Virtuous Capital

In the 1970’s I became a friend of Peter Crisp, the Managing Partner for Venrock & Associates. On two occassions he flew from New York to Portland to meet some start-up companies that were clients of my law firm. In 1982 Venrock invested in Mentor Graphics. About the same time I got to know Dick Kramlich, the Managing Partner with New Enterprise Associates, then located in San Francisco. When NEA was starting a new fund in 1982 I offered to introduce him to the State of Oregon’s Public Employees Pension Fund and to the Meyer Memorial Trust. Both of these entities invested in NEA. From these visits to Portland I gained respect for the venture capital process. In the case of Mentor Graphics it took less than an hour while Venrock, Greylock and Sutter Hill’s representatives heard the presentation, without a business plan yet prepared, to decide to invest. I later introduced Lattice Semiconductor to NEA and within one week Dick called and authorized me to present an offer from NEA to invest $8 Million (which they unfortuantely rejected, only to file for bankruptcy a short time later). These two men, Peter and Dick, legends in the venture capital industry, played very important roles in my decision to become a venture capitalist myself. One thing stood out. It never was about their money, or the terms of the transaction, it was always about what could those funds do to help the companies in which they invested gain significant advantages and strategic relationships.

In my personal opinion, venture capital as I experienced it, has dramatically changed over the intervening years, and not for the better. Without going into details based on the kind of terms and conditions that are commonplace in a today’s venture capital agreements, I do not subscribe to the position that when the company makes a profit, or is sold at a gain, that all the money belongs to the investors and the management of the comapny. A condition of every termsheet should contain a requirements that imposes an obligation on the investors and the management to share in profits, or the proceeds from the sale of the company, with non-profit organizations and charities that have a relationship with the company’s products or services. To that end I coined (no pun intended) a new term of ‘Virtuous Capital.’

Virtuous Capital, as created and defined by the founders of Impact Advisors, LLC (in which I am involved) requires the application of a heretofore unheard of formula for equity investments. This formula assures that included in the return on the investment (ROI) is a requirement for participation by one or more selected charitable organizations in (i) a percentage of the initial amount of monies invested, (ii) sharing in future net income of the portfolio company; and, (iii) a transfer by the source of the funds of a percentage of its acquired equity in the portfolio company to one or more charitable organizations.

This concept is an extension of the long-standing model used by the venture capital industry. However, rather than having all the return on investment go to the investors and hope that they, in turn, will make meaningful contributions to charities, under the Virtuous Capital formula not only will the fund have the potential to realize gains on its investments, but its portfolio company and the fund, working together, are committed to sharing their gains with selected charitable organizations. This way, everyone wins, including society as a whole.

The underlying goal of Virtuous Capital is to assure that there can be a Social Return on Investment (SROI) with every investment made under this banner.

When Impact Funds LLC invests in a portfolio company the following terms and conditions, in addition to some but not all of the commonly used terms and conditions used by venture capital funds, will be included:

1. Out of the amount being invested, up to five (5%) percent thereof will be immediately contributed to charitable organizations that are mutually selected by the Fund and the company. Those selected will, in some way, directly benefit from the products and/or services that the portfolio company will create;

2. Annually up to five (5%) percent of the company’s pre-tax net income, or more, will be
contributed to one or more charities that are selected by representatives of
the company and Fund; and

3. The Fund will contribute five (5%) percent or more of its equity position to one or
more charities that it selects prior to a liquidity event in the portfolio company.

EXAMPLE:

1. Impact Advisors LLC invests $10 M in ABC, a financial services company in exchange of an equity position that is equal to thirty (30%) percent of ABC:
(a) ABC receives $10M and net of the contribution to the selected charities, books a $9,500,000 equity stake for the Fund in ABC.
(b) ABC immediately donates $500,000 (5%) percent thereof to a non-profit organization in Africa that provides micro-finance loans to women.

2. ABC has a net income of $1 Million after the first year.
(a) ABC donates $50,000 to one or more charities (5%), and;
(b) ABC continues to donate 5% of its net income annually to charities.

3. ABC has a $100,000,000 liquidity event in year five, of which Impact
Advisors receives $30,000,000.
(a) Impact donates $1,500,000 (5%) to the micro-finance non-profit or other selected charities.
(b) ABC donates $3,500,000 (5%) to specified charities, before any distributions are made from the liquidity event to its other equity holders.

Copyright by Jacques B. Nichols, February 2007