Socially responsible investing (also known as ethical investing) is on the rise. More and more people are looking to bankroll sustainable businesses that not only make money but also a real difference in the world.
Unlike other enterprises, social startups are focused on creating a long-lasting social or environmental impact while working in traditional business markets—a feat that requires a new type of funding model.
In recent years ethical investing has become incredibly popular and saw investors commit about $12.7 billion in 2014 to socially conscious businesses—up drastically from the $8 billion committed in 2012 and $10.6 billion in 2013—according to a report by the Social Impact Investment Taskforce, an international organization established by the G8 global leaders. While this type of investment is growing in popularity many companies hoping to enter the lucrative market are unsure over how to find the right business opportunities.
Enter Jenny Abramson, founder and managing partner at Rethink Impact, a venture capital fund that invests in social enterprises. Her company partners with businesses that use new technologies to make the world a better place, empower people and find untapped market opportunities.
“Traditionally people thought nonprofits and government were the only real ways to solve problems,” Abramson says. “I certainly believe these groups are critical to solving [social] issues, but I really believe that the private sector has a role to play to accelerate that change.”
But investing in socially responsible companies isn’t the only thing that matters to her and her company. While at the United Nations for International Women’s Day she discussed how gender equality also helps create sustainable growth and improve a company’s bottom line.
“While serving as the CEO of a tech company, I often found myself as one of very few females amongst other executives in the space. I was surprised, given the number of impressive women who had graduated with me from HBS [Harvard Business School] and the fact that women start businesses at twice the rate of men,” Abramson says. “Female CEOs get only three percent of venture capital dollars, despite the fact that firms that go from zero percent to 30 percent leadership see a huge net revenue margin increase—the data clearly shows there’s a market opportunity here.”
At the end of the day it also makes sense to invest in startups (socially conscious or otherwise), she says. Companies with “balanced leadership that are solving great challenges [is] just good business.”
The tech leader knows what she’s talking about. She’s spent years working in the social impact space with several firms, like LiveSafe a mobile security company that helps prevent school shootings and sexual assaults. “We finally have sufficient longitudinal data to measure and show that socially impactful businesses outperform other businesses, including the S&P,” she explains. “Ever since then there’s been interest from investors who now see social impact not just as philanthropy, but as key criteria for investment.”
One need not look any further for proof of this investing phenomenon than Silicon Valley, the unofficial capital of tech innovation. Recently, industry heavy weights such as Y Combinator, the “world’s most powerful startup-up incubator” began investing in more for-profit social businesses, such as Critical Link (which connects local first responders with injured people in developing countries) and Mountain Hazelnuts Group (which uses MySQL databases and smartphones to help sustainable nut businesses in Bhutan prevent environmental degradation and increase output).
Google Ventures, the venture capital branch of Google’s parent company Alphabet, has also pivoted towards social enterprises and investing in fighting health ailments using new medical and biotechnology innovations.
It’s not difficult to understand why this lucrative and growing industry would attract such a wide range of influencers. Poverty, unemployment and environmental issues plague every country around the world, regardless of wealth or cultural designation. Companies that seek to fix these issues can end up doing a lot of good, but also making a lot of money.
“When I was a CEO of a tech company that was in the social impact space I saw firsthand that when you do good for the world you can actually accelerate financial returns,” Abramson explains. “[I] also consistently saw social impact businesses that had value, but that investors were missing.”
Meanwhile, social impact can have also a profoundly positive effect on the overall financial industry and economy, according to the same report from the Social Impact Investment Taskforce.
“The impact investing market today is still small, but growing fast. It addresses a range of social and environmental issues by supporting entrepreneurship and appropriate market-based solutions,” the report explains. “It allows investors to use their money for socially beneficial purposes whilst aiming to return capital with a financial gain.”
“At a time when there is a huge disillusionment with the opacity of financial markets, it is little wonder that a more transparent form of investment which demonstrates its social benefits directly is becoming increasingly popular,” the report continues.
As more social startups find broader success in the financial industry, more incubators, business investors and networks will pop up to support them, says Abramson. “I would say this shift in leveraging the private sector is becoming more and more popular because it actually works. There are some global problems that you need technology, scalability and financial resources to fix.”