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MBAs Drive Social Impact In Corporate Venture Capital Funds

Business school graduates are pioneering corporate venturing – venture capital funds run inside large companies that invest in social enterprises.

Tue Oct 28 2014

A host of business school graduates are turning to impact investing, as social impact continues to gain ground with MBA students and the world’s largest businesses look to expand their investment portfolios to support innovation and entrepreneurship in developing countries.

Companies are under pressure to do more to create a positive social impact in the aftermath of the Great Recession and have been ramping up the amount spent on corporate social responsibility (CSR), with the total spend last year reaching $15 billion, according to EPG, the economic consulting firm.

Many companies have launched social impact venture capital funds, which pool capital into social enterprises. Unlike normal corporate funds, impact investments only pay out if measurable social benefits have been achieved, such as improving children’s reading or reducing criminal reoffending rates.

Business schools such as Oxford and ESADE of Europe and Wharton in the US have begun supporting social entrepreneurs to complete MBA degrees with funding and other measures.

But a growing number of students from corporate backgrounds want to drive social change from within companies, and are instead joining these social venture funds at some of the biggest global conglomerates.

About $10 billion has already been invested in social impact globally, according to the Social Impact Investment Taskforce, set up by the UK government.

Some $45 trillion in capital controlled by more than 1,200 asset managers is earmarked for responsible investment, according to the organization, while $13.6 trillion is sitting in funds that include environmental, social and corporate governance returns in their investment decisions.

“Helping the future generation… Is the difference between businesses that will continue to operate for the next 100 years versus businesses that will die,” says Julia Reholz, who manages Ignite Social Enterprise, the UK’s first impact investment fund which focuses on the energy industry, from Oxford's Emerge conference.

The £10 million fund has deployed £5.5 million in investment capital into eight businesses and Ignite expects to recycle it a number of times, Julia says.

Julia earned an MBA in strategy in 2004 at the Open University halfway through a career at Centrica, the London-listed British energy major.

But it was a mini life-crisis that turned her towards venture capital. She wanted to help people, she says, and realized that the company she was working for at the time wasn’t going to be able to do that.

On the Tuesday morning when she began plucking up the courage to quit her job, Julia was called by the firm’s HR director, who offered her the chance to set-up a fund to invest in entrepreneurs in the energy industry.

“It’s been an amazing journey,” she says. Julia designed a social impact fund – a corporate venture – to find energy entrepreneurs who can make a difference in society by using the resources of one of the UK’s largest energy groups.

Its portfolio of investments includes a £500,000 injection into E-Car Club, the UK’s first entirely electric car club which seeks to improve mobility whilst reducing both the cost and environmental impact of car travel.

“All businesses will need to focus on social, environmental, ethical and economical outcomes,” says Julia.

But critical to social impact venture funds’ success is a sustainable business model. Like many other corporate VC funds, Ignite is profit seeking.

Julia says commercial aspects of the business are essential for social outcomes to be made. That is because companies are happier to pay for venture capital funds that generate financial returns.

“It’s easier funding something like a corporate venture capital fund instead of a CSR [initiative] because a corporate venture fund in theory still generates financial [returns],” says Yiming Ma, senior business development lead at Pearson Affordable Learning Fund.

Yiming joined the fund, part of education giant Pearson, in 2013, after spells at the consultancy McKinsey and Goldman Sachs, the investment bank, in New York.

Education is in his roots. His parents, both university professors, immigrated to the United States and they saw education “as a way out of poverty”.

“That is by far one of the biggest factors in my success so far,” says Yiming, who graduated from Canada’s Richard Ivey School of Business in 2011.

Pearson Affordable Learning Fund is a $15 million fund, he says, which has invested in seven education enterprises and currently manages eight companies which collectively serve more than 120,000 children.

“There’s a massive market out there,” says Yiming. He leads the fund’s education investments in African markets including Ghana, Kenya and South Africa.

“Usually people only have access to a public education system, and in many developing countries that can be a very poor service,” he says.

“It’s always been a big part of the thesis in Pearson, but large corporations have never been a part of addressing the mass consumer market [the poorest socioeconomic group].”

Large corporates are seen as comparatively slow to traditional fast-moving VC firms. But social impact funds are a useful marketing exercise in branding for many companies such as Centrica, a company which Julia says is “vilified in the energy industry”.

“Big corporates are not very sexy,” says Fokko Wientjes who manages the social impact fund at Royal DSM, the Amsterdam-listed Dutch life sciences company.

Fokko says he has “changed the way that the company is now perceived”.

The €100 million fund has more than 40 direct investments. For that, it takes between a 5% and 35% equity stake, Fokko says, with investments ranging from €3 million to €15 million.

He has worked at Royal DSM for two decades and studied an international executive program at INSEAD, a leading business school which has campuses in Europe and Asia.

The fund is profit-seeking and generates “healthy returns”, but the real risk to social entrepreneurs, Fokko says, is potentially losing some control over their business. For large investments his fund preferably wants a seat on the board of directors, he says.

“If your mission is different I would advise to not go forth with the deal – even if there is a better valuation or more resources,” says Yiming.

But he adds that brand affiliation, particularly in the case of Pearson – a large global conglomerate – is one of the main benefits that social entrepreneurs can reap, while enterprises can tap into the company’s vast trove of resources.

Julia says that partnering with a corporate like Centrica which understands the political landscape in the energy industry can accelerate a business two to three years ahead. “[It] is around opening doors,” she adds.

Beyond the benefits to social enterprises, many of these impact investment funds act as a talent pipeline within their parent companies.

Fokko says it is a valuable learning experience to join the VC fund at Royal DSM. “Your eyes are opened much more than ever before, because now you’re scanning and scouting for companies that can contribute,” he says.

He says that the role of business in society is changing and traditional borders are being eroded.

Social entrepreneurs are helping to drive these changes – but business school graduates can generate just as much impact from the inside of large corporations.

“I’m a typical intrapreneur,” says Fokko. “I’m not as courageous as some of you. But I influence from within.”