The majority of impact investors seek market-rate returns, including 95% of the $6.8 billion of impact capital that is allocated to conservation among respondents to the 2018 GIIN Impact Investor Survey.
Impact Capital Managers, a network of impact private equity and venture capital funds, has invested in several companies that advance conservation outcomes, including Full Harvest and Farmers Business Network. They believe impact contributes added financial value through “impact alpha.”
The future of market-rate investments into conservation-oriented business models looks bright. Thirty percent of the 2018 GIIN Impact Investor Survey respondents planned to increase their allocation to the sector, and the number of entrepreneurs interested in the space has reportedly skyrocketed.
Impact Capital Managers (ICM), a network of impact-focused venture capital and private equity funds, is out to disprove the notion that investing for impact requires sacrificing financial return. On the contrary, ICM members aim to match or exceed the overall performance of the market, and they believe social and environmental objectives contribute to their success.
ICM members invest in companies across a wide range of growth stages and industries, including several with conservation-oriented missions. Their work sheds light on how this growing branch of impact investing can help address conservation challenges.
The Prominence of Market-Rate
Since launching in April 2018, the ICM network has grown from 25 funds with a combined $5 billion under management to 40 funds representing over $11 billion of impact capital. Its members, based in North America, span the gamut of market-rate impact investors. The network includes venture capital firms that helped establish the field, like DBL Partners, SJF Ventures and Bridges Fund Management, along with mainstream financial institutions that more recently embraced impact investing, including the TPG Rise Fund and Bain Capital Double Impact.
According to Karl Khoury, co-founder and partner at Arborview Capital, an ICM member, this rapid growth is a sign of growing acceptance among investors of the market-rate impact philosophy. “People are beginning to realize you can invest for both financial return and positive social and environmental impact. Most investors weren’t comfortable saying that 10 years ago, but there’s no doubt now,” he said.
The 2018 GIIN Annual Impact Investor Survey supports the potential of market-rate impact investing to address the gap in global conservation funding. The survey provides a snapshot of 229 impact investing organizations managing $228 billion of capital. Fully 64% of respondents seek market-rate returns, including all ICM members, with the remainder targeting below-market returns. Though both types of investors allocate just 3% of their capital to conservation investments, that represents $6.5 billion of market-rate capital, compared to $342 million of below-market capital. The report also indicates that interest in market-rate investments in conservation is poised to grow further, with 30% of respondents planning to increase their allocations to the sector.
Future growth of private, market-rate impact funds will depend in part on their financial performance relative to the broader market. Strong returns that validate ICM’s thesis could drive even higher demand from institutional investors like endowments and pension funds, some of which have not yet decided whether impact investing can fulfill fiduciary duties to maximize returns.
A benchmark created by Cambridge Associates and GIIN in 2015 has shown that, in aggregate, impact private equity and venture capital funds launched from 1998 to 2004 outperformed their non-impact peers. Though early results indicate that more recent vintages seem to be underperforming, it is still too early to tell. A fund can take 10 or more years to fully exit its investments, delaying final return measurement. As with all private investing, the performance of impact funds varies widely, with some managers achieving consistent, market-beating returns.
By demonstrating collective success, ICM members believe they can help build a broadly accepted consensus. “We think investing in founders committed to impact is a strategy that provides an advantage and can deliver outsized returns, and we are going to work together to prove that,” said Paul Straub, co-founder and managing partner at Wireframe Ventures, an ICM member.
Models for Market-Rate Conservation Impact
Several ICM-funded companies demonstrate that it is possible to advance conservation outcomes with business models capable of attracting venture capital. Typical prerequisites for venture funding include a large addressable market, defensible differentiation from competitors and potential to scale rapidly.
For example, in 2017 Wireframe Ventures led a $3 million seed round for Full Harvest, a business-to-business marketplace for surplus and imperfect produce. The company aims to reduce food waste by connecting large farms with commercial buyers—like juice or snack manufacturers—that have latent demand for disfigured and excess crop production often discarded at the farm level. It differs from competitors in its focus on building consolidated demand from commercial buyers, rather than using a direct-to-consumer model. By targeting crops like kale that have recently surged in demand, Full Harvest may also help to create secondary markets that do not already exist.
“Land, water, and nutrient inputs have all been used to grow this excess produce, and to let it go to waste is not only an enormous environmental cost, it’s a huge economic cost to the growers,” said Wireframe’s Straub.
After the initial investment, Full Harvest gained traction with national food and beverage companies and raised an $8.5 million Series A in August 2018, led by Spark Capital with additional follow-on from Wireframe. Full Harvest’s CEO, Christine Moseley, provides investors with reports on water saved and carbon abated through the platform, alongside the company’s financial results.
Portfolio Company Engagement
When the opportunity arises, impact venture capital funds can contribute environmental expertise to assist portfolio companies in targeting new, conservation-oriented business opportunities. For example, DBL Partners, an ICM member, leveraged its knowledge of organic and environmentally sustainable farming after investing in Farmers Business Network (FBN), an ag-tech company that uses machine learning to analyze aggregated data from its member farmers. FBN provides farmers with democratized information that improves outcomes by enabling better operational decisions, including fertilizer application, land use practices and seed selection.
DBL has been a key investor in FBN since June of 2014 and a board member since 2015. During that time, DBL has engaged in an ongoing dialogue with FBN’s leadership about the company’s potential to address key issues in farming today, including worker access to healthcare and the shift to sustainable farming practices. In part due to these conversations, FBN introduced a health insurance product for the families of its members in 2018. That same year, FBN acquired AgriSecure, a startup that helps farmers of large row crops switch to organic production.
“After the acquisition, we felt empowered as a board member to advocate for the business opportunity presented by organic production,” said Nancy Pfund, founder and managing partner at DBL. “We worked with the leadership at FBN to publish a white paper explaining the process of going organic and why it was compelling. The paper provided a well-researched, effective communication tool to market the new organic dimension of their platform.”
The paper, “Got Organic? Welcome to the Age of 21st Century Organic Farming,” outlines the economic opportunity presented by organic farming and provides a roadmap for conventional row crop farmers interested in transitioning. Since its release to more than 3,000 farmers at the December 2018 Farmer2Farmer conference in Omaha, Nebraska, the paper has helped increase interest in organic production across the FBN network, and the company now plans to organize additional educational opportunities for farmers. For example, DBL and FBN are organizing a workshop and organic farm tour during the summer of 2019 in Nebraska that will include traditional and organic farmers along with public and private entities engaged in farm finance.
Several impact investing field-building organizations have emerged in recent years, but ICM differentiates itself with its exclusive focus on market-rate impact funds. ICM members believe there are clear benefits to this narrowed scope.
“The field of impact investing is continuing to grow, and the number of practitioners and approaches is growing as well,” said Pfund. “ICM is not a value judgment about other approaches, we simply feel that market-rate impact firms share particular needs and challenges. Bringing those firms together to inform one another's experiences is especially helpful.”
ICM members plan to share best practices, support policies that promote the expansion of market-rate impact investing and engage in research to advance the field. To this end, ICM partnered with Tideline, an impact investing consultancy, to publish “The Alpha in Impact” in December 2018. The report outlines ten drivers of “impact alpha,” or ways that operating with an impact focus can create financial value for investors and portfolio companies. While the concept is not new, the report articulates a novel, detailed framework for impact alpha.
Notably, all ten drivers identified in Tideline report can be enhanced through collaboration, including sourcing companies through mission-aligned networks and leveraging impact expertise to identify new market opportunities. For Straub, attracting talent is a key source of impact alpha that collaboration with other ICM members magnifies.
“The most important thing when you’re building a company is finding great people, and it’s always very competitive,” he said. “If you have a mission, that gives you an advantage and provides intrinsic motivation to employees. The extent to which we can band together and use our networks to help each other access great people for our companies is a very interesting opportunity.”
The Way Forward
Despite promising examples like FBN, conservation-related investments are still a small fraction of the portfolios for the impact private equity and venture capital firms that make up ICM. According to Pfund, that is going to change.
“We are convinced that as people continue to realize that conserving land and forests, reducing waste and using resources efficiently are vital to the future of our planet, there will be more investments in companies that employ conservation improvements not only for environmental purposes, but to propel their core business,” she said. “We expect this field to become a promising new part of the impact investing opportunity set going forward.”
Growing entrepreneur interest could provide another tailwind to accelerate venture capital and private equity investments into the space. According to Khoury from Arborview Capital, the number of entrepreneurs focused on sustainability has exploded in recent years.
“The concept of resource efficiency and sustainability is a mammoth, multi-generational problem,” he said. “I think the number of companies dedicated to sustainable foods, sustainable products and services creating more efficient outcomes for our economy will continue to grow because extraordinarily smart, mission-aligned people want to build a career on something that is important to them. That’s only going to continue over the next 10 to 20 years.”