Corporate VCs are exploring different models of impact and diversity investing - but which is right for you and why?
Corporate impact investing has been getting increasing amounts of money over the past decade, ever since Comcast Ventures in 2011 put $20m into a Catalyst Fund to invest in underrepresented ethnic minority founders while Intel Capital launched a $125m Diversity Fund in 2015.
But now there is heightened interest in sustainability and diversity in the wake of the George Floyd killing and the growing climate emergency, and as pressure grows to make sure impact funds really have impact, companies are evolving their models.
Some are moving away from funds run by their VC subsidiaries to independent specialist vehicles while others prefer to invest directly or through dedicated foundations. Others have decided an impact investment vehicle works best if it is it completely outside corporate control.
We have a look at the pros and cons of the emerging models.
The classic approach — a dedicated fund inside a corporate VC unit
The traditional approach was for a company’s existing corporate venturing arm to put together a dedicated fund under a qualified leader that could facilitate its existing deal flow and make use of the unit’s resources.
In addition to Comcast Ventures’ Catalyst Fund, Intel Capital put together a $125m Diversity Fund in 2015 before Salesforce followed suit with a $50m Impact Fund two years later. Intel Capital had fully committed the capital in 2018 and has not launched a successor fund, instead setting internal targets on investment in founders from diverse backgrounds.
Salesforce Ventures however continues to operate through the model, announcing a $100m second Impact Fund in late 2020 to back sustainability, workforce development and the social sector along with diverse founders.
The vehicle, led by Salesforce’s director of impact investing, Claudine Emeott, essentially works with the same core strategy as the rest of the unit and hunts out impact-focused portfolio companies which can also bring strategic benefit to the company.
“We’re looking for the best-in-class enterprise software companies,” Emeott tells Global Venturing. “For every potential investment we try to solve for three things: financial return, strategic integration with our platform and impact. This means that we are different from a traditional investment fund that’s only looking for a financial return because we also need to demonstrate a strategic integration and measurable impact.
“The close relationship between Salesforce Ventures and Salesforce also provides our portfolio differentiated access to one of the fastest-growing enterprise software companies in the world. This offers value beyond just capital, including go-to-market advice and customer introductions.”
The independent fund model
Other corporates have chosen to put dedicated funds together outside of their existing VC operations. The specialist fund approach allows for increased concentration on target areas while hopefully accessing the cash and resources of a corporate.
Banking group Citi already invested out of its Citi Ventures and Spread Products teams when it launched its Impact Fund with $150m in early 2020, but the fund’s 12-strong team works independently while sharing resources across the company’s various departments.
“Right now, it works pretty seamlessly,” says Impact Fund managing director Meredith Shields. “We collaborate, share deal flow and pipeline, but we do have separate and distinct teams.”
The decision to create a separate fund does however require a clear vision of its aims and brief.
Insurance firm Massachusetts Mutual formed the $50m MM Catalyst Fund in March 2021, allocating half its capital to startups with black founders and half reserved for founders in its home state of Massachusetts (but not Boston). Rilwan Meeran initially led the unit but left MassMutual early this year without it announcing a debut deal.
MM Catalyst Fund did eventually surface under Diane Henry, MassMutual’s head of impact investment funds, leading a $10m round for restaurant staff management platform HourWork, a restaurant staff management platform in March this year, but it stands as an example of how the best intentions require the same focus and stability as any other VC vehicle.
The independent fund model has also been pursued by Microsoft and Amazon — two of the world’s five largest companies by market cap — with the launch of dedicated climate technology funds in 2020, both pursuing separate investment strategies to their exiting investment arms.
Brandon Middaugh manages the $1bn Climate Innovation Fund as part of Microsoft’s Environmental Sustainability team, making large-scale investments in companies such as drinkable water technology developer Source and sustainable jet fuel provider LanzaJet that are markedly different from those by M12, the enterprise-focused VC firm Microsoft sponsors.
Similarly, Amazon’s $2bn Climate Pledge Fund is led by Rodrigo Prudencio through its corporate development team having come from the company’s voice technology-focused Alexa Fund. As with Microsoft, the markedly different strategic requirement necessitates a different team with different priorities.
The most active of the specialist corporate impact funds is SoftBank’s Opportunity Growth Fund, which has backed some 50 companies in the past two years. Its leadership team crosses over into SoftBank Investment Advisers, which runs the company’s Vision Funds, but its deals are sourced by a dedicated team, partly due to its earlier-stage focus.
Another option is to filter impact investments through a foundation. Shell Foundation is a registered charity but also makes investments in startups focusing on energy access or social mobility using capital from oil and gas major Shell.
“Having an internal fund where we can truly say we’re going to make an investment in you, but then we’re going to make an investment in you through our different groups and initiatives,” Shields adds. “That is something that is unique in an organisation this size.”
External funds – laying the groundwork
As models of investing continue to diversify, some corporates are looking to back external venture funds outside the company in order to make an impact and enhance the overall ecosystem, harnessing the expertise of investors who are on the ground and talking to diverse founders.
Several corporates follow this approach to an extent — Microsoft has backed a dozen cleantech-focused funds through the Climate Innovation Fund — but the most active is probably digital payment processor PayPal, which supplied a total of $100m for nearly 20 diverse venture funds across late 2020 and mid-2021.
PayPal had executed an internal analysis after noting the lack of Latinx representation in its portfolio, and realised startups were raising cash at seed stage but not at the point where its corporate venture arm, PayPal Ventures, would get involved, spokeswoman Taylor Watson tells Global Venturing.
“So, they thought: ‘How do we create a field of startups that are getting to the level we get to?’,” Watson says. “The answer they came up with was to invest in funds that invest in black and Latinx founders, and founders who are working with underrepresented minority communities at seed stage via these funds, who know these founders very well and have this specific focus on them.
“The idea is that those funds will fund a startup at seed stage, that startup will grow to their series A or B round, and if they’re within our remit for investing, we’ll take a look at them and hopefully invest.”
Going outside corporate venture
Sometimes, impact or diversity investing can simply work better when it is completely removed from corporate confines.
Mass media group Comcast decided in late 2020 that Comcast Ventures should concentrate on investments limited to its core business, spurring most of the Catalyst Fund team to leave in the following months.
Andre Iguodala and Fatima Husain are now at Mastry Ventures, a VC firm which lists diversity, equity and inclusion as its ‘cornerstone’ and which has two other ex-Comcast Ventures investors – Amy Banse and Sam Landman – in prominent positions.
The split does not have to be acrimonious – it makes sense to keep on good terms with your former company and potentially use that contact to bring them on as a limited partner.
Lo Toney was at one time a partner at Comcast Catalyst Fund and later moved on to GV (then known as Google Ventures), where he incubated venture firm Plexo Capital, spinning it off in 2018 with an aim to seek out founders from underrepresented groups.
Google owner Alphabet was an LP when Plexo closed its first fund the following year. Toney explained the inspiration behind it involved his experience at GV and the desire to expand the field of potential deals by accessing the networks and perspectives of women and people of colour.
“This is very important at the seed stage, as it leads to a deal flow that is differentiated and enables us to pursue deals that require an intimate understanding of certain problems or market opportunities in the absence of an abundance of data,” Toney said at the time. “Women and people of colour bring this to the table.”
More recently, the founding team of health insurance provider Blue Cross Blue Shield of Massachusetts’ Zaffre Investments unit unveiled venture firm Seae Ventures in June this year with an LP list including multiple Blue insurers and a brief to tackle areas of healthcare outside of the affluent, urban, white, male target areas often taken as default.
Seae managing partner Jason Robart told Global Venturing a big factor at Zaffre was that the number of stakeholders at its parent company narrowed the field of potential investments while the company’s size could make it difficult to invest quickly. There is also the issue of overall focus.
“In our fund it is foundational to what we do,” Robart says. “Every single investment we look at, we talk about who the founders are, what the services are, what populations will these services support and what the ultimate impact on the users of that service will be.
“I am cautiously optimistic that [other VC investors] are allocating dollars to address these types of issues. I’m cautiously concerned that as long as it’s something that’s separate and distinct from what they do from a core investment strategy, it’s not going to have legs.”
Diversity and sustainability are increasingly being baked into corporate investment, so impact may one day form part of the average CVC’s core investment thesis. In the meantime, it is encouraging to see companies experimenting to find the model that suits them best.
Feature photo courtesy of Clay Banks via Unsplash.