There’s an idea that’s long been gospel in the venture capital industry, that investing in companies that have a positive social impact is a money loser — impact investing is “concessionary.”
But what if it isn’t?
Mitch Kapor is a well-known tech investor. He helped create the Lotus 1-2-3 spreadsheet and was an early Uber investor. But for the past decade, Kapor and his wife, Freada Kapor Klein, have focused on companies that they say fill a gap, whether it’s social, information or opportunity. And in 2019, their firm, Kapor Capital, reported that in fact it does make money. Lots of it. Mitch Kapor told me it’s only a matter of time before other firms get the message. The following is an edited transcript of our conversation.
Mitch Kapor: The resistance, which is considerable, is a testament to the power of unconscious assumptions. This is another case with this concessionary idea that people are going to have collective amnesia in five or 10 or 20 years, however long it takes, and they will pretend that they never asserted that. And I just know, that’s wrong.
Molly Wood: I wonder, as part of that shift, there has been some reporting from TechCrunch that you or your partners may be raising a $125 million fund, which would be the first time that Kapor Capital has taken on money. How important do you think is it to sell the vision of impact investing to those limited partners, the ones who control the purse strings for so many venture capital firms?
Kapor: So I think there are very important conversations to happen with all of the people who allocate capital. Limited partners, they very often represent endowments of foundations and universities or pension funds. And the oddest thing is that historically, the people who invest money on behalf of those institutions are actually investing them in undertakings and funds that are creating more of the problems that their organizations are dedicated to fixing. And so with impact investing, there is an opportunity to align their values with how they are making the money.
Wood: Do you think at some point, this dam is just gonna break and LPs are gonna say, “Hey, wait a second. You should actually be making us more money and doing better in the world?”
Kapor: Yes, I absolutely do. I think there will be a tipping point.
Wood: Are we close?
Kapor: Timing is very hard to predict. If you look at climate change, for instance, and you go back even just a decade, people were saying that you’ll never get the mainstream of industry and government to take it seriously. It is now taken seriously. Climate skeptics are increasingly the sort of wacky minority, and vanishing. So that actually happened. And this will happen. The whole idea that business should have a social purpose, that it matters what it does, that is still in the process of moving from the margins to the mainstream, but it will happen.
Wood: Obviously, empathy is the best way forward. In times when there also need to be metrics, I wonder how you think about measuring impact and quantifying impact in a way that makes the argument even more unavoidable?
Kapor: Well, for what we do, we have a thesis about a business. We want to know what gap is it going to close, who is going to be better off? So if it’s an edtech company, we will be looking at, for instance, how many students in Title I schools, ones where the majority of kids are eligible for free or reduced lunch, how many of those kids are they serving? And is it closing the achievement gap between kids in those schools and kids in more fully funded schools? For fintech, we ask: Is this helping to improve the credit scores, or some other measure of financial health or wealth creation, for low-income communities? So we can tell how we’re doing. We’re not counting the number of recycling wastebaskets a company has in its offices to see if they’re socially conscious. It’s different sector by sector. Edtech is not fintech is not the workplace. But if you’re focused on outcomes, and you ask the kind of Marxist question of who’s benefiting here, through this operation of capitalism, you can actually feel like you’re being rigorous about the impact that you’re having or not having.
Wood: I mean, it’s remarkable to hear you describe that because it also sounds like basic due diligence in some ways, and it feels like so many problems could have been headed off by companies asking themselves that simple question: not just are we benefiting everyone, but who might we hurt?
Kapor: Well, I mean, I agree with you. But the fact is, that is not what is done. People in general want to know, is this going to make money? Is there a big addressable market? Can you build a big business out of it? And they don’t ask the question about who benefits. The pendulum swung very far in the wrong direction, going back to [free-market economist] Milton Friedman and [the idea that] the only purpose of a business is to enrich its shareholders. It now has swung back quite a long way. But it’s a kind of unstated religious orthodoxy that the only thing that matters is making money. And that is very, very deeply rooted. And that’s what we’re up against.
Related links: More insight from Molly Wood
We should note for maximum clarity that to receive Title I funding, a school doesn’t need to have most students be low-income. But we take the larger point, and Kapor clarified to us later that the firm looks at both the schools that receive such funding and the percentage of students who qualify.
Kapor Capital’s 2019 Impact Report is where the firm reported it’s in the top quartile of all venture capital firms of comparable size, whether they’re impact investors or not. That report did not include returns from Kapor’s investment in Uber or the communications infrastructure company Twilio, which had an impressive IPO in 2016. The report noted that including those big returns would have pushed those numbers “dramatically skyward.”
Now there are big differences between Kapor Capital and the biggest Silicon Valley firms: The Kapors invest their own money, as we mentioned, and even raising $125 million, as TechCrunch and Crunchbase reported, makes it an undersized minnow compared to giant funds like Sequoia Capital, which has raised a little over $19 billion across 30 funds, also per Crunchbase.
So when you’re that big, your impact investing has to have an even bigger impact. That argument is probably equal amounts legitimate reason to be cautious and total copout, considering all the extra money they have to play with.
But as long as we’re doing charts and graphs, of its 225 investments overall, Kapor Capital has made 113 that are specifically considered “diversity investments.” The latest one was $50 million.
Sequoia Capital has made 1,474 investments overall, of which 139 are diversity investments. The latest one was $100 million.