Articles

Minding the investment gap
Tomorrow April 2002 By Annabel Short.

An onion relish called Students' Pride doesn't sound like a typical venture capitalist investment. Nor do organic spices, furniture recycling or wind-up torches. But for London-based investment company, Foursome Investments, these ventures make good business sense because they aim to make more than profits. Foursome invests in 'socially responsible' enterprises - ones which have "a beneficial impact on people's lives today and in the future".
Venture capital has been slow to take advantage of the heightened interest in Socially Responsible Investment (SRI), mainly because principles and profits are still thought by most traditional investors to be mutually exclusive. Foursome aims to show that 'caring venture capitalism' actually takes social responsibility one step further than charity. It does this by helping new ventures become self-sustaining.

Much of Foursome's energy and inspiration - and its funding - filters down from its founder Kurt Engelhorn. When the Engelhorn family sold its pharmaceuticals giant Boehringer Manheim to Roche in 1997, Kurt set up Foursome for his four daughters with some of the proceeds. The idea was to teach them the art of business and risk-taking, but also to show them they could aim for a social and environmental return as well as a financial one.

Kurt created Foursome as a "kitchen table business" and it has retained that style. Its four London employees work in an airy loft-style office on the fringes of London's financial district called the City.

Jim New, Foursome's managing director, emphasises they are not latter-day Robin Hoods redistributing money from the rich to the poor. "There's a real problem getting past the tree-hugging, do-goody image. We do do good, but we also do want to make a lot of money. I want to make people rich and myself, and Iím doing it in a way that Iím proud of."

Their investments cover four areas - the environment, education, technology and culture (although there's a certain amount of overlap). While the companies they invest in could well be signalling the way of the future, Jim says that if they are trend-setters it is just by accident. The assessment criteria for proposals have been developed over time. Environmental criteria are relatively easy to measure, as ultimately a sustainable business makes good financial sense, but the social aspects are still largely judged by that well-known metric: 'gut feeling'. Foursome looks at current social performance, such as how companies treat their employees, but the harder part is measuring their future impact and the likelihood of the idea replicating itself nationally or internationally.

Bulky Bob's furniture recycling company in Liverpool, UK, is one such local success story which is likely to catch on elsewhere. Bulky Bob's collects unwanted furniture and white goods, sorts them into reclaimable and non-reclaimable goods then redistributes them for repair. Repaired goods are sold to low income families through a shop at Bulky Bob's parent company, the Furniture Resource Centre. It was hardly a profitable prospect at the outset, with its purely social aims of providing poor people with cheap furniture and reducing waste through recycling, while training the unemployed. But the business has nevertheless been relieved of its 95% grant-dependency and is now 95% self-funded. Foursome loaned £150,000 to the venture at commercial rates. The business as been successful enough to consider early repayment of the loan.

In Bulky Bobís case Foursome's incentive was largely social but their investment decisions involve a balancing act between financial viability and social good, sometimes playing one off against the other - its investment in Freeplay, for example, was more profit-motivated. Freeplay manufactures and sells wind-up torches, radios and more recently, a charger for mobile telephones. As well as being environmentally friendly because they require no batteries, the products provide light and information to isolated villages throughout the world. But despite using technology to meet social needs, Freeplay sets itself out first and foremost as a profit-making business. Jim adds: "We invested in them because we saw that the potential for a handheld charger for a mobile phone would make us a lot of money. The social component attracted us to the project, but the justification for our investment was the financial component. The fact they go hand in hand is just rather nice."

Foursome's support ranges from micro-funding to the complete ownership of two companies - Amana (see box) and Student's Pride, which provides young people from a deprived London borough with business experience through developing and licensing gourmet foods. Foursome's aim is to make a return on its equity investments of around 30%, although this is currently a goal more than reality.
"In everything we do at Foursome, we always seek the passion, motivation and ability of the entrepreneur. As much as we invest in ideas, it is the ability of the entrepreneur to deliver the idea that is fundamental to the success of the business and subsequently our investment," says Jim.

This is where the proactive role brought about from owning a part of the company can help. Kurt Engelhorn highlighted this in a speech at the Family Office Conference in Geneva last year: "What society - and the economy - needs, is ownership. Managers and administrators of money, assets, whatever, normally see only the share price of tomorrow. Owners see the full picture. They get involved. They confront themselves and the managers of the companies they invest in."

One of the challenges of bringing together sustainability into the financial world is their conflicting time scales. "The equity market is amazingly short term - people measure their outlook in months, whereas our businesses operate in years. If you could find a way to unwind this short termism into a long term view - that would feed back into the valuations and the pension funds and slowly bring about change."

Roberto Milk, CEO of Novica, an American-based company selling artisan products in which Foursome has invested $1 million (see box) agrees, but adds a strong dose of realism which has been key to his companyís success.
"Long-term vision is crucial in building and managing a business.† However, I feel that "short-terminism" is often given a bad rap and is overlooked by many entrepreneurs in the early stages of building a business.†I cannot tell you how many dreamers, particularly in our social market segment, that I've encountered who will tell you about the grand businesses that they intend to build, but have no idea of the short term deliverables. A crucial piece in building a business is setting aggressive yet attainable short-term benchmarks for growth. If you're not racing against the clock, you will never finish the race."

A lack of information on investment opportunities also holds back potential social venture capitalists. As does the fact that venture capitalism requires individuals with pots of money, a sense of risk and a social or green conscienceÖa rare species. But there are signs of rising interest. At February's World Economic Forum meeting, a Global Exchange for Social Investment (GEXSI) was set up to bring together suppliers and users of capital to fill the information gap. If GEXSI comes off, Alex Hook, Foursomeís operations manager, believes it could develop into an investors' index for the social capital market. This will increase public awareness, create a spotlight and provide access to funding for ethically-minded companies and projects around the world. (More on GEXSI at www.gexsi.org )

Financial institutions are becoming more interested in social investment as they tune in to the increasing demand for ethical goods and services. In 1999 six global financial players including Gerling insurance group, Storebrand and Sustainable Asset Management launched a $100 million venture capital fund called Sustainability Investment Partners. The following year the Netherlands-based Triodos bank established its own venture capital fund to invest in companies which fit its ethical criteria and also have high growth potential ñ hence the emphasis of its investments on organics, renewable energy, and environmental technologies. Perhaps it is no coincidence that Foursome is also considering specialisation in the established area of organics (and fair trade), having realised the need to narrow-down its eclectic mix of investment companies.
Ethical venture capitalism is also growing in the US, but slowly. It is there that the International AIDS Vaccine Initiative has established the term ìsocial venture capitalî, using it to describe its partnerships with both pharmaceutical companies and developing country scientists: in return for investment funded by both governments and foundations, the IAVI requests not financial returns but a guarantee that any successful vaccine developed is offered to developing countries at a reasonable price. American social venture capitalism, though, tends to be skewed towards ìventure philanthropyî - investing in charities and NGOs rather than ethical profit-making companies, partly because the tax incentives favour this.

"In terms of dedicated social/caring venture capital, there does seem to be a vacuum in the marketplace," says Roberto Milk of Novica. "This offers an opportunity and it is exciting to see industry pioneers such as Foursome take the lead in this area.† Companies such as Novica will have increasing opportunities as the area develops.†However, if a company relies on the "social" aspect of its profile for funding rather than the merits of its business model, then it does not deserve to exist as a venture candidate. It is the duty of companies such as Novica to produce capital gains for investors in order to justify our segment as a valid market segment. The more success stories that occur, the more developed and justified the social/caring venture capital industry will become."

So Foursome has reason to be positive about its prospects. The company is atypical of a venture capital company at the moment with only two shareholders. Jim New envisages setting up a venture capital fund in a conventional sense by expanding the shareholder base, using the track record established with Foursome. "We can say look, caring venture capitalism, yes it works, here is what we've done, and now weíd like to have a go with your money."

The kitchen-table days may be numbered, but the forward-thinking is unlikely to fade. "The guys half a mile down the road there in the City see this as not quite proper. And that's a pity," says Jim, "Because we are the way of the future, I really do believe that."

AMANA
Foursomeís first investment was in Amana, a company that provides auditing, training and consultancy to textile factories to help them comply with ethical standards. It has also established the Link Fair Trade Guarantee label, an social label for clothing based on the international SA8000 social standard. Foursome and the management own 100% equity of Amana, having been the only investor in its start-up, and helped create its financial structure, formulate its marketing and public relations strategy and develop its business.

"If you want to attract capital you have to promise something. To create something positive with the money of the rich begins to make sense of the world," says Amanaís CEO Herbert Ammann. Companies have long-recognised the financial benefits of environmental sustainability but are slower on the uptake when it comes to social sustainability. Yet Ammann is convinced that investing in people makes savings, highlighting the example of Triumph who have been forced to pull out of Burma after a successful campaign by human rights groups: "Short term thinking is more expensive and more risky. It leads to crises that you canít afford."

He is determined to generate a social consumer-conscience to parallel the growing environmental one. "An organic carrot looks like any other carrot - which goes to show itís the inner beauty of the product that counts. We need to convince people of the value in what they buy. So when you climb behind the designer bed-sheet you know that the woman who made it in Pakistan was well treated." www.amana-limited.com

ForesTrade
The demand for organic spices and essential oils is beginning to match that for organic coffee. A US company, ForesTrade, aims to meet 25% of it, having spotted the perfect opportunity to combine profit-making with sustainable principles. Founded in 1996, the company fulfils its triple aim of supporting sustainable agriculture, forest conservation and socio-economic development by developing and trading from plantations in Indonesia, Grenada and Guatemala. Foursome's 16% equity stake in the company and $200,000 loan helped lead it into profit within five years of its conception.

Key to ForesTrade's success is its close work with small-scale growers of spices such as chilli, turmeric, ginger and nutmeg. As well as giving direct access to a growing market and paying premium prices, the company provides over 5,000 farmers with training and education and technological support, and funds community projects. The farmers only use organic methods, helping build 'buffer zones' of sustainable production that maintain the biodiversity of nearby forests, threatened by large-scale plantations. www.forestrade.com

Novica
Alpaca tapestries, carved chess-sets and hand-dyed scarves are no longer the exclusive trophies of hardened ethno-travellers - you can get them online. Novica is using the internetís ability to shrink distances and allow exploration from an armchair to open up a global dot.com bazaar for artisans, cutting out strings of middlemen so that producers and consumers get a fairer price, haggle-free. Novica was founded by a former UN human rights officer, Armenia Nercessian de Oliveira, her daughter and son-in-law, and has become a multi-million-dollar international company with ten offices around the world and established relationships with over 1,7000 artisan groups, representing over 10,000 artisans. Foursome has invested over $1 million in Novica and is a significant minority shareholder.
"We see ourselves as trendsetters on various fronts,"says Roberto Milk, Novica's CEO. "We're helping to show that it is possible to take socially responsible ideals and turn them into successful businesses. Weíre popularising cultures and art forms that much of the world knew little about.†And while "anonymous commerce" has become a way of life in the modern age, we're setting out to change that, reuniting creators and customers. Now more than ever, we as a society crave personal contact - the old way of doing businesses.† At Novica, we've worked hard to do this by creating a new marketplace."
www.novica.com

Annabel Short is a consultant with Environmental Context, a London-based consultancy that specialises in helping multi-nationals communicate on sustainable development issues.