Social Venture Financing Best Practices Survey
Survey Description and Executive Summary
Since 1990, Capital Missions Company has helped create 10 networks of socially-responsible investors. The first, Investors’ Circle, brought together the leading practitioners of social venture capital to create an efficient marketplace for this new niche of finance. Nurtured by the Circle, a number of social venture capital funds sprang up and most have now prospered.
Early in 2001, Capital Missions Company (CMC) conducted qualitative interviews with these leading practitioners, asking this question:
What are the best practices you have actually used with your portfolio companies which have most enhanced your “triple bottom line” returns (financial, environmental and social).
Their answers are included in a 24-page report available from above. Loosely summarized, the operating principle underlying these values is: “A deal is a good deal when it is good for all concerned.”
However, this executive summary has been created from the full report by CMC President Susan Davis, Nth Power Managing Director Nancy Floyd and UV Partners Co-Founder Jim Dreyfous. It was formally presented at Private Equity Roundup 2003 in Scottsdale, Arizona Jan. 29, 2003.
The costs of this survey were underwritten by Solaria Corporation, a solar company with breakthrough solar technology which desired to exemplify social financing best practices (Solaria.com). Solaria has closely followed the principles identified by these industry leaders and is serving as CMC’s Alpha project, called “Angel Venture Capital”. CMC’s Alpha intends to illustrate that establishing a formal template of shared values between investors and management serves to reduce risk and enhance shareholder value. While Solaria does not expect to do its IPO until 2007-2008, no investor has experienced a devaluation during the last 5 years, when cram downs have been both common and severe.
Executive Summary of Social Venture Financing Best Practices Survey
Summary of interviews with 26 leaders of venture capital best practices.
1. A deal is a good deal when it is good for all concerned. In particular, treat seed investors fairly for having taken the early risk.
2. Do business only with people with absolutely the highest level of integrity.
3. Be patient! Entrepreneurs need time for the team and business strategy to jell.
4. Don’t string entrepreneurs along or make them sign “no shop” provisions or term sheets before the due diligence is done.
5. Insure before investing that the entrepreneur(s) want professional managers brought in.
6. Have entrepreneurs do due diligence on your venture fund and design the process collaboratively.
7. All employees get stock options for common stock, while all investors of cash get preferred stock with anti-dilution and veto rights.
8. Venture investing is an interpersonal game, not an intellectual one. It is not just a way of working, but a way of being a person.
9. All parties are proactive in telling each other bad news and are generous in designing win-win solutions.
10. The optimal composition of boards for early stage companies is a balance between inside directors, investors and independent experts.
11. Institute socially-responsible practices including code of ethics, disclosure policy, information sharing, mission statement, diversity, progressive personnel practices, stock options for all, recycling, progressive environmental practices, and fair investment terms. Monitor adherence to these principles. Consider adopting the Earth Charter principles.
12. Discontinue using excessive liquidation preferences; they may be common today, but they demotivate management teams.
13. The largest business opportunities of the millennium spring out of its largest social problems.
14. Private equity firms should voluntarily operate in the spirit of Sarbannes-Oxley and the new stock exchange listing requirements as follows:
- Boards and their committees (specifically the audit committee) of portfolio companies should be filled by qualified independent individuals.
- Audit Committees must understand the financial reporting process of the portfolio company and the internal control process.
- The audit committee must understand the implication of key accounting rules and their impact on the reported results.
- Use of auditors for non-audit services should be carefully reviewed.
- Private equity firms must understand that failing to comply with Sarbannes-Oxley and listing requirements could limit their future financing and exit strategies.
Most principals named below were founders of their funds:
- Alan Broadbent – Avana Capital Corporation
- Gina Domanig – Sustainable Asset Management
- Mark Donohue – Social Capital Partners, Inc.
- Nancy Floyd – Nth Power Technologies
- Harry George, Henry Newman, and
- Fred Bamber – Solstice Capital
- Dick Grafer – Private Investor, Investors’ Circle Member
- Liz Harris – UNC Partners, Inc.
- Peter Heller – PerEnergy/Canopus Foundation
- Alan Kay – Technology Investor, Investors’Circle Member
- Jeff Leonard – Global Environment Fund, LP
- Audrey MacLean – Challenger Venture Consulting
- John May – New Vantage Partners
- Steve Moody – Calvert Group
- Willy Osborn – Commons Capital Management LLC
- Nick Parker – Parker Venture Management
- Ann Partlow – Rockefeller & Co., Inc.
- Noel Perry – Baccharis Capital
- Vin Ryan – Schooner Capital Corporation
- Barbara Santry – Capstone Ventures
- Markus Schmid – Ecos.ch
- Bob Shaw – Arete Corporation
- Wayne Silby – Calvert Social Investment Fund
- Joel Solomon – Renewal Partners/Endswell Foundation
- Sona Wang – Inroads Capital Partners
- Peg Wyant – Isabella Capital