More than a decade after it first emerged, the private equity strategy known as “impact investing” has suddenly taken on new importance.
With the world navigating a pandemic and the U.S. and others confronting social upheaval, ensuring that investment dollars back companies that not only seek to earn profits but are also making the world a better place have taken on newfound importance.
With that backdrop, Oracle NetSuite hosted an Open for Business event designed to highlight impact investing. Whether it’s working on COVID-19 treatments, tackling key environmental challenges or providing opportunities to women and people of color, there are opportunities for impact investors today to generate healthy returns while supporting our society and planet.
And when it comes specifically to women- and minority-owned businesses, the opportunities have always been there, but so too have the prejudices, according to panelists.
Eric Bahn, co-founder and general partner of pre-seed venture capital firm Hustle Fund, believes that the practice of applying pattern matching to investment decisions has left many behind. Especially in Silicon Valley, Bahn said during the Open for Business event, the bulk of investment dollars have gone to companies run by white or Asian men who are usually graduates of prestigious schools.
Hustle Fund boasts a portfolio that’s 50% women-owned companies, with another 30% owned by “underrepresented groups.”
Bahn decided to take a closer look at why white and Asian men were getting capital. He looked for evidence that companies with these demographics performed better than those run by women or African-Americans. But his findings were inconclusive, which told him that pattern matching was a flawed approach for making investment decisions. Which is why his company chooses investments based on the equalizer of “hustle,” which Bahn defines as an optimal combination of execution and velocity.
“What is really the joy of this work is how consistently wrong I am,” Bahn said. “The right phenotype isn’t always the hustler that we’re trying to back.”
Helping Enlightened Investors Sleep Well
Kristin Hull, founder and CEO of Nia Impact Capital, which was named after the Swahili word for purpose, said enlightened investors eventually realize that they can use their money to create the world in which they want to live. Hull said one of Nia’s goals is for investors to sleep well at night knowing that their money is helping to create positive impact.
And the way she sees it, the “who” of impact investing has become more important than the “what.” She cited a study that found that women and minorities manage just 1.3% of the global investment industry’s $69 trillion in assets.
“If we’re not thinking about moving money with a racial or gender lens at this time, can we call that an impact investment?” Hull asked. “I’m not sure.”
Reforesting by Selling Apparel
Tentree is a Saskatchewan, Canada-based company that sells sustainable apparel with a very specific environmental goal: It plants 10 trees for every product sold. So far, the company has planted nearly 50 million trees, with a goal of planting a billion trees by 2030.
CEO Derrick Emsley said that when the company was founded in 2012, the founders (who were all students at the time) knew nothing about making or selling apparel, or even running a business. They started in high school by selling carbon offsets, and they wanted to transition into planting trees. Eventually they settled on apparel as a way to fund their goal while also helping to transform an industry that often has come under fire for its use of natural resources.
Along the way, the company became a Certified B Corporation, a designation that indicates a balance of purpose and profit, which has enabled it to compare itself with other conscious companies and keep the company on the cutting edge of purpose-driven business.
And here’s the thing: its focus on tree planting has actually proven to be a competitive advantage.
“Building a social and environmentally-focused business allowed us to scale in ways that others couldn’t,” said Emsley.
It didn’t matter to the founders what the company sold—Emsley said they were “product-agnostic.” But apparel has been the perfect product to help deliver environmental and industry-reform messages. (Tentree has also created technology tools designed to reinforce global reforesting efforts.)
The company would fit right into the investing sweet spot of Impact Engine, a venture firm that seeks a combination of financial and social returns. The company makes investments in four areas: education, health, environmental sustainability and economic development.
Senior Associate Chris Wu said company filters potential investments based on three qualities: skills and competencies, large market opportunities and compelling opportunities to have an impact. Applying those objective factors, the firm has amassed a portfolio that’s 70% owned by women and minorities.
One of the goals of Impact Engine’s approach is to ensure that consumer spending is routed toward products that yield a positive impact whenever possible. After all, if a purchase isn’t having a positive impact, it’s probably achieving the opposite.
“Each dollar that you spend as a consumer has an impact,” said Wu.
Opening Doors to Conscious Investing
Simply doing business with women- and minority-owned companies can help to open doors that will lead to more conscious investment decisions, panelists said.
Bahn stressed this point by pointing out his own privilege as an Asian-American man who grew up in a wealthy Michigan neighborhood and had college and his first vehicle paid for. Bahn said it was relatively easy for him to access capital in comparison to someone who came from a poor neighborhood and graduated from college with debt. That latter may take a lot longer to gain access to investment dollars, which may mean they’re further along in life and thus less positioned to take risks.
“It’s disturbing,” Bahn said of this unfair reality.
Bahn envisions a future in which small investment funds aren’t set up specifically to meet the needs of women and minorities, but rather anyone can get access to pools of private equity based on merit.
“Inclusivity is actually the way you make the most money,” said Bahn. “Why not have the ability to view talent wherever it comes from?”
Watch the full streaming event on impact investing.