'Investing for good' gains appeal amid rocky tech startup market

[SAN FRANCISCO] 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 US$15.2 billion globally last year from US$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 per cent 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.

Big financial institutions such as Bank of America and JPMorgan Chase 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 US 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.

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 US$2 a day, profits can at times be slim. "Maybe 2 per cent 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 US$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 US$400 million fund last year.

Still, many of the high-profile Silicon Valley venture firms have steered clear of investing outside their comfort zone. "Your impact could be bigger. Stop looking at the 60 mile (area)" of Silicon Valley, Youssef Chaqor, founder and general manager of Kilimanjaro Environment, which recycles used cooking oil into biodiesel, told an audience of investors and entrepreneurs.

Some venture capitalists are worried about emerging market risks, such as fluctuating currencies, military coups, disease and corruption. Others don't see enough profit.

Andrea Carafa, founder and CEO of art and music event coordinator ArtsUp, says he does not bother to tell Silicon Valley venture capitalists about the societal benefits of his startup. "They don't care if you're a social impact company," he said. "They care about your profitability."

REUTERS