Venture Capitalists Reap Rewards of Doing Good
Oct. 25, 2005--Recent sales of venture-backed companies show how small business finance can be married to social goals to help entrepreneurs and the communities they live in.
The Community Development Venture Capital Alliance announced Saturday that its members have profited handsomely from recent sales of growing businesses in their portfolios. Pacific Community Ventures (PCV), which invests in small businesses in California, earned four times its initial investment when it sold its stake in handbag maker Timbuk2 in September. On the other side of the country, Coastal Venture II of Portland, Maine, sold its share in Recruiternet, a local software developer, earning seven times its initial investment from 2001.
Community-development venture-capital funds (CDVCs) invest in small businesses that create jobs in rural areas and inner city communities. Serving the community, however, must come in tandem with financial returns. "Our financial due diligence is every bit as detailed as what you would find in the traditional venture capital community," said Todd Schafer of Pacific Community Ventures. "But we're also looking for social returns on our investment," said Schafer. "That means investing in companies that provide jobs with good wages and benefits for low- and moderate-income communities."
According to Schafer, San Francisco-based Timbuk2 had about $3 million in sales of backpacks and carrying bags when PCV made its investment about three years ago. Since then, revenue has risen to $15 million, and the product line has expanded to include yoga bags and duffels. That growth has fueled employment for 40 people from San Francisco's Mission District.
In addition to jobs, recipients of CDVC investments oftentimes provide employees with valuable shares in the ownership of the company. For example, half of Recruiternet's 40-person workforce earned between $10,000 and $200,000 each on stock options when the company was bought by First Advantage Corporation.
Year after year, CDVC funds have increased the amount of money they raise from investors. According to the CDVC Alliance, the amount of capital managed by CDVC's has more than doubled since 2000, reaching $870 million in 2004. Over the same time period, the number of active CDVCs has shot up from 45 to 68.