Can a Double Bottom Line Bring Better Returns?

DBL Partners' Managing Partner, Nancy Pfund and Partner Seth Miller Make the Case for Free Music Lessons

January 31, 2013

That’s what employ­ees of Inter­net music and DBL port­fo­lio com­pany Pan­dora are giv­ing kids in Oak­land, Cal­i­for­nia schools.  Why would a VC firm encour­age its invest­ment com­pa­nies to do this?  To show how com­pa­nies with active com­mu­nity out­reach pro­grams make a dif­fer­ence where they’re based, and deliver supe­rior finan­cial returns — the Dou­ble Bot­tom Line.

This post in Yale Insights, from the Yale School of Man­age­ment details DBL Part­ners’ approach and why it’s work­ing for a grow­ing num­ber of com­pa­nies that are win­ning their respec­tive mar­kets.  The orig­i­nal arti­cle ran in 2008, but the mes­sages res­onate even louder today.

DBL Man­ag­ing Part­ner Nancy Pfund

A group of third graders bumped into Steve Hogan as he walked in the door of Futures Ele­men­tary School in East Oak­land on the last day of school. Their eyes got wide. They began jump­ing up and down in excite­ment, say­ing, “Do we have music class today?” After a dozen two-​​and-​​a-​​half-​​hour ses­sions, Hogan says, “It was grat­i­fy­ing to know they were still look­ing for­ward to it” — even in the last hours before sum­mer vacation.

Hogan is a pro­fes­sional musi­cian and the music oper­a­tions man­ager for the inter­net radio com­pany Pan­dora. This past year, he was among 10 employ­ees of the Oakland-​​based com­pany who cre­ated and pre­sented a music cur­ricu­lum at the nearby school, which had lost its arts pro­grams to bud­get cuts. The lessons intro­duced the var­i­ous fam­i­lies of instru­ments and even explained some music the­ory, using a great deal of live per­for­mance from the Pan­dora vol­un­teers, who are all also pro­fes­sional musi­cians. The classes cul­mi­nated in stu­dents singing or rap­ping on tracks that were then mixed into CDs.

It may be sur­pris­ing to learn that the vol­un­teer project was prompted by one of the ven­ture cap­i­tal firms fund­ing Pan­dora, DBL Part­ners. Per­haps more sur­pris­ing is the fact that Seth Miller, a part­ner at DBL, par­tic­i­pated in every ses­sion. Miller ral­lied Pan­dora vol­un­teers and worked with them to ensure that the pro­gram became self-​​sustaining. In the process, he built con­nec­tions at Pan­dora. “We get to know our com­pa­nies in ways that other investors may not, so we’re bet­ter able to help and guide them on behalf of our lim­ited part­ners, who are expect­ing us to gen­er­ate supe­rior returns,” Miller says.

DBL stands for Dou­ble Bot­tom Line. Like any VC firm, its goal is to make money. But an addi­tional focus — its sec­ond bot­tom line — is social, envi­ron­men­tal, and eco­nomic improve­ment in the San Fran­cisco Bay Area’s low– and moderate-​​income neigh­bor­hoods. Nancy Pfund ’82 cre­ated the com­pany when she spun the $75 mil­lion Bay Area Equity Fund off from JPMor­gan in early 2008.

DBL Part­ner, Seth Miller

Though many of the firm’s invest­ments have an envi­ron­men­tal angle, such as the elec­tric car com­pany Tesla or Bright­Source Energy, which builds and oper­ates solar power plants, DBL doesn’t use pos­i­tive screens (“we invest only in com­pa­nies that do x”) or neg­a­tive screens (“we won’t invest in com­pa­nies that do y”), as many ven­ture investors with a sec­ond bot­tom line do. Miller says, “Our phi­los­o­phy is that every com­pany has an impact on the com­mu­nity around it. If that com­pany is aware of that impact, proac­tively seeks to improve, and exe­cutes every year, the rip­ple effect is huge.”

Hope­fully we’re work­ing with com­pa­nies which, at some point, are going to grow to have many employ­ees. We can influ­ence them at an early stage — make the sec­ond bot­tom line part of their DNA,” Miller adds.

Pan­dora was attrac­tive, from a second-​​bottom-​​line per­spec­tive, because it is bring­ing good jobs to Oak­land and employs musi­cians, who are typ­i­cally under­em­ployed, with low incomes, and have a hard time find­ing jobs flex­i­ble enough to con­tinue per­form­ing. But, DBL founder Nancy Pfund points out, the mission-​​driven part of the work con­tin­ues only if the returns are there. “We made an invest­ment with them, first and fore­most, because we think Pan­dora is a game-​​changing com­pany with poten­tial to be very successful.”

Much of that poten­tial comes from the intel­lec­tual prop­erty at the heart of the com­pany: a mas­sive data­base called the Music Genome Project. Each of the 600,000 songs in the ever-​​growing data­base has been ana­lyzed for some 400 attrib­utes by Pandora’s staff of 45 headphone-​​clad musi­cians, who spend their work­days lis­ten­ing to music, typ­i­cally ded­i­cat­ing 20 to 30 min­utes to each song.

The data­base lets Pan­dora users cre­ate free, cus­tom radio sta­tions on their com­put­ers. Sim­ply enter the name of an artist or a song and the Music Genome Project plays music with sim­i­lar char­ac­ter­is­tics in the vocal style, instru­men­ta­tion, rhythm, or melody.

In its third year since launch­ing the web­site, Pan­dora is on track to achieve $20 mil­lion in sales for 2008, almost entirely from ads. “Ulti­mately our goal is to be the biggest provider of radio in the world,” Joe Kennedy, the CEO of Pan­dora, says. He adds that with more than 15 mil­lion users Pan­dora is already the largest inter­net radio ser­vice, and has grown quickly in recent months, in large part because its iPhone appli­ca­tion is among the most pop­u­lar for the Apple device.

While ven­ture cap­i­tal­ists gen­er­ally look for par­tic­u­lar qual­i­ties in invest­ments, it often mat­ters less to com­pa­nies where their money is com­ing from. Kennedy says, “Every good ven­ture cap­i­tal­ist knows to look for dif­fer­en­ti­a­tion in the strat­egy or assets of a poten­tial invest­ment. Iron­i­cally, VCs them­selves are not at all dif­fer­en­ti­ated. From the stand­point of a com­pany look­ing for invest­ment, they tend to look and sound alike, at a firm level.” DBL is a ven­ture cap­i­tal group that stands out, Kennedy says. “Seth is the only VC the employ­ees could name.”

From a typ­i­cal busi­ness per­spec­tive, some of DBL’s approach may seem indi­rect, but the firm sees its role as fos­ter­ing a healthy ecosys­tem, includ­ing the com­pa­nies it invests in and their sur­round­ing com­mu­ni­ties. For exam­ple, the dig­i­tal media busi­ness is in a dis­pute with the music indus­try over fair and appro­pri­ate com­pen­sa­tion of roy­al­ties, a fight that has moved to Wash­ing­ton. When Pan­dora wanted to talk to mem­bers of Con­gress, it turned out that the U.S. Rep­re­sen­ta­tive for Oak­land, Bar­bara Lee, had already heard about Pandora’s project at Futures Ele­men­tary School and was eager to meet with the company.

Nancy Pfund says that this sort of full-​​circle impact of the involve­ment with the com­mu­nity isn’t unusual. “We have seen it so many times that we’re con­vinced that this is a very pow­er­ful busi­ness tool, as well as a social tool.”

Kennedy explains the busi­ness impact of DBL’s sec­ond bot­tom line this way: “Their social pur­pose makes them much more con­nected to gov­ern­ment and pol­i­tics than a nor­mal VC firm.” One of those dif­fer­en­ti­at­ing skill sets the com­pany offers is the abil­ity to work with state, local, and national gov­ern­ment agen­cies. In one case that meant find­ing employ­ment pools for entry-​​level posi­tions through local work­force devel­op­ment boards. In another it was help­ing to secure a pack­age of about $200,000 in tax and other incen­tives from San Fran­cisco for solar sys­tem installer SolarCity to locate a train­ing cen­ter in a low-​​income neigh­bor­hood as an anchor for revi­tal­iza­tion efforts.

A lot of what we do is edu­cate entre­pre­neurs about the pro­grams that exist to attract busi­nesses into these enter­prise zones,” Pfund says. “It’s just not part of the knowl­edge set of the entre­pre­neur­ial econ­omy. So we do a lot of con­nect­ing the dots.”

Our whole the­sis is based on pro­mot­ing public-​​private part­ner­ships,” she adds. “It takes a very ded­i­cated and for­mal com­mit­ment to reach­ing out to the pub­lic sec­tor in order to get these things done.” Pfund describes assist­ing Tesla Motors with gain­ing a pack­age of incen­tives from the state of Cal­i­for­nia worth $15 mil­lion to locate its elec­tric car man­u­fac­tur­ing facil­ity there. That prompted a $20 mil­lion offer from New Mex­ico that was accepted.

When the com­pany decided to bring the plant back to the Bay Area, we were involved, but they had already learned how to do it, so they didn’t need as much involve­ment from us. They kind of ran with it and got the gov­er­nor to sit down with them. That’s immensely grat­i­fy­ing, to see that once you edu­cate and make peo­ple aware of the ben­e­fits of this approach, they can go and do it them­selves,” Pfund says.

The focus on teach­ing com­pa­nies to engage with their commu-​​nities and find solu­tions to com­plex issues through public-​​private part­ner­ships seems to be pay­ing off finan­cially. Four years in, with two liq­uid­ity events and sev­eral com­pa­nies hav­ing com­pleted addi­tional rounds of fund­ing, DBL’s port­fo­lio is track­ing in the top quar­tile of funds of the same age. Next up, a crit­i­cal issue with­out any glamor but count­less inter­ested par­ties: the trans­mis­sion infra­struc­ture. Bright­Source Energy is prepar­ing to gen­er­ate solar power on a large scale. “If you gen­er­ate hun­dreds of megawatts of solar power in the Mojave Desert, that’s won­der­ful, but if you don’t have a trans­mis­sion grid to take that power to the cen­ters of pop­u­la­tion that need it, that’s a prob­lem. And the minute you start get­ting into build­ing trans­mis­sion infra­struc­ture, you are in a morass,” Pfund says. Refer­ring to the sup­port pro­vided by San Fran­cisco for the SolarCity job train­ing cen­ter, she says, “That’s sort of Pub­lic Out­reach 101, but trans­mis­sion infra­struc­ture is a post-​​graduate seminar.”