A Different Kind Of Angel Network

In Business, September-October, 2004, Vol. 26, No. 5, p. 10

Since its founding 12 years ago, Investors' Circle has helped to finance an incredible number of sustainable companies that are making major impacts on society.

SINCE 1992, Investors' Circle - based in Brookline, Massachusetts - has facilitated the flow of over $95 million into more than 150 early stage companies and small venture funds, all in the name of “Venture Capital for a Sustainable Future.” Just what is meant by “sustainable” and how venture capital is a tool for promoting it are the questions at the center of the Investors' Circle (IC) nonprofit mission:
o Increasing the flow of capital to entrepreneurial companies that address major social and environmental problems;
o Growing the network of investors who are engaged in mission-driven venture capital; and,
o Fostering corporate cultures that integrate financial capital, social capital and natural capital.
While this mission is challenging on many levels, an ethos of concern about social and environmental problems, and a belief in the power of entrepreneurship to solve them, has proven a powerful cohesive force. At its conferences, workshops, breakfasts, venture fairs and retreats, members not only find deals and build coinvestment relationships, but also support one another in a process of culture building, collaboration and shared learning. (The IC National Conference and Venture Fair this year will be held October 24-26 at the Charles Hotel, Harvard Square in Cambridge, Massachusetts.)
“Generally speaking,” says IC Chairman Woody Tasch, “we face all of the challenges of any angel network, and then stir the pot some. To the typical challenges of scale and the dynamics of individual and group decision making, we add several layers of complexity. Our members are dispersed across the United States (with clusters in Boston, New York and San Francisco). Our investment sectors range from environment and energy to education and health care to community development and women and minority entrepreneurs.”
By all measures, then, Investors' Circle should not still be in business. It is not local, nor focused on a specific industry sector in which all of their members have experience, and complicates things further by introducing all sorts of nonfinancial factors into its investment process.

A CONSIDERABLE EVOLUTION
What began as a self-selected group of privacy-oriented high net worth individuals, has evolved considerably. “We are now a network, a fund and a foundation, positioned to grow over the next decade into a more substantial national organization, a nontraditional intermediary that can galvanize the flow of capital and add greater value, for investor and entrepreneur alike,” Tasch continues. In the world of social investing, IC works alongside such organizations as Business for Social Responsibility, Social Venture Network, CERES, the Community Development Venture Capital Alliance, the Social Investment Forum, the Interfaith Council on Corporate Responsibility and others.
During the 1990s, when angel investing was exploding onto the scene along with the general ebullience in the public and venture capital markets, IC was evolving at a slower, smaller pace, driven by the dynamics of the stakeholder capitalism movement.
Its deal flow is another index of these broader forces. Investors' Circle receives submissions from over 350 entrepreneurs each year, and while this deal flow is early stage, smaller and with fewer high-tech deals than that of established venture funds, the process has brought opportunities sufficient to impel a steady, discernible improvement over the years. Companies and funds (see sidebar) that have received investment from IC members include:
o Honest Tea - an herbal tea company that uses organic inputs when possible and is known for its socially responsible mission;
o CellTech Power - a developer of an advanced high temperature fuel cell using modified solid oxide technology;
o CitySoft - a web consulting and design company that uses inner city employees; a minority-owned company;
o Wild Planet Toys - best known for its award-winning line of innovative nonviolent toys;
o Sonic Innovations - founded to develop, manufacture and market the world's most effective hearing instruments;
o Zipcar - a metropolitan car share provider;
o Niman Ranch - a producer of naturally raised and humanely treated beef and pork;
o Progressive Trade - a brokerage firm for socially responsible investors;
o TeachFirst - provides online best practice curriculums in K-12 education by teachers, for teachers;
o Care Connexions - web based software tools for extending patient care.

AND AS TO RETURNS?
Investors' Circle has recently completed a study of returns, with the assistance of Harvard Business School and McKinsey & Co. Overall, a significant portion of investments found their way into the handful of winners; only one winner had the returns that any venture capitalist would call a home run; other winners had more modest multiples than typical venture home runs; write-offs ran at about the same rate as in typical venture portfolios; overall returns were in the high single digits or low double digits (depending on two sets of buy/hold/follow-on assumptions that were used for modeling purposes); only a small fraction of members considered financial returns to be the only measure of their success.
Based upon its own internal review of programs and services, IC gives this accounting of how its triple bottom line (Financial-Natural-Social Capital) has achieved results:
The Network. At its core is a 501 (c) (4) network of members, the community of individuals who are seeking ever more effective ways to integrate venture capital financial objectives with concerns about social justice and ecological health. Members receive the IC briefing, a monthly summary of investment opportunities. IC hosts a national conference (2-plus days, including a full-day venture fair, often in Boston), one full-day, freestanding venture fair (Bay Area), a members' retreat (Martha's Vineyard) and quarterly breakfasts in Boston. Collaboration with other angel groups and event partners is constantly evolving, leading to such events as Investing in Media that Matters and a one-day renewable energy event held this year in collaboration with the Drucker Graduate School of Management. IC currently has 120 members.
The Fund. Commons Capital was organized in 2001 with $13.5 million. Twenty-seven of the original investors, a majority, were IC members. The fund is building a professionally managed, diversified portfolio of double-bottom-line investments, leveraging off, but not limited to, IC's deal flow. With over $7 million committed to 12 deals, the fund expects to deliver competitive returns. IC will continue to focus on incubating new funds and plans to share management expertise with other funds like the Massachusetts Green Energy Fund.
The Foundation. Formed in 2002, the IC Foundation is a 501 (c) (3) that supports IC's educational programs at regular and special IC events, including workshops on mission-related investing for foundations. The foundation will undertake research into financial returns and the assessment of social impact, as well as explorations relating to External Rate of Return (ERR - see sidebar), including below-market strategies for funding organic/sustainable food enterprises and innovations in corporate governance structures. IC has received a substantial multiyear commitment from the Kellogg Foundation to support exploration of new strategies for supporting early-stage sustainable food companies.Entrepreneurs and investors will be encouraged to make voluntary contributions of stock to the IC Foundation.

“NEW FORTUNES TO BE MADE IN THE NEXT INDUSTRIAL REVOLUTION”
Despite the ongoing challenges,
IC believes that it is riding a kind
of market wave that any venture needs if it is to succeed. “There
are new fortunes to be made in the next industrial revolution,” states
IC Member Ray Anderson, Chairman of Interface, Inc. and former Co-Chair of the President's Council on Sustainable Development. By the next industrial revolution, Anderson refers to the transition from technologies that are extractive, linear (take-make-waste), fossil-fuel driven and focused on labor productivity
to technologies that are renewable, cyclical (cradle-to-cradle), solar and hydrogen driven, and focused on resource productivity. Paralleling this great wave of technological change is a transformation in the culture of corporations and investors, and a gathering wave of entrepreneurial companies that explicitly address the social and environmental challenges of our time.

VENTURE CAPITALIST IN SEARCH OF SUSTAINABILITY
AS a venture capitalist interested in companies that help solve social and environmental problems, Woody Tasch - Chair of Investors' Circle - travels back and forth across the boundary between natural systems and financial markets. This boundary, writes Tasch, “is defined primarily by time and its corollary, speed, Natural time versus money time; seasons and generations on the one hand, and fiscal year quarters and product life-cycles on the other; the time it takes water to flow through the soil and aquifer versus the time it takes money to cycle through mutual funds and IRA.”
In describing Investors' Circle, Tasch calls it “a group of over 120 individuals most of whom are investing their own money, some of whom are investing money entrusted to them by others, meaning small fund managers. We have a few foundations, a few family investment offices, and we get together a couple times a year. We meet several dozen early stage companies, the entrepreneurs who are trying to start the next Ben & Jerry's or Stonyfield, or in another sector, a new photovoltaic or renewable energy firm.”
Tasch is particularly fond of a quote that includes IRR (Internal Rate of Return) and ERR (External Rate of Return). “Each is one lens of the binocular, you need them both to see clearly into the distance, as in 'external' rate of return. We use the term “ERR” generally to refer to the long-term social and environmental costs that companies typically externalize as they seek to grow and maximize return to shareholders. The quote is: 'To IRR is human ... to ERR, divine.'”
Tasch lives on Martha's Vineyard in a solar-powered, off-the-electric-grid house with a composting toilet. Tasch also serves as Chairman of the Board for Chelsea Green Publishing, an active publisher of books on sustainable living. Previously, he was founding Chair of the Community Development Venture Capital Alliance, the Nantucket Sustainable Development Corporation, and a Principal at Prince ventures, a healthcare venture fund.

COMPANIES FEATURED AT INVESTORS' CIRCLE EVENTS

FARMERS DINER
Launched in Barre, Vermont by part-time farmer/full-time entrepreneur Tod Murphy, the more than two-year-old diner plans to expand. About 65 percent of its food dollars are spent purchasing from farmers and small-scale food producers within 70 miles. “Our biggest business challenges are putting together good compensation packages for the high quality employees who are attracted to us because of our social mission,” says Murphy. “We are paying better than the market here by 10 to 15 percent, and we recently added health insurance. The company also operates one of the smallest USDA-inspected meat processing facilities in the country. Plans call for this commissary to serve three diners in a built-out “pod” and to roll out the pods to other regions. The commissary produces sausage, tomato salsa and smoked cheese sourced from local farms and packaged under the Farmers Diner label.
Dragonfly Media
Publishes a network of city-based monthly magazines in major North American markets, including Los Angeles, Chicago, Vancouver, B.C., Seattle, and San Francisco. As an independent and mission-driven company, Dragonfly focuses on human health, spirituality, social justice, and environmental issues. The company plans to grow to 10 publications over the next few years and to reach a combined circulation of 1 million.
GUAYAKI SUSTAINABLE RAINFOREST PRODUCTS
Works in partnership with indigenous and local communities in the South American rainforest to provide, market, and sell its flagship product, Guayaki Yerba Mate. With over 70 percent of the U.S. yerba mate market, a strong presence in the natural foods market, and increasing penetration in cafes, Guayaki is introducing new product lines.
ICESTONE
An environmentally responsible manufacturer, purchased by two IC members. IceStone makes building materials from 75 percent recycled glass and cement. This material is used to make countertop or floor and wall covering. IceStone is fabricated, installed, and priced like granite.
NIMAN RANCH
Building a national brand of gourmet meats that are renowned for their flavor and origin. Its meat comes from animals that are raised by a network of more than 300 family farmers who meet high standards for humane husbandry and sustainable agricultural practices. Over nearly 30 years, the company has developed a reputation for superb quality products by focusing on sales to restaurants in the San Francisco area, and has been expanding nationwide since raising venture capital in 2001. Two of its investors, Commons Capital and Pacific Community Venture, were introduced to the company by Investors' Circle.
SONIC INNOVATIONS
Launched an extremely sensitive hearing aid, Natura, which fits discretely inside the canal of the ear. It works off a single tiny chip. Most impressive about this new technology is that it focuses in on the consonants that begin words, which until now has been overlooked in the design of hearing aids.
VERDANT POWER
A sustainable energy company that is a systems integrator and a developed of free-flow turbine systems that generate utility and village scale electric power from natural underwater currents. In addition to delivering affordable and safe electrical energy, the system can be adapted for use in developing other community-based services. These services include irrigation, desalinization, creating potable water, oxygenating anoxic waters, and producing hydrogen through electrolysis. The company intends to deploy distributed generation free-flow hydropower systems in New York City's East River. They are expected to be the first of their kind anywhere in the world.
VOXIVA
Developed a communication and information collection system for addressing health and security challenges. Voxiva applications utilize the power of the internet and the reach of the telephone to allow public health agencies to collect critical data from and communicate with front-line health workers and patients in real time. Though Voxiva started with a focus on the developing world, Voxiva is now working in the United States and is entering additional developed countries, including the UK. In the United States, Voxiva has deployed health monitoring systems for the FDA, Defense department, and the San Diego County Health Department.

Copyright 2007, The JG Press, Inc.