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Its not a hot industry for investment, and venture capitalists arent known for their philanthropic sensibilities. So how did Watertown-based CitySoft manage to raise $1.8 million in its first round of funding? Nick Gleason, chief executive, found investors looking not only to make money, but also to make a difference.
His company and its social mission are the beneficiaries of a venture capital niche that, since March, has reeled in almost $100 million for new investments in New England and other markets. Fresh out of Harvard Business School, Gleason founded CitySoft in 1997 with $250,000 from friends and family. His goal: to bring the benefits of the technology economy to the urban poor. Today, his 35-employee company designs and maintains Web sites out of offices in Watertown, Baltimore, and New York. Half of the employees graduated from urban training centers. Activism is often relegated to the not-for-profit sectors, and because of this, I think there are opportunities that are missed, Gleason said. But though Gleasons investors support job creation in urban neighborhoods, venture capitalists arent into charity. They expect to make money.
So Gleason also showed them a company with 300 percent annual growth, more than two years of profitability and a client list that included blue chips like Siemens, Reebok and AOL Time Warner. His company dipped into the red late last fall, but Gleason expects to return to profitability by second quarter. The round was led by the Sustainable Jobs Fund and the Calvert Social Investment Fund, with participation from the Coastal Ventures Limited Partnership, MMG Ventures, and New York Community Investment. Mitch Kapor, founder of Lotus Development Corp., and Esther Dyson, chair of EDventure Holdings in New York, also invested. Companies looking for venture capital arent the only ones who have to worry about profitability. Its a concern for the VCs as well. Startup VCs who show a loss on their first fund dont often raise a second, and investors today are skittish about putting cash into untested hands.
Nevertheless, many of these do-gooder VCs have convinced investors theyll see returns. CEI Ventures Inc., for example, a subsidiary of Coastal Enterprises Inc., is one of the funds that invested in CitySoft. The Wiscasset, Maine-based venture capital firm also on $12 million of a projected $20 million second fund |
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CEI Ventures first fund $5.5 million raised in 1996 only seen returns of 7 percent of capital so far, said president Nat Henshaw. In the VC world, these are small returns. But the primary motivation for CEIs limited partners is economic development, Henshaw said. In the last five years, CEI has helped create 1,000 jobs and invested in 20 companies in low-income areas. Willy Osborn, general partner at Commons Capital in Boston, didnt have the luxury of a track record when he started raising his first fund. Nevertheless, he closed on $12 million of what he hopes will be a $30 million first fund. Common Capital plans to make initial investments of between $250,000 and $1 million in 10 to 12 companies.
Its focus will be on companies that aim to improve both society and the environment. The firm has its origins in the Investors Circle, a national organization of about 150 angel groups that invest in companies with a so-called double bottom line profits and a social mission. The angel investment community is good at starting these companies, but not so good at supporting them, Osborn said. So a group of investors from the circle created Common Capital, which is independent from the angel group.
Were not just screening bad stuff out, Osborn said. Were screening good things in. SAM Equity, based in Zurich, Switzerland, and Boston, proves that VCs with a social mission dont have to settle for small funds. Last month, it closed on $75 million of an anticipated $120 million first fund. Sustainable Asset Management, SAM Equitys sponsor, developed the Dow-Jones Sustainability Index. The SAM Index consists of the top 10 percent of environmentally and socially friendly companies on the Dow Jones. The partnership with Dow Jones is a big credibility factor for them, said Amy Domini, founder of Domini Social Investments, a mutual fund. Also, the European Union is much more focused on corporate social responsibility than the U.S. realizes. Indeed, most of SAMs investors are European.
So, for those entrepreneurs looking not only to strike it rich, but also to save the world, this boomlet in social venture capital could be a sign of good things to come. The fact that there are innovative firms out there means theres more opportunity to do the kinds of work were doing, said Gleason at CitySoft. |
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