A SOCAP Guest Post by Sarah Williams, CEO at Propel Capital
All impact investors remember their first fund. For us, at Propel Capital, it was 2008 and an investment in the Social Enterprise Expansion Fund (SEEF). At the time, the Fund promised–in that exciting way that first-time fund managers do–the sun, the moon, and all the stars: it would deliver double digit returns while helping social impact companies scale.
Now nine years later, after three fund extensions, and challenges and successes among portfolio companies–some of the original investors are weary. However, in the life of this small $4.5m fund, the portfolio companies have made over $30m in purchases supporting 26,000 smallholder organic farmers annually, generated 70 tons of carbon offset, directed $30m in funding for libraries in Africa, saved 2.3 billion tons of water, and planted 35,000 trees. The SEEF fund managers were instrumental in creating SOCAP and the ImpactHub, playing a key role in advancing the impact investing ecosystem. They have since gone on to raise subsequent funds while being on track to deliver a modest return when it dissolves next year, allowing us to recycle funds to other impact investments. At Propel, we believe that taking risks on first-time fund managers helps strengthen the field of impact investing.
First-Time Fund Managers are Innovators
When Propel Capital first began making impact investments in 2008, we wanted to do more than generate a strong market or social return–we wanted to expand the field itself to accelerate capital flows to impact-driven opportunities. At the time, impact investors were primarily focused on microfinance, the space was not well-organized, and there were only a handful of early funds like Microvest and Calvert trying to figure out the model to deliver both financial and social returns. There was little infrastructure in place to effectively deploy capital for impact at any kind of efficient scale.
Impact investing needed aggregators to more efficiently bundle capital–more impact funds overall; funds of funds to get larger pools of capital to places it might not otherwise go; and fund managers who could evaluate social as well as financial returns. We bet on first-time fund managers–developing a talent pool of fund managers and allowing them to experiment with structures and models that could drive impact investing into the future.
Some of our early investments like Sarona, Endeavor Catalyst, and Village Capital were all testing new ways of working in impact investing. Sarona wanted to build infrastructure in emerging markets through a fund of fund model, capitalizing local fund managers in emerging markets; Endeavor Catalyst was streamlining the due diligence process with a rules-based approach to investing; and Village Capital was pioneering a peer-selection process to identify entrepreneurs that have been overlooked by most investors.
We’ve learned a lot but still have thorny issues to figure out…
We have to think creatively about impact. While the infrastructure is more sophisticated and the tools for deploying capital are more systematized than when we first began, measuring impact is not for the faint of heart. Our fund managers cumulatively track over 100 impact metrics which is inefficient for everyone. And, it is still difficult to tell who or what is having the highest level of impact per dollar invested. As larger pools of capital come into this space, we need to ensure that impact capital actually provides a solution that works for the end user.
Impact capital needs to be patient capital. The exits of portfolio companies have proved harder as the companies seek buyers who will preserve the impact focus. Not every investor can be as flexible on the life of the fund as we have been, but flexible capital is needed to allow the field to develop further.
With $7M in early investment from Propel Capital and space to lead, our network of first-time fund managers has leveraged $370 million in assets. Most have gone on to raise or are in the process of raising for a second or third fund in the next year to scale their impact. There are still challenges, as we experience waiting patiently for SEEF to return our capital. However, taking risks on first-time fund managers with creative approaches to investing will continue to help build the field and drive significant new investment.
Sarah M. Williams is co-founder and CEO of Propel Capital, a social impact fund that supports bold leaders creating a just and equitable future.
For more stories from first-time fund managers, join me and some of Propel Capital’s most successful first-time fund managers at SOCAP17 panel, Remember Your First Time? What I Wish I’d Known Then: Lessons from First Time Fund Managers at 12:15PM on October 12th.