Why Every Venture Capitalist Should Focus On Social Impact
My partners and I intend to change the world. We invest only in companies whose employees have a burning desire to solve a large social problem (in our case, a social problem related to learning and teaching). We turn down many potential investments that we think will make a lot of money because we don't think the company is committed enough to doing something genuinely transformative.
It is sometimes hard for us to explain why we do this. Some potential investors in our fund ask us what sort of trade-off we make between social impact and financial returns. How much money are we leaving on the table when we focus on changing the world?
The answer is that we do not believe that we are leaving a single nickel on the table because of our focus on social impact. On the contrary, we believe that our attention to social impact makes us far stronger as investors and helps us avoid many mistakes.
When we think about social impact, we don't just ask whether a category of product is a good thing. Yes, digital books are good. And so are thin film solar panels. So in a general sense investing in companies in those categories may have a positive social impact. But when we look at an investment, we think it is important to ask a further question, the most important single question in impact investing: does the world need this particular company?
One reason why so many investors lost so much money on clean tech over the last decade was that they funded many very similar companies with similar technologies and similar strategies. The world may need solar panels, and it may even need thin film solar panels, but did the world really need thin film solar panels from Solyndra, Abound, First Solar, Oerlikon Solar, Sanyo, General Electric, Miasole, Konarka Technologies, Heliovolt, United Solar Ovonic, and many others? And should startups be building manufacturing plants that could cost $500 million and scaling processes involving dozens or hundreds of technical challenges, or was this a game best played by large companies? In retrospect, it is now easier to see that investing in thin film solar companies was not a good way to achieve either a social impact or a financial return. First Solar made spectacular returns for its investors because it entered a vacant space. First Solar's hordes of imitators have not fared as well. The world did not need those companies. The biggest rewards go to entrepreneurs and venture capitalists who set out to go into the blank space, where no adequate solutions exist.
There will also certainly continue to be investors who make money on investments that are socially irresponsible. But those investors will run terrible, career-ending risks every day. Investing for social impact is the only rational investment strategy.