Impact: The Next Venture Capital?

A recent article in the Harvard Business Review has the impact investing airwaves humming. In it, the author presents his case for the notion that impact investing will be for the early 21st century what venture capital was for the later 20th century. Interestingly, much of the commentary has been negative, with pointed remarks about the difference between investing for maximum financial return (venture) and investing with the intention of generating returns other than, and in addition to, financial. Most of these comments seem focused on the notion that venture capital is soulless, whereas impact is by definition “soulful”. Although my many good friends in venture capital would go to great lengths to disagree, and although some of them actually play in blues bands, I find myself sympathetic to this stance. There IS something essentially soulless in viewing the process of seeding, nurturing and harvesting a company exclusively through the very narrow – if very powerful – microscope of financial return. But despite this, I disagree with the conclusion: the analog has nothing to do with soul. Instead, it has everything to do with history. To wit, a Brief History Of Venture Capital:

Venture Capital as we know it today was launched in 1946, when two firms opened their doors to invest specifically in companies started by returning GI’s. The companies – American Research & Development Corporation (ARDC) and JH Witney & Co. – were the first firms to systematically raise and deploy capital on behalf of wealthy individuals and institutions with the intent to seed small, innovative companies that had the capacity to disrupt existing businesses. (As an aside, I have to point out the clear “social” benefit of targeting returning GI’s as the beneficiaries of this strategy. Echoes of this strategy can be clearly seen in today’s impact-facing VC’s who focus on groups such as minorities, women and the poor. Plus ca change, n’est pas?) The transaction that cemented the notion that venture could be a rather interesting discipline was ARDC’s $70,000 commitment in 1957 to the company that went public as DEC a decade later, valuing that initial investment at nearly $400mm. A tidy CAGR of over 100%.

The industry, such as it was, evolved rapidly over the coming decades, as the center of gravity moved west to what we now know as Silicon Valley, and fortunes were made as technology invaded virtually every aspect of the world’s economy, and as start-up companies received ever more funding from venture capitalists. But it is worth noting that the “industry” was still tiny as late as 1979. With a handful of firms, and total assets raised that year of only $750mm and total invested assets of around $3billion, one could have excused the broader public for knowing virtually nothing about it.

We all know the story of the 1980’s and the hugely successful, very public successes of Kleiner Perkins, Apple, Sequoia, Google, Genentech, etc. that triggered a flood of capital and resulted in the tech bubble of the late 1990’s in which individual firms were raising over $1bb funds every single year, so I won’t bother reviewing it here. Suffice it to say that in less than two decades, VC evolved from an important but minuscule cog in the vast capital market machine to one of the most notorious, well-funded, competitive fields in finance.

It is, in my mind, this evolution that the author of the HBR article referenced. Why? Because, as we have written here, and as others much smarter than I have written elsewhere, only capitalism has the capacity to address some of the heretofore most intractable problems that we, as a global community, face. More to the point, only the power of the capital markets – well-funded, competitive and unbridled – can direct the amount of capital necessary to both address these challenges and reward those who derive solutions from them.

Personally, my fingers are crossed so tightly that this same evolutionary arc is seen in impact that they are turning blue. It is an amazingly exciting time to be engaged in impact, and I think/hope/believe that twenty years from now we will all be looking back at this moment – these few years in the first decades of the 21st century – when the promise of impact was not only identified but realized.

Your ever-optimistic observer,
Matthew