Impact Unicorns: Can We Have Our Cake and Eat It Too?

SOCAP
By Fran Seegull
September 9, 2016

The term “uni­corn” was coined by Aileen Lee of Cow­boy Ven­tures to describe pri­vate com­pa­nies that have achieved a post-​​money val­u­a­tion of $1 bil­lion or more. Orig­i­nally, these com­pa­nies were scarce, mag­i­cal and elu­sive. As of August 31, 2016, accord­ing the Crunch­Base Uni­corn Leader­boards, there are now 191 unicorns.

In my impact invest­ing prac­tice at ImpactAs­sets and in the grad­u­ate class I teach at USC’s Mar­shall School of Busi­ness, I have adapted the phrase. I describe an “impact uni­corn” as a com­pany that is posi­tioned to achieve a mar­ket rate of finan­cial return AND high lev­els of impact. Pop­u­la­tion growth, income inequal­ity, cli­mate change and other social and envi­ron­men­tal fac­tors are shap­ing our world. The pri­vate sec­tor has a major role to play (and returns to make) in ame­lio­rat­ing these intractable chal­lenges by invest­ing in ven­tures that are con­sis­tent with our val­ues. Indeed, impact uni­corns achieve strong finan­cial returns because of, not in spite of, their impact theses.

The impact invest­ing field has often used the Mon­i­tor Insti­tute frame­work of “impact first” and “finan­cial first” to cat­e­go­rize the invest­ment ori­en­ta­tion of com­pa­nies and funds. While a bit reduc­tive, this frame­work has per­sisted since its intro­duc­tion in 2009. Accord­ing to it, invest­ments that seek to max­i­mize impact with a finan­cial floor are called “impact first.” Those that seek to max­i­mize finan­cial impact with an impact floor are deemed “finan­cial first.” Implied by this frame­work is a trade­off between finan­cial and impact returns. Recent stud­ies from Cam­bridge Asso­ciates, GIIN and the Whar­ton School of Busi­ness indi­cate that impact-​​focused ven­ture cap­i­tal invest­ments can achieve mar­ket rate returns. But, what about the mea­sure­ment of their impact returns? Can investors have their cake (finan­cial returns) and eat it, too (impact returns)?

Let’s take a look at this frame­work and deter­mine where Impact Uni­corns may fit in a 2×2 matrix. Impact first and finan­cial first as described above are in the upper left and lower right quad­rants, respec­tively, imply­ing a trade­off. In the lower left quad­rant, we have deals with sub­op­ti­mal finan­cial and impact returns—an investor wouldn’t make these types of invest­ments. In the upper right quad­rant, we have those invest­ments that achieve risk-​​adjusted rates of finan­cial returns and strong social and envi­ron­men­tal impact. These are the so-​​called “Impact Unicorns.”

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Over the last five years, as Chief Invest­ment Offi­cer of ImpactAs­sets, I have had the oppor­tu­nity to see the impact invest­ing field grow sub­stan­tially. Many invest­ment funds and impact ven­tures over time have deliv­ered a very strong com­bi­na­tion of finan­cial and impact returns. In build­ing a pri­vate debt and equity plat­form for ImpactAs­sets, we have largely, but not exclu­sively, added funds that invest in impact uni­corns. These include funds from firms such as Bet­ter Ven­tures, Core Inno­va­tion Cap­i­tal, Ele­var Equity, MicroVest and Sarona. To bring the impact uni­corn to life, let’s explore some examples.

Ele­var Equity, from their sec­ond ven­ture cap­i­tal fund, invested in Varthana, an afford­able pri­vate school finance com­pany in India. Only 260 mil­lion of the 400 mil­lion school-​​aged chil­dren in India are enrolled in school. Neigh­bor­hood pri­vate schools are crop­ping up, but they need growth cap­i­tal to scale–this is the gap filled by Varthana. Today, Varthana has improved over 400 schools, impact­ing over 200,000 stu­dents, exem­pli­fy­ing Elevar’s approach to “human cen­tric ven­ture cap­i­tal.” While there hasn’t been a real­ized exit to date, the com­pany has received fur­ther financ­ing rounds at increased valuations.

An impact uni­corn that has already seen an exit is Nex­Tracker. This com­pany, a DBL Part­ners ven­ture investee, makes solar tracker sys­tems, serv­ing clients in Asia, Europe, and North and South Amer­ica. Nex­Tracker sold to Flex­tronix for $330 mil­lion just 21 months after the company’s found­ing and DBL’s invest­ment.  To date, the com­pany has cre­ated 4.8GW of solar energy through its projects, off­set 1,226,121 tons of CO2 emis­sions, pow­ered 920,629 homes and planted 2,465,756 trees.(1)

To read Fran Seegull’s com­plete SOCAP post, visit SOCAP.