Venture Capital Funds all have a thesis about what makes them tick and why institutional and individual investors would join them as Limited Partners. Social and Environmental Impact Funds often struggle to articulate their social or environmental impact thesis because of a variety of conflicts within the impact investing space – not the least of which is the false dichotomy of “purpose over profit” while others struggle with being hyper-focused on one cause vs. taking a holistic approach. Here is a chance to read an Impact Venture Capital Fund’s thesis that reconciles this dichotomy and offers a way for investors to make significant and measurable social and environmental impact while also achieving top quartile market rate returns. The Fund is the Rockies Impact Fund, based out of Denver, Colorado. The Fund is launching in 2020 with a mission to invest in the most innovative impact companies in the U.S. Led by an experienced management team with over a hundred investments, this new fund is pioneering a way to make the most impactful investments targeted at top quartile market rate returns. Read on to learn how they do it. Rockies Impact Fund Investment Thesis: Our thesis is that we will achieve top quartile venture capital returns while focusing our investments innovative companies that are the drivers of human growth creating measurable impact in social and environmental sectors such as healthcare and life sciences, education, food and employment security, and cleantech. The Rockies Impact Fund thesis unpacked. Our thesis is comprised of five elements, each of which has deep thinking behind it based on our experience in the venture capital investing world, intensive work in social and environmental impact companies and our engagement in the world of impact investors and how they think about “impact”. We’re concerned about attitudes about “impact investing” and general confusion about what this means exactly. We find little in common between early stage venture impact investing and public “ESG” (Environmental and Social Governance) companies. The differences are far more substantial than just size and corporate structure. The “ESG” companies are rarely innovative in the way that startups are, and worse, their impact may actually be negative overall. We’re skeptical of the greenwashing that companies like Exxon, ConocoPhillips, CocaCola, Nestle, Clorox and others use when they raise the ESG banner over their names. There is simply no way that the net impact of these companies is positive, despite their ability to comply with ESG metrics that somehow don’t take the massive negative environmental and social impacts these companies create into consideration. The Rockies Impact Fund seeks to distance itself from these companies, and the disfunctional metrics that allow them to be considered “impact investments. The Rockies Impact Fund is in search of high returns in truly innovative companies that are solving problems for the future of all of us, our children and our children’s children. Please take a moment to consider the perspective of these five elements of the Rockies Impact Fund’s thesis to better understand where the leaders in impact investing are headed. 1) “Our thesis is that we will achieve top quartile venture capital returns” Top quartile returns in the VC industry have ranged from 18% to 37% in annual growth over the past decade with an average across vintages of 25.59%. The current investments in the Rockies Venture Family fall squarely within the upper quartile returns spectrum, based on year over year increase in Net Asset Value. Our experience has been that impact companies in our portfolio have actually slightly outperformed other sectors such as SaaS technologies, Artificial Intelligence and E-Commerce. The surprising conclusion is that impact companies don’t need to have reduced expectations of growth or investor returns that many people in the impact world seem to expect. Our thesis is that if we’re investing in a company that creates positive measurable social or environmental outcomes, everyone involved should be working to grow this company as large as possible to create positive returns and exponential growth in impact and financial return upon acquisition. The more these companies grow, the more good we create in the world. It’s that simple. Many impact funds and investors believe that “zebras are better than unicorns” and focus on small business. While there is a place for this, our belief is that it is not a place for venture capital. The concept of “concessionary” returns for impact companies which may seek to return only one to five times the investment is simply not necessary when companies that are creating true innovation and are driving human growth in so many ways, while also having the potential of returning 10X the investment or more. Rockies Impact Fund has had a geographical secret weapon for creating better returns that other Funds may not have in their arsenal. While the Fund may invest in the best companies anywhere in the U.S., its portfolio is weighted towards Colorado and the Rocky Mountain Region. Companies here are valued at up to 30% less than similar companies in Silicon Valley or New York. Silicon Valley Bank has done research for us showing this discount is consistent over time, but that as companies move towards acquisition, their valuations converge with those of coastal firms, thus resulting in potentially higher returns for portfolio companies in our region. The Fund also benefits its individual Limited Partners by primarily investing in QSBS stocks that qualify for Section 1202 tax free status for individual investors. The Fund additionally passes through Colorado tax rebates of 25% on qualifying investments, also to individual Limited Partners who are Colorado taxpayers. These tax favored structures benefit individual L.P.s with increased cash on cash returns without detriment to institutional investors who may not qualify for these tax breaks. To create top quartile returns, we have a portfolio strategy that includes diversification into approximately 25 portfolio companies. We believe that smaller portfolios increase concentration risk to Limited Partners and defeat many of the reasons for investing in a managed fund. We also believe that significantly larger portfolios suffer from a lack of the hands-on engagement with management teams and boards which has been shown to increase returns. The “spray and pray” method of investment does not foster best investment and portfolio practices and makes thorough due diligence and management difficult. Our portfolio theory also holds that a significant portion of the Fund, ranging from 50-66%, should be held in reserve for follow-on investment. Our first round investments typically include rights to participate in follow-on rounds. We believe that after investing and working closely with a portfolio company, we have better inside information than new investors, and we are in a better position to invest (or not) in subsequent rounds. By continuing to invest in follow-on rounds, we reduce overall risk to the fund, by shifting a portion of the capital to increasing later stages of company development where many of the early stage risks have been mitigated. Additionally, this strategy allows for any of our portfolio companies to grow to the point that just one company can “return the fund”. 2) “Focusing our investments innovative companies” The companies we invest in are truly innovative and are bringing new technologies, products and services to markets that don’t have the ability to develop innovation on their own. We have a saying, “M&A is the new R&D”. Large corporations are no longer innovating as much as they did in the past, and they are using M&A to acquire innovation instead of developing it in house. This simultaneously reduces risk for them, and creates opportunities for social and environmental impact companies that have created scalable impact solutions. While R&D budgets have been on the decline, a combination of the 2017 corporate tax breaks, cheap access to plentiful capital, and large corporate cash reserves, have all led to an increase in acquisitions in recent years. Impact investments in so called ESG companies in the public markets don’t provide the same level of impact innovation that early stage startups can, so Limited Partners in early stage impact funds can have a chance to support game-changing technological advancements rather than incrementalism of the incumbents. As an example, one of our portfolio companies, PharmaJet, Inc. based out of Golden Colorado, is innovating in healthcare vaccine delivery in ways that create multiple positive social and economic benefits. Their patented, innovative needle-free delivery system for both subcutaneous and intramuscular vaccines is game-changing in providing the following health care benefits:
- The needle-free system engages more members of the community who may have been needle-phobic, to get vaccinations, resulting in higher overall public health outcomes.
- The needle-free system eliminates needle-prick infections for healthcare practitioners, resulting in significant savings.
- The needle-free system results in elimination of needle re-use, especially in third-world countries where a single syringe may be used ten or more times, with resulting infection increase.
- The PharmaJet cartridges have zero waste vs. up to 35% vaccine waste in traditional needles and vials. This makes a huge community impact for vaccines such as polio which are currently in a world wide shortage.
- The PharmaJet delivery methodology pierces the skin, and also the cells below the skin. This makes delivery of new DNA based vaccines extraordinarily more effective because of the need for these vaccines to interact with the DNA within the cells. Traditional delivery methods require much more of these expensive and difficult to manufacture vaccines to achieve the same results.