Philanthropists Enter VC Game with Impact Investing
June 20, 2014
Endowments and foundations are typically thought of in the private equity and venture capital space as limited partners that provide the capital for firms to invest in companies, but that may be changing for some mission-focused organizations. In what is a relatively new approach taken by endowments, such as theBill & Melinda Gates Foundation, “impact investing” involves using endowment money to directly finance private-sector companies that can advance their causes, while also potentially bringing profit back to the foundation for future investment.
Direct impact investing or “mission investing” has seen growth in recent years, despite the category’s relative infancy. A 2011 survey of foundations involved in impact investing showed that almost $4 billion had been earmarked to be invested in 2012, and the category is expected to constitute 5%-10% of portfolios in 10 years. The largest foundations are leading the way. The Gates Foundation, for example, has been purchasing equity stakes in pharmaceutical and education startups since early 2011, when it made its first everventure capitalinvestment, joining with Retro Venture Partners and Founders Fund for a $4 million Series B financing of Inigral (now called Uversity), a developer of Facebook applications to get students more involved in school. The PitchBook Platform puts the Gates Foundation’s VC deal count since that first investment at 15, including a recent $40 million Series B financing with the Wellcome Trust for Kymab, a drug discovery company involved in human monoclonal antibody therapeutics.
Bill Gates addresses public health officials in Geneva in 2011. | Source: U.S. Embassy Geneva, Wikimedia Commons
The Financial Times quoted the Seattle-based philanthropic organization’s global health chief, Trevor Mundel, saying in 2012 that the foundation planned to acquire as much as $1 million each in up to 12 biotechnology companies that year. While PitchBook data show that it didn’t quite get there, the foundation hasn’t been shy about making bets in pharmaceuticals that will help cure diseases and education startups that inspire a new generation of students. It’s clear that this VC approach is here to stay, at least for now.
While it’s not yet clear what kind of return these types of investments will yield for the Gates Foundation and others—or whether the potential monetary payoff carries much weight compared to the real societal benefits of these investments—there is at least one organization attempting to quantify the financial returns. The Global Impact Investing Network published a report on performance data in 2011 that provides some insight into how companies that received funding from impact investors have fared on a profit-margin basis. It found that a majority of the companies (63%) that it surveyed or received a report from were profitable.
While more needs to be done to determine whether impacting investing ends up being a profitable endeavor, mission investing does represent a new shift in the way endowments and foundations hand out money for initiatives and programs. Their usual model is to fund charities, research grants, and its own programs with endowment money and other donations, but, at least in the case of the Gates Foundation, more of these VC-style investments will be coming down the pipeline, particularly in biotechnology and pharmaceuticals, where promising vaccines or drugs may be the works to cure deadly global diseases. The money generally goes toward commercializing the drugs in developed countries to provide potential financial returns, “while offering low-cost licenses for their use in developing nations.” In some cases, the foundation may not ask for a return, but for that money to be used to increase access either by reach or lower pricing for poorer nations.
Impact investing on the scale that theGates Foundationhas been operating on may not be feasible for all foundations and endowments. After all, the Gates Foundation has more than $40 billion in its coffers waiting to be put to good causes. It can probably afford to do a little investing if it sees some societal benefit. Among U.S.-based foundations and endowments, PitchBook data show more than 60 organizations that have provided grant funding or VC money to U.S.-based startups since 2010. The actual number may be somewhat higher, but it does show that PE and VC firms largely run the show in the alternative asset market. Plus, endowments may find it harder to source potential investments without experienced professionals to put their capital to work.
It remains to be seen if mission investing will grow and take hold going forward, or even spread to more VC firms instead of just at endowments and foundations. But there’s no denying the potential dual benefits of monetary and societal gains that could be produced if it were to spread.