Perpetual Motion

This afternoon I had the pleasure of introducing and listening to Seth Miller from JP Morgan’s Bay Area Equity Fund (BAEF) present at Wharton.  BAEF is a $75M double bottom line venture capital firm committed to generating market rate venture returns through a portfolio of socially responsible businesses. 

To oversimplify, “social return” in the BAEF framework seems to consist of employee welfare, contribution to local communities, job creation, and general environmental stewardship.  Interestingly the fund is focused on the business practices of its portfolio companies, not necessarily the business models (i.e. it is not necessarily important that a company’s product or service have an overtly positive social impact – rather the focus is on corporate citizenship in its operations).

Lest you think this is less than fertile ground for lucrative investments, one of the funds clean tech portfolio companies, PowerLight, was sold last week to SunPower for $330M.  As Ian MacMillan, Director of Wharton’s Snider Center for Entrepreneurship, would say in regards to similar societal wealth enterprises:  

“We are not talking about hot-dog stands in Harlem; rather we are trying to launch high-impact programs that help thousands, if not tens of thousands, of people.”

$330M is a heck of alot of hot dogs.  Combine that financial return with the genuine, quantifiable environmental impact of a company like Powerlight and you have the makings of radical new way of approaching business valuation.  Or do you?

Listening to Seth I was struck not by the radical nature of the fund’s model, but rather by the common sense quality of it.  Paying your employees a living wage, contributing to your local community, operating in LEED certified facilities, and seeking green business certifications are not radically progressive notions – they are simply good business.  As Jeffrey Immelt of GE would say, “Green is green“.

From my perspective, BAEF is doing what all great venture firms do – they are uncovering emerging companies with distinct competitive advantage.  The difference, and the unique aspect that places them at the vanguard of what will hopefully become the status quo, is that their portfolio companies derive competitive advantage not only from differentiated products, but also from differentiated and responsible operating practices.  Consequently, BAEF’s pioneering vision will have succeeded when it is no longer known as a successful double bottom line firm, but rather when its due diligence formula is commonplace and it is known as simply a successful venture capital firm.

Idealistic? perhaps.  But its always nice to hear people like Seth who make you believe the future could be that bright.

Last Friday I participated in Wharton’s Entrepreneurship Conference as the Panel Director for the Emerging Technologies session.  I would like to say that the panel itself was my most memorable experience at the conference… Fred Wilson graciously returned to his alma mater for the panel and was as insightful and entertaining in person as he is every day in prose; Jeffrey Citron, the founder of Vonage, was a one man tour de force discussing massive market disruptions; and Robert Poor, the founder of Ember and Adozu, was a passionate, creative, and inspiring technologist.

However, the thing lingering in my mind post-conference is the peculiar venue in which the conference was held.  Over the past many years, I’ve spoken at, attended, and helped organize tens of conferences.  The venues (hotels, exhibition halls, community centers, etc.) are rarely inspiring.

Yet walking into Philadelphia’s Union Leaguefor a conference on entrepreneurship was downright ironic.  The Union League is a sprawling, Civil War era building in the heart of downtown Philadelphia.  Its walls are adorned with the portraits of aging men peering down accussingly at passers-by.  It would be a regal, elegant location for a debutante ball, but a thoroughly odd place to muse on emerging technology.  Most practically problematic was the strictly enforced dress code (from the Union League website):

For men:

Jacket and collared shirt are required at all times on the first floor members-only section of the League House and the Boker Room on the ground level. Jacket and tie are preferred.

Unacceptable Attire:

The following attire is never acceptable on the first or second floors of the League: jeans, denim wear, tee shirts, athletic wear, tank, halter, or jogging tops, shorts, baseball caps, sneakers, extremely casual or beach footwear.

The dress code would have snagged Facebook Founder Mark Zuckerberg and left him out in the cold in his Adidas flip-flops.  It would have also caught David Hornik, Raj Kapoor, and nearly every attendee of UC Berkeley’s widely covered >play digital media conference held concurrently.

This should not be construed as a criticism of the student organizers – they did a fantastic job doubling the budget of this year’s conference and bringing in more than 500 attendees.  Yet the venue to me was fairly symbolic of the still discernibly awkward marriage of Wharton and entrepreneurship.  There is undoubtedly top notch work being done in the field here and as a first year student I am admittedly still scratching the surface of the university’s offerings (for example, watch for an upcoming post on my new involvement with the Wharton University Venture Fund).  The WEP program office hosted an alumni entrepreneur dinner on Thursday night before the conference and I am certain that it was well attended by many a successful company founder.

However, day to day among students, entrepreneurship still feels like a hobby… a way to pass the time between investment banking, private equity (the leveraged buyout kind, not the venture kind), and management consulting interviews.  That being said, there is much bubbling potential and it does indeed feel that there is momentum for change.  As I’ve written before, the only way to make meaningful change in institutions is sometimes to get right in the middle and start painting the walls a new color.  With only two years here, I may only get to paint a corner or two, but I will do my best to leave some color behind.

“Value systems change,” said Dr. Daniel Vasella, the chief executive of Novartis, during his keynote, “and it is our duty to adapt our behavior when and where appropriate.” That’s really what has happened here: as the values of Western consuming culture have changed, companies have begun to change with them. That is what the rise of corporate social responsibility really represents. If the movement takes that next step — if it really does become about the core business model — it won’t be because corporations have led the way. It will be because the rest of us have.

Joe Nocera, in his column, “The Paradoxes of Business as Do-Gooders“, managed to capture a sentiment that been brewing in my head since I left the previously referenced NetImpact conference.  Last week in my business ethics class we read an old – over 35 years old – article by Milton Friedman that also appeared in the NY Times entitled, “The Social Responsibility of Business Is to Increase its Profits.”  One need not read much more than the title to infer Freidman’s strict interpretation of the purpose of business.  And just in case you think he had government restraint in mind in order to check the mighty power of the market, he dispenses with that notion as well.

Nocera references Friedman’s article as well and goes on to state that “it’s not hard to find critics of corporate social responsibility who still take that hard-line view.”  A 1995 survey done by Masaru Yoshimori of senior managers across the world found that 75% of U.S. managers believed that the corporation existed solely to serve shareholders, as opposed to all stakeholders (figures referenced at the end of this article, the U.S. ranks last in the percentage of managers supporting all stakeholders).  On the flip side, I was able to dig up a BusinessWeek survey from around the same time (1996) that pitted the statement:

“U.S. corporations should have only one purpose—to make the most profit for their shareholders—and their pursuit of that goal will be best for America in the long term”

Against…

“U.S. corporations should have more than one purpose. They also owe something to their workers and the communities in which they operate, and they should sometimes sacrifice some profit for the sake of making things better for their workers and communities”

95% of average Americans chose the latter statement.  Even if we assume that the 75% of managers favoring shareholders over stakeholders has dropped in the last decade (let’s be generous and assume that this would now poll at 50%), there is huge chasm between public opinion and senior executives.

This divide represents opportunity for change, yet one’s values and beliefs are not always neatly translated into the products that one buys, the companies that one invests in, and the candidates that one votes for.  There are a myriad of social and economic forces that ultimately shape behavior.  And that is the challenge for those who believe that American business models require continued reform. 

Nocera is right.  Corporate social responsibility ultimately needs to be a populist movement driven by the broad mandate of consumers, stakeholders, and shareholders, not by executives.  While I applaud the efforts that are being driven by corporate America and hope that they continue, I do believe that long term, sustainable change will only come when those 95% of citizens who favor, on paper, a broader definition of the corporation translate those opinions into real behavior.

It is hard to complain about a student life where a difficult decision consists of which competing evening lecture to attend.   Last night, The Weiss Tech House was hosting an intriguing “Innovation Week” panel discussion on innovation and commercialization.  Across the street, Jonathan Safron Foer, arguably the most important writer of my young generation, was speaking at the bookstore.  I opted for the literary route thanks to the prodding of my younger brother (an aspiring novelist himself).  Somewhat ironically, I think I learned more about the art of creation and innovation from Foer that I would have from the technology panel.

Foer is the author of Everything is Illuminated and Extremely Loud and Incredibly Close.  For all his success and evident intellectual prowess, he comes across as completely accessible and down to earth.  He also struck me as remarkably familiar, as if he might have been an old college friend with whom I spent late nights philosophizing on the state of politics and religion. 

In response to a question about his literary influences, Foer responded that his most important artistic influence had been Joseph Cornell, an eccentric, mid 20th century, assemblage artist.  He continued by explaining that the beauty of Cornell’s work was that it inspired him to want to run out and create.  He framed his own work with the same lens stating he is hopeful that readers will not praise his work, but rather be moved to create themselves – whether that is through art, music, or literature.  I found this to be a simple, yet powerful observation.

As I walked home from the lecture, I reflected on my own reactions to music or art and then to my professional interests in entrepreneurial companies.  Foer’s observation began to make perfect sense to me in many contexts.  I find myself instinctively drawn back to the piano after listening to my favorite musicians and to a computer keyboard to write in response to phenomenal lectures or articles.  And when I read my morning dose of company fundings and foundings, my brain itches to be back at work building a new venture. 

The urge to create can be downright paralyzing when it seems that there are always too few hours in the day to act on these myriad of inspirational impulses.  Now, especially with the freedom that school provides, I will often spend as much time cataloging the projects that I want to pursue than executing on the tasks to move them forward.  It is an admitted indulgence that I know I must soon abandon.  For inspiration, I need to look no further than Foer himself.   According to an interview with him last year:

He released his second novel, Extremely Loud and Incredibly Close, in April. He hasn’t limited himself to writing fiction, either. His recent projects include installation art, an opera libretto, and coediting The Future Dictionary of America, a liberal lexicon whose proceeds support the Sierra Club, the League of Pissed Off Voters, and other groups. 

And with that, it is time to begin crossing a project or two off my list.

From “As Investors Covet Ethanol, Farmers Resist”: 

One mysterious investor who visited the Mid-Missouri plant a few months ago claimed to represent a pool of $11 billion aimed at ethanol investments, and outlined a bid of about $275 million. The problem?

“He didn’t really know what ethanol was,” said Ryland Utlaut, a veteran of 40 years of corn farming who is the president of Mid-Missouri’s board. “That bothers me. We built this plant.”

I will begin with a simple admission of ignorance: until last weekend, I did not have a good grasp on ethanol either.  Fortunately, I attended the Net Impact Conference at Northwestern University.  Net Impact is a national organization of MBA students interested in issues of social responsibility, environmental sustainability, and other benevolent causes (it is like the Marines – “the few, the proud”).

At the conference, I had the opportunity to listen to Professor Bruce Dale of Michigan State along with representatives of BP Renewable Energy and GE Wind Energy discuss the future of alternative power.  A sought-after expert on ethanol production, Professor Dale holds 13 patents in biochemistry, yet speaks as accessibly as an 8th grade science teacher.

I would hazard to guess that after an hour and a half with this panel, I knew as much about ethanol as the man who came calling on those Missouri farmers with his $275M check.  It was not the sweet smell of manure that brought that banker out to the plains of the Midwest, it was the unmistakable scent of quick and easy money.

The farmers actions are a valuable lesson to entrepreneurs (and investors) in any industry.  The lesson is not “go it alone”, but rather, “find the smart money”.  There are trillions of dollars invested by dispassionate people looking to move numbers from one spreadsheet to another in hopes that the numbers grow and that they can take the difference.  At the same time, there are billions invested by passionate people who not only come calling with capital, but with expertise and empathy.

When the money men (or women) cometh, entrepreneurs need to carefully assess the people who are going to be true partners.  Do they have dirt under their fingers from working the same land as you?  Certainly all investors are out to ultimately make money, but it is the smart ones who understand that they are entering a symbiotic relationship.  It is the smart investors that will understand money grows in fields, not in spreadsheets.