unanimous sense that you would need to build a team with local connections in the countries and sectors. Some concern that there were not many "serial social entrepreneurs" that could be recruited. Interesting to see the MBA perspective that few would be willing to start with fund if they felt it would require long term sacrifice on compensation. Most seemed to think that, properly structured, the fund could be competitive on compensation.

Cost structure: Many were concerned with the additional cost of a global network. While salaries are lower in other parts of the world, opening offices, reviewing deals, sitting on portfolio company boards all raised concerns.

General Partner fees: With cost concerns, some students felt a higher management fee would be required. 3-5% was proposed, but the "investors" were skeptical.

Syndication: The lack of other funds was a concern, as there are few others (yet) to share risk, due diligence, etc.

Investment strategy: some concern about investing in subsequent rounds (we noted that funds that are too small get squeezed as winners emerge in a portfolio if they can't invest in subsequent rounds). The sense of the group was that early rounds would be several hundred thousand (NOTE: this 1/10 conventional VC) and perhaps a bit over $1 million total capital. So the portfolio would be 15-30 companies.

Instruments: we didn't get into this in the main discussion, but after class we had an interesting chat about "additional terms" in, for instance, a convertible debt instrument. What if, for instance, the interest rate (or conversion discount) varied based on achieving social/environmental goals. The idea was that some investors might be willing to trade down on valuation if social returns were ACTUALLY being generated (as opposed to merely promissed) by the entrepreneur.

In short, we didn't figure it out. My sense is a number of people have been thinking about this, but have yet to come up with a business model that "works" enough to attract the human capital to run it, the financial capital to fund it, and an efficient deal flow screening mechanism. Just a matter of time, I think, before a few more "testable" models will emerge.

Monday, November 24, 2008

DiaBlog: Net Impact

I wasn't able to attend much of Net Impact this year, but several students from Colorado State reported back that the event at Wharton was better than ever. Below are some comments from Joseph Darnell and Mitesh Gala about this year's annual conference:

Q: What were the most interesting sessions you attended for BOPreneurs?
Mitesh: "Definitely the one on Socially Responsible Investing - There were three venture firms, including Innosight Ventures, headed by Clayton Christensen. They have invested in a laundry kiosk business in Bangalore."
Joseph: The biomimicry workshop was by far the most interesting panel I attended. I also thought the 'Hype vs. Reality: Impact and Potential of Social Enterprises in International Development' was particularly enlightening, and very relevant for any aspiring BOPreneur." (For Matt Austin's blog on this panel, click here)

Q: What were the key points you remember from these sessions?
Mitesh: "There doesn't have to be a trade-off between social business vs. traditional business. Both businesses are run on or evaluated on their bottom lines by the investors. However, investors use a more advanced evaluation tool to measure social impact and its effect on the bottom line, for instance, using a 'balanced scorecard' tool."
Joseph: "Some of the other business strategy applications from the world of nature were nearly mind-blowing. I liked insights like “optimize rather than maximize”, “use free energy”, and “ focus on shape, rather than material”. There was also talk of building within “ecological building codes” as opposed to the manmade versions we’ve invented. I really liked the business applications; Industry Biomes, Ecosystem Succession (as related to market entry) and Market Dietary Strategy (organism doesn’t define it’s food, it’s food defines the organism)."

Q: How are current global financial worries impacting MBAs' interest in sustainability and, more specifically, BOP work?
Joseph: "I think the interest in sustainability as a value add is only being heightened by the financial crisis. I think that it’s a way for MBAs to make themselves more attractive to employers. As for the BOP, it seems that interest in 'emerging markets' hasn’t waned."
Mitesh: "The conference had more panels on social businesses compared to last year and so it is hard to relate current financial worries with MBA's interest. There is still a lot more interest in CSR and Green technology, than in BOP work."

Monday, November 17, 2008

Tim Keeps on Tickin...

Tim Bauer was selected today as a Rolex Awards for Enterprise Laureate. Tim is one of the founders of Envirofit and it is really cool to see him recognized for all his great work. Read and see more about Tim's work, as well as the other laureates, at the Rolex Awards website.
And while Ron, Nathan, Jaime, Harish, Alan, Roshan, Martha, Clark, David and many others may not get a gold chronograph, they too deserve to bask in the reflected glow of Tim's new timepiece.
OK, I am not going to blog about any more Envirofit awards for a while.

Thursday, November 13, 2008

Green and Nerdy

It's an underground engineer's hit- Weird Al's "White and Nerdy"... and now Envirofit has real cred as "green and nerdy"- a spot in Popular Science! Later this month, when I visit MIT for a few days, I can roll with the best of the book bangers. Heck, I might even be able to figure out why they number their buildings, instead of naming them.

It is interesting to see how media coverage builds around an idea from the inside. It is great to see the Envirofit team get recognition for all their hard work. But media coverage is kind of like money... when you could really use it, no one returns your calls. Then you get one or two people interested, and it builds. Jaime has been working hard to get the word out and we also got some help from the pros at Weber Shandwick.

We know that "the popular people" don't read Popular Science. But we are glad that a few more nerds now know about Envirofit. And maybe a few smart ones will want to come work for us. Probably the ones with a Weird Al Pandora channel on their iPhones.

Tuesday, November 04, 2008

Big Time(s) Squared

Ok, I know there is a lot going on today, but for a New Yorker like me, this was pretty cool "Big Apple" site to see!

"Envirofit Ramps Up Production of Clean Burning Cookstoves to Meet Demands"