Investing for Good’ Gains Appeal Amid Rocky Tech Startup Market

Fortune
By Reuters
June 25, 2016

VCs see risk in emerg­ing mar­kets, but they should also be see­ing huge poten­tial profits.

As val­u­a­tions floun­der for Sil­i­con Val­ley star­tups once worth bil­lions of dol­lars, investor inter­est is on the rise in star­tups with both finan­cial and social ben­e­fits, such as health­care soft­ware for poor com­mu­ni­ties or low cost solar pan­els for homes.

So-​​called “impact invest­ing” rose to $15.2 bil­lion glob­ally last year from $10.6 bil­lion in 2014, accord­ing to a recent report by the Global Impact Invest­ing Net­work. The fig­ure includes sev­eral types of invest­ment, from funds to foun­da­tions, which intend to gen­er­ate social and finan­cial returns.

The group expects a 16% rise in 2016. The change reflects investor con­cern with cur­rent val­u­a­tions of more main­stream tech­nol­ogy star­tups, a desire to help by some investors and a broad­en­ing def­i­n­i­tion of social-​​good star­tups. There is also grow­ing sen­ti­ment that the rise of mobile tech­nol­ogy will allow for prof­itable upstarts in parts of the world rel­a­tively untouched by Sil­i­con Valley.

Ear­lier this year Union Square Ven­tures Part­ner Fred Wil­son called the devel­op­ing world “the next white­space” for ven­ture cap­i­tal, point­ing to 2.5 bil­lion peo­ple poised to adopt smartphones.

Altru­ism and Prof­its for Kick­starter the Pub­lic Ben­e­fit Corporation

Big finan­cial insti­tu­tions such as Bank of Amer­ica BAC –5.58% and JPMor­gan Chase JPM –2.89% are invest­ing, see­ing rural com­mu­ni­ties and emerg­ing mar­kets as poten­tial cus­tomers for finan­cial services.

The drop in val­u­a­tions for tech indus­try dar­lings that do “things my mom used to do for me” was a “piv­otal wake up” for investors, said Doug Galen, chief exec­u­tive of Rip­ple­Works, which pro­vides advis­ers for entre­pre­neurs in the devel­op­ing world.
Speak­ing on the side­lines of the Global Entre­pre­neur­ship Sum­mit, put on by the U.S. State Depart­ment this week at Stan­ford Uni­ver­sity for entre­pre­neurs from around the world, he and oth­ers poked fun at busi­nesses made by and for well-​​off Americans.

Uber for pets or overnight under­wear delivery—those things def­i­nitely aren’t get­ting the same trac­tion they were six months ago,” Andrew Beebe, man­ag­ing direc­tor at Obvi­ous Ven­tures, a ven­ture firm for ‘world-​​positive’ invest­ing, said in an inter­view with Reuters. “But take water (short­ages) —on the other side of that solu­tion is a mas­sive pot of gold,” he said.

How Com­pa­nies Can Enrich Shareholders—and the Planet

The case for invest­ing in social impact star­tups is the sheer size of the mar­ket; mil­lions of peo­ple lack access to clean water, for instance. But, with com­pa­nies serv­ing cus­tomers liv­ing on $2 a day, prof­its can at times be slim.

Maybe 2% is a fab­u­lous return in some cases,” said Matthew Ban­nick, man­ag­ing part­ner at Omid­yar Network.

By com­par­i­son, tra­di­tional ven­ture cap­i­tal­ists might seek a return 10 times their investment.

Some impact investors such as DBL Part­ners have had strong returns by using a broader def­i­n­i­tion of ‘social impact.’ DBL con­sid­ers its invest­ments in elec­tric car com­pany Tesla Motors and Juicero, a juice com­pany that raised $70 mil­lion in March, as hav­ing both finan­cial gain and social impact.

You can walk and chew gum at the same time,” said Nancy Pfund, founder of DBL, which raised a $400 mil­lion fund last year.

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