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Rising Trend of Social Venture Capital

July 23, 2009Sparxoo

rising trend of social venture capital

By Ethan Lyon, Senior Writer

If there’s any indicator of how influential social entrepreneurship has become, take notice of the several hundred eco-capitalists in attendance at SOCAP—a conference where business and social responsibility intersect. The rising trend in impact investing has accelerated in recent years. The pool of socially responsible investment dollars in the United States has now grown to $2.34 trillion and the second quarter of this year has seen a 12% increase in clean tech investment, a $1.2 billion upswing.

Though social capitalists are seeing significantly less profits, for them, impact overshadows profitability. As social ventures operate under business plans and financial models, they do need to turn a profit, but revenue expectations are much lower—as social endeavors take more center-stage.

“Many socially responsible investors are under the impression that there needs to be a tradeoff between social impact and financial returns. We believe it’s possible to have both and tradeoff is not always necessary,” said Josh Cohen, managing partner at the VC firm City Light Capital. City Light Capital focuses on early stage, social mission-driven companies with promising financial returns. Their foremost objective is investing with impact. The eco-venture has secured two exits and has interests in an array of social enterprises, from media to education to robotics and surveillance.

Underdog Ventures, a social venture fund, notes conventional VC funding seeks to protect the rights of the private shareholder, while social venture funds prioritize investor values to elevate the welfare of all stakeholders. That means all those involved, from the beneficiaries to investors, are funded based on value and impact. Venture capital firms can influence and hold their portfolio companies accountable through investment dollars.

City Light Capital is amongst many venture capital firms funding and influencing the new business model—one in which social compassion, accountability and profitability intersect to create impact. “Much like cleantech five years ago, impact investing is a hot topic and we see a lot of social entrepreneurship programs developing in business schools,” Cohen said.

As Cohen notes, there is a new generation of entrepreneurs coming out of business school with a different perspective than those that came before them. With a strong influence to create a long-term impact, social entrepreneurship will emerge as a profitable, important sector for venture capitalists.

As venture capital continues to support cause-driven companies, entrepreneurs have an opportunity to be profitable and create long-term sustainability. Where at one time cause-driven businesses found it challenging to find investment, if the trend continues, social entrepreneurship will take center-stage and potentially be the gold standard of the investing world.

Photo by Riyas Hamza from Stock.Xchng