Andy Funk: Entrepreneur Turned Socially Conscious Venture Capitalist

The story of Andy Funk left me impressed, amazed, envious and motivated. I think it will do the same for you. Funk moved to the US from Germany at the age of 19. Just six years later, without a formal college education, he had founded and sold 3 companies, and then became the youngest founding member of a venture capital firm in the country. His firm, Funk Ventures, is also one of the leaders in a new category of VCs that maximize social and environmental impact as well as financial return in its investments.

I reached out to Funk to understand more about his VC work, and found his back story equally compelling. Funk was born into a wealthy family in Germany. His family owns and runs Funk Gruppe, the largest privately-held and non-American owned insurance brokerage company in Europe; and as the oldest son, Funk was slated to take over the reins. This did not appeal to Funk whatsoever and he instead shipped off to the US. Funk cited that “[the family business] was already perfect – I am an innovator and a creator,” so he had no passion for running it. After a 2-month long cross-country motorcycle adventure, he landed in Santa Monica and decided to stay. It was there that he started building his first company, Microdyme, a technology company focused on vector-based online animation, and began living on his credit cards. “I never thought about the fact that I would have to pay these cards back,” he commented. By 21, Funk faced almost $250,000 of debt. “I was building my business but it barely made any money for the first few years… As an entrepreneur you have to be willing to fall on your face and get back up.” Luckily his first company took off, and as he puts it “I got a little bored, and felt the need to start more companies [Daily F1 and Helping.org]. I didn’t enjoy being CEO and had too much energy to focus on just one company at the same time, so I decided to build several. After exiting out of the companies, I was wondering how I could apply my passion for building companies but without the need to run each venture as CEO, and it dawned on me I would have to go into venture capital.”

Funk got a taste for socially conscious investing with his 3rd company, Helping.org, which allowed Americans to donate to any charity using a credit card or e-check. Funk noticed that non-profits often use a disproportional amount of their money on fundraising, which is an unsustainable model, so to change that, Funk’s company streamlined that process. Helping.org was sold to AOL in 1999 and later renamed to Network For Good. Funk noted, “Helping.org made me realize that it must be possible to make money and do social good at the same time.” So, in 2000, at age 24, and just a few months after the market crash, Funk founded Funk Ventures, a VC firm with an exclusive social and environmental focus. Funk never formally attended university – instead he poured over Harvard business school text books in his free time. However, he notes that “the best way to learn how to invest is to actually invest. Venture capitalism can’t be taught in school. This business is just as much about relationships as it is about money, and even more so about how much value you can add to your portfolio companies.”

Funk receives well over a thousand business plans each year and will take on 3 to 5 new deals annually, ranging in size from $.5M to $5M. When making investment decisions, Funk’s team of 7 looks at dozens of metrics, including the quality of the team and board, scalability, market growth, whether intellectual property is protectable, and the overall fit with the firm’s investment philosophy. That said, Funk pointed out that “80% of it comes down to the people and how we feel about the core management team. Is this a team I trust and believe in?” Some of the portfolio companies include Prolacta Bioscience, a medical technology firm that uses breast milk to nurture premature babies, and Cyber-Rain, makers of a smart sprinkler control unit which senses weather conditions and waters lawns accordingly, preventing over-watering and saving consumers 30-70% on their monthly water bill while conserving a vital resource.

“There are a lot of sharks and it’s easy to be labeled poorly,” Funk noted, keenly aware of the poor reputation that VCs have acquired. “But venture capital is still the backbone of our economy. The riskiest period of finance is the first 3 years…you have to be open to failure.” Despite Funk’s risk-taking, his portfolio is doing exceptionally well. Out of ~15 portfolio companies, several have sold or gone public while all but one of his current companies are on the path to success. Compare this to common VC experience, wherein of 10 investments 2 will be home runs, 4 or 5 will break even, and the rest will fail. Perhaps there is more than a little wisdom in a model that allows all stakeholders to win. “With some exceptions, I actually find for-profit companies more effective than non-profits. A for profit company can bring about the same social and environmental returns as a non-profit, the difference is that the entrepreneur and the employees are still incentivized with potential profits which encourages them to produce a better product or service, a scenario which benefits both the consumer and the shareholders. Ultimately, everyone wins, which to me seems like the most sustainable way to do business.”

[Originally posted to TriplePundit]

 

The silver lining in the market collapse: social capital

Just as things are falling apart, I feel them starting to come together. Amidst a free-falling roller coaster global economy, social capital is an encouraging bright spot. While traditional profit-driven capitalism is failing us, the social capital movement is budding, striving to do good and make money at once, shattering the traditional for-profit, non-profit dichotomy. I was a relative newbie amongst the brilliant, entrepreneurial and proactive attendees of the first Social Capital Markets Conference (SoCap08) which took place this week in San Francisco.  I wanted to share my post-event summary and thoughts.

SoCap08’s tagline refers to the “intersection of money and meaning” where “doing well and doing good is the mantra of a new generation of entrepreneurs and the organizations that invest in them.” For so long, for-profits have been efficient and scaled but potentially evil (i.e. focused on profit at all costs) and non-profits have been benevolent but inefficient and underfunded (a great Stanford Social Innovation Review article by FSG speaks to this). At last we are seeing more and more successful social enterprises that can turn a profit and maximize social impact at once. Companies are adopting social missions alongside their profit-maximizing goals. The Journal of Private Equity ran a fabulous article entitled “What Should Investors Know About Social Ventures?” which describes the space, listing Whole Foods, IKEA, Starbucks, Stonyfield Farm, Tom’s of Maine, Patagonia, and Newman’s Own as just a few of the “pioneering” socially responsible companies leading the space.

Kevin Jones, partner at Good Capital and SoCap08 producer, pointed out in his opening remarks the fortuitous timing as well as the gathering momentum that the conference represented. Conference organizers expected 300 attendees. But 600 registered; 50% did so in the last 3 weeks, which you may recall as some of the worst weeks in Wall Street history. The conference fee was around $1000 and people flew in from all over the world to attend, which is the most basic indicator of the excitement, energy and dedication gathering around the movement. Perhaps the meltdown really catalyzed this convergence. As the Skoll Foundation blog notes “Many see the financial meltdown as a unique opportunity to promote the idea of social capital markets and double or triple bottom line accounting. The meltdown has revealed the risk associated with profit maximization at all costs.”

Katherine Fulton of Monitor Institute gave a fantastic keynote speech. My consultant core may be shining through here, but she adeptly and logically dissected and described the industry and what needs to happen for it to prosper. According to her framework, we will need to: create industry defining funds as a beacon for how to address specific social issues, place substantial catalytic risk taking capital in mezzanine finance structures, develop an impact investing network, set industry standards for social measurement, and lobby for specific policy and regulatory change. All of this converging under the guidance of outstanding leadership, and social capital becomes viable.

One of the big questions of SoCap08 centered on how to make money while having an impact, an area where we’ve already seen some exciting things. Microfinance and clean technology are two of the stars of social capital, having shown returns and impact, but I think that with adequate energy and investment, many aspects of social and environmental impact can become booming and even (modestly) profitable industries. How can this be? On the social impact side of things, one illustrative component involves treating employees fairly – providing healthcare and comprehensive benefits as well as humane working conditions and adequate vacation time. It doesn’t take a genius to realize that such an employer will very likely have lower than average absenteeism, turnover and costs from health care claims. And each of these metrics results in cost savings, which help maximize returns. Now, let’s turn to environmental impact. The green rush we are seeing is fueled by the promise of cost savings achieved through environmental adjustments, which may include energy savings, resource conservation, and transportation reduction and rethinking. I don’t want to go into any more detail, as details abound elsewhere, but you get the point – organizations that take sustainability as integral to their operations will relish savings and enhance profits. So both social and environmental leanings can result in a fatter bottom line. Lastly, Jay Godsall reminded me of the self-worth enhancing implications of doing good. When people feel good about the impact of their work, their quality of life will be improved.

Certainly there will be cases where a for-profit model misses the boat, however I see successful enterprises scaling most effectively using a for profit model. As Elizabeth Funk of Unitus pointed out in Tuesday evening’s SoCap debate on this topic, people are greedy, and in order to raise adequate amounts of capital for development and particularly growth, entrepreneurs must be able to promise returns.

Coming out of the conference, a few questions remain:

• How do we measure social impact? This was a recurring question throughout SoCap08. SVT on Impact, a blog by my colleagues at SVT, Sara Olsen and Brett Galimidi, explores these topics from an experienced viewpoint.
• What is the best model for maximizing social return on a spectrum of non-profit to profit-maximizing? My guess is that the answer is somewhere in the middle, it will vary for each industry and sector and perhaps it doesn’t really matter. What does matter is that we continue to work together and experiment with creating hybrid social enterprise organizations.

In any case, the conference was filled with bloggers and video cameras, so please check out all that is being written about the many fabulous sessions.

[Originally posted to Just Means' "All Things Reconsidered" blog]

 

Ladies who Launch live event review

I used to cringe at the thought of blogging and I rarely read blogs based on the erroneous idea that bloggers are looking for an audience to relay their personal narrative, rather than sharing valuable information.   I am a consultant by training and I don’t have the time or desire to read dull anecdotes or irrelevant rants.  I want to learn, grow and be entertained.  That said, the aim of this my own blog is to relay information, observations, and thoughts.   My focus is clearly on sustainability, but not all my posts will be about green.  For example, this one, which I hope you find valuable nonetheless.

Yesterday I attended an all day extravaganza celebrating women entrepreneurs.  In blogging about this, I want to share the key take-aways I learned from each of the inspirational and accomplished speakers as well as share some of my overall thoughts coming out of the event.  I attended the the San Francisco live event with Green Zebra, who donated books for the gift bags.  Ladies who Launch is a “multiplatform lifestyle company” that defines itself as “THE source for women who want to live their dreams and love their lives.”

I had two overall impressions coming out of the event:

1. Women can do incredible things BUT most companies on my radar are founded and run by men: The goal of the event was to empower women to take control and run their own businesses and lives, but I couldn’t help but notice that men really dominate major companies. The women in attendance tended to be small business owners and entrepreneurs, and even the successful speakers were running smaller companies. Ebay and VMware are the few examples of large women-run companies that come quickly to mind.  I think part of this also has to do with lifestyle.  According to LWL, women are launching their own businesses twice as often as men, mainly for greater freedom and control to shape their own lives.  I don’t imagine there’s too much of that in the CEO role of a Fortune 500 company. 
2. Ladies who Launch doesn’t strike me as particularly green: My two cents about the environmental impact of this event is that the hosts were not thinking about the environment. Lunch was organic, which was nice, but in this setting it came off as more of a choice of healthy food. Especially since each and every lunch was individually packaged in supposedly compostable packaging and outright plastic cutlery. My top issue was the lack of recycle and compost bins for our plastic bottles and compostable lunch packaging. Compostable ware does no good in the landfill as far as I know (correct me if I’m wrong here as I’d love to be wrong on this one). My second concern was the many water bottles available. And thirdly was the preponderance of free stuff.  The first 350 to arrive received a gift bag loaded with a few decent gifts – which included the Green Zebra guide, the canvas gift bag itself, and a free pair of tiger print panties – as well as a bunch of paper offers and plastic gadgets I would not have chosen to own and may end up in the landfill including $75 off your first botox treatment.  Sweet!
   

The bulk of the event was interviews with successful women entrepreneurs.  The very first featured speaker cancelled and was replaced by a man, who was possibly making more money than any of the following presenters.  Here is what I learned from each:

Zach Nelson, CEO and President of NetSuite, 2nd fastest growing company in Silicon Valley

Its easier to run a billion dollar company than a small business for two reasons:

1. In a large company a mistake teaches you something and can even get you promoted, in a small company the same mistake can cause the company to fold.
2. Larger enterprises have many more staff, so leaders are less bogged down with doing everything that needs to be done.

Ann Crady, SVP Consumer Experience, Babycenter and previously founder of Maya’s Mom, which got bought by Babycenter 18 months after its inception

1. Don’t keep your idea to yourself – talk about it and get feedback from trusted friends.  An idea is nothing until it has been vetted and executed upon.
   
2. f you can, put your own money into your company.  This will speak volumes to investors and prove that you believe in your idea and are willing to invest it in yourself.
3. When trying to get funding, you need a presentation that proves the following points: Your product addresses a large market, Customers need it, The product is unique, and You are in the best position to make it successful.

Daryn Kagan, founder darynkagan.com and former CNN news anchor; Daryn was fired after 12 years on CNN working her dream job and was a reluctant entrepreneur but has never been happier now that she started her own media company focusing on the inspirational news stories she most enjoyed covering

1. Starting your own company means you get to pick yourself.
2. Build a profitable media company by creating good content and then using tools on your website like Google ads, Amazon Associates, Cafepress.com and Voxant.

Arcadia Maximo, founder Maximo Construction, “the only solely woman owned and operated General Contractor in San Francisco”

1. Maintain 100% ownership of your company so you call all the shots.
2. Grow slowly and thoughtfully; rapid growth can spiral out of control.

Kathy Preston, best-selling author

1. Don’t stop trying.
2. Listen to yourself.
   

 

Broke and trying to grow better pot: two ingredients for world class eco-innovation

Tom Szaky was a freshman at Princeton when he and some friends stumbled upon a killer fertilizer: worm poop. “We were trying to grow better pot and it turned out worm poop did the trick” Tom told me matter-of-factly at the start of our conversation. At the time they were just trying to improve their homegrown plants, but Tom knew this find had broader implications. And furthermore, he was inspired that their fertilizer was made from garbage. Rather than stick it out in college a full four years, Tom waved goodbye to campus life and said hello to the life of an eco-entrepreneur. His goal is to run the world’s most environmentally friendly company, TerraCycle. “I was not a huge environmentalist, I just wanted to use waste as an economic driver,” Tom said. In bringing this first product to market, they didn’t have the capital to invest in new packaging. Nor did he want to waste raw materials. So they reused 1 liter soda bottles to package the stuff, collecting them locally.

TerraCycle soon branched out into a myriad of waste based products: bags made from old Capri Sun pouches and old plastic bags, cleaners, lawn and garden products – packaged in reused bottles of course, office products such as juice pouch pencil cases and homework folders, eco-binders and so on. Each product is unique and requires a distinctive plan in order to collect the targeted typically unrecyclable trash. Tom uses an innovative brigade model to collect materials typically. One of Tom’s favorite projects involved a front cover ad in Newsweek in which TerraCycle requested people’s plastic bags. Quite niftily, the ad itself turned into an envelope into which people could place their plastic bags and mail them in. Tom received over 40,000 plastic bags from that one ad, which were used to make reusable bags. “It’s a win-win and a really fun product too.”

Every piece of news coverage for TerraCycle will not fail to mention the abundance of high profile partnerships Tom has created. TerraCycle goods can be found at major retailers such as Office Max, Whole Foods, Target, Home Depot, and Wal-Mart. It’s not surprisingly then that Tom’s favorite part of his job is creating just such big partnerships. “ I was grocery shopping this weekend and picked up a box of Capri Suns and saw that my logo was on the side of the package. That just gets me.”

The biggest surprise for Tom has been the realization of what you can do with waste. “Fundamentally there is almost no waste that cannot be upcycled and no product that cannot be made from upcycling. We can create a solution.” For those new to the term upcycle, Wikipedia defines it as “a component of sustainability in which the use of waste materials to provide new products. It is generally a reinvestment in the environment. This process allows for the reduction of waste and use of virgin materials.” Upcycling differs from recycling. Recycling often uses more energy than making something from virgin materials, Tom points out. This is never the case when upcycling.

While I love the idea of a product made from waste, I can’t help but wonder about hygiene and other related issues. I asked Tom if consumers or retailers had had any negative reactions and apparently not – “People are really into green products right now so they are much more receptive.”

Throughout our conversation and my pre-interview research, one issue was on my mind: greenwashing. I see Kraft partnering with TerraCycle (see press release) to invest in upcycling the loads of plastic packaging created when you make individual 6.75 ounce drink pouches as a way to allay Kraft’s guilt. I would hope that the partnership was a step in the direction of creating better packaging that can be more easily reused. Tom replied that they will collect 50 million juice pouches this year and while that is not enough, they can take it all. “We don’t see the issue of not being able to use the waste.” While he agreed that they should use more reusable stuff, Tom pointed out insightfully that “People aren’t great at recycling…It’s better to have lighter packaging get tossed away that is not recyclable. At the end of the day the argument is there environmentally to package juice in a pouch as it is lighter.” To Tom, greenwashing is when a company claims they have a 96% natural product when it’s just 96% water. Or when a company brags about using recyclable packaging, when it all is. Or when BP runs an ad which features “kids swimming near oil rigs with dolphins.” “But this Kraft thing is a serious step. If that is perceived as greenwashing then everything is. What these companies are doing should be encouraged.”

Before closing the conversation, I am always one to ask about profitability. TerraCycle is backed by a venture fund with most money invested in growth. Tom unfortunately could not speak to profits (other than “It is definitely profitable”), but he could share with me his sales, which have been growing exponentially. In 2004, TerraCycle had revenues of $70,000, up to $0.5M in 2005, $1.5M in 2006, $3.3M in 2007 and projected sales of $7.5M in 2008. That’s some garbage! As for the future, Tom imagines TerraCycle will double in size every year, something he thinks will be manageable. What’s next product wise? Look out for TerraCycle’s upcoming launch of a line of gift wrap and trimmings made entirely of waste.

[This piece also posted to the Just Means All Things Reconsidered blog today]