3 Players That Exemplify The Complexity Of The Impact Investing Ecosystem
This post was originally produced for Forbes.
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Three impact investment players provide an interesting view of the broader impact investing ecosystem and how all the parts work together. Their approach helps to make capital more available to social entrepreneurs and investment opportunities open to more investors, including some ordinary investors.
The three include Impact Assets, New Media Ventures and Better Ventures. Impact Assets, a nonprofit asset manager holding exclusively philanthropic capital, serves as a hub in this part of the impact investing world. New Media Ventures and Better Ventures use Impact Assets in strategic but almost opposite ways.
Impact Assets and Donor Advised Funds
Impact Assets provides a place for donors to place philanthropic capital in what is known as a donor advised fund or DAF. As the name implies, funds contributed to a DAF are donations where the donor gets to advise on the final disposition of the funds. DAFs work like small foundations with fewer restrictions and generally more flexibility. Most DAFs don’t give the donor much influence over the investments, only the final charitable distribution.
Impact Assets is different. Built from the ground up to facilitate impact investments, donors also have significant flexibility in advising Impact Assets on the investment strategy. The only investment options available through Impact Assets are impact investments.
Rick Moss, Better Ventures
Rick Moss, founder and managing director of Better Ventures, approached Impact Assets to access some of the capital. Individual donor advisors or clients were given the opportunity to put as little as $25,000 to work in the fund through Impact Assets. Apart from Impact Assets, the minimum investment was $500,000. This works because only Impact Assets is legally an investor in the fund. The individual donors get their information from Impact Assets and are not recorded as investors in the Better Ventures fund. Moss doesn’t have to worry about the number of individual investors participating because he doesn’t have to deal with them.
Tim Freundlich, president of Impact Assets, says you don’t have to be Bill Gates to have sophisticated impact investment options like big foundations see. The nonprofit has about 850 DAFs with an aggregate value of $350 million under management. Hundreds of the accounts are in “the $5,000 range.”
New Media Ventures, led by Julie Menter, its principal, also operates as a 501(c)(3) charity. To create a vehicle for making impact investments and grants, it opened a DAF at Impact Assets. The investors in New Media Ventures get a tax deduction when they make the contribution to the fund and will not have the capital returned to them. New Media Ventures uses the money both to make grants to nonprofits it supports and impact investments in for-profit ventures it decides to back. They can do both via the Impact Assets DAF.
How Impact Assets Supports Both Better Ventures and New Media Ventures
Freundlich explains that Impact Assets does professional due diligence so that its donor advisors don’t have to worry about doing it themselves. For the clients, the risk is mitigated somewhat by the fact that the money is legally a charitable contribution and can’t be withdrawn by the donor for noncharitable purposes.
Impact Assets has a broad range of investments across all asset classes and across all geographies. The company can’t hope to manage all those investments directly. Instead, the firm has brought in 55 funds like Better Ventures to make direct impact investments. The donor advisors can choose whether they want their DAFs to invest and if so how much, subject to the constraints of minimum investment sizes.
Impact Assets also has relationships with about ten firms like New Media Ventures, where they have assets in donor advised funds from which they make impact investments, grants or both.
Tim Freundlich, Impact Assets
Freundlich says not only that Impact Assets was built from the ground up to facilitate impact investing but also that the democratization of impact investing is important. You don’t need to be an accredited investor to establish a DAF and to begin making investments. That said, he acknowledges that to participate in the most sophisticated investment options you may need an account with $200,000 to $2 million. Still, at that level, donors get access to investments that otherwise may be open only to institutions and individual investors with greater than $25 million in net worth.
In addition to the relationships with asset managers like Better Ventures, Freundlich says Impact Assets does make direct investments in social ventures but only on behalf of clients. Last month, he says, the firm made six such investments at the request of donor advisors.
Certainly, among the readers of this article will be some who are interested in the investment strategy for both New Media Ventures and Better Ventures.
Menter’s New Media Ventures developed her vision for investing after realizing that business as usual could solve some but not all the world’s problems. She recognized that our beliefs are influenced by the media we consume and so she wanted to invest in and support media companies and nonprofits that support her progressive view of the world. She’s raised $2.6 million to do so and has invested in “nine or ten” media companies.
She describes three buckets into which the firm invests or makes grants. The first is media, companies like Upworthy, Daily Kos and Blavity. The second bucket is what she describes as movements and the technology to support movements. Examples of investments in this arena include Indivisible, Swing Left and Sister District. The third and final bucket she describes as non-partisan civic engagement platforms like Vote.org and Turbo Vote.
“We’re interested in how we essentially bring the levers of power into the hands of more people and we believe that over time that will create a more just, environmentally friendly world,” she says.
She acknowledges that the media space is challenging. “It’s still not clear how you make money in media.” She hastens to add, however, that Young Turks just raised $20 million, suggesting hope for the media industry.
Moss’s Better Ventures begins with this: “Our basic investment thesis is that mission-driven entrepreneurs outperform.” He believes that passionate entrepreneurs will work harder.
He focuses on firms that have impact with every sale so “the bigger they get the more good they do.”
Moss indicates that they look to invest in companies that have at least two founders that are solving an important problem. He notes that the companies don’t need to have a lot of revenue or historical growth. Typically, they have an MVP or minimum viable product in the market before Better Ventures invests.
Message to Those Passed Over
Most people don’t get investments. Moss acknowledges that when he started the fund he expected to be writing checks all day and instead ended up saying “no” all day.
To the companies he likes but doesn’t invest in, he usually says, keep making progress. He finds they come to him too early, before they are ready for his investment. He encourages them to raise money from family and friends and from angel investors first.
Menter reflects on the difficult “power dynamics.” She says, “I have all the power yet the entrepreneur is actually the one who’s actually making the world a better place.” Motivated by this philosophy, she says she’s developed the ability to deliver bad news well.
She tries to give specific feedback, identifies gaps in the team, business model or marketing strategy that need to be closed. She also encourages social entrepreneurs to get creative with funding, recognizing that not everyone has a network that will support them financially. Some, she points out, finance a startup by winning lots of business plan competitions, others keep their day job to support the work until outside financing comes in.
Evolution of Impact Investing
Freundlich has been working in impact investing for 20 years. A lot has changed in that time with a great deal more attention and capital devoted to the space today. Of the momentum in the impact space he says, “I remember 20 years ago thinking that it was like watching icebergs melt.” He reminds himself—and the audience—that others in the sector had been there for 20 years before he got there.
He sees the entrepreneurs as the real heroes, echoing Menter’s remarks. “Every single one of these tenacious, crazy people who are living a dream, eating ramen soup with the extra job while they crowdfund their way into some amazing venture… deserve the most support and admiration.”
He also admires the successful entrepreneurs like Seth Goldman of Honestea who sold his business to Coca-Cola and now gives back by investing much of his capital in startups and by serving actively on boards.
The three firms profiled in this piece participate synergistically and differently within the impact investing space. Impact Assets, a 501(c)(3) nonprofit, earns fees from the clients that contribute to donor advised funds, much of which is tied to the size of the portfolio.
Julie Menter, New Media Ventures
New Media Ventures gets donations, earns some revenue from events and service contracts, plus takes a percentage of the donations to the NMV Innovation Fund. The nonprofit operates with just three full-time employees with the help of some contractors and volunteers. Menter describes the firm as an impact first investor.
Better Ventures relies on venture capital returns for its operating revenue. The seed fund has $21 million under management. He notes that the operates are profitable today. Moss says the firm seeks to back those who can achieve impact on a massive scale using technology. He says, he like to give founders a safe place to admit they care more about doing good in the world than they do about making money.
These three impact investing players don’t encompass and represent the entire spectrum of activity within the impact investing arena but they do help to demonstrate the breadth of approaches, business models and the necessary collaboration that make it work.
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