Are There Too Many VC's?

Speaker 1: Yeah. So we are doing another episode of season three for impacted. And today we actually have the man, the legend, the myth himself, Ben Thornley, someone I've known for a number of years. I'm really proud of that. Someone who's been in the impact space ⁓ in a variety of roles, but for many years, has been the co-founder and managing partner of Tide Line, which is one of the leading thought leaders and research partners in the impact investing space. And of course, we've got one of our co-hosts. Lucas Turner Owens, my guy for about 10 years now. ⁓ good to have you, my friend. And so we're going to have a really ⁓ really interesting conversation today with ⁓ two luminaries in my perspective from my perspective in the impact investing space. But we're gonna be really particular in terms of the role of venture capital and impact. So we've got a very provocative question: Are there too many VCs? ⁓ I know Lucas and Ben have different perspectives on this question. I myself have a particular perspective as well. But today we're going to dig into this question and really be able to unpack ⁓ a variety of perspectives. So one thing I wanted to kind of start off with, guys, is that ⁓ there's an argument that the impact investing landscape has been sort of oversaturated with venture capital, right? ⁓ again. I'm not saying that's true or not, but there is a perspective around this. Want to dig into that question with you all today. And I think one of the things that we sort of wanted to get started with, given Ben, your perspective and the work that you do with limited partners across the globe, by the way, not just in the US, but across the globe, ⁓ is really as someone who has has been positioned as a thought partner, a research strategist alongside entities. institutions that are deploying capital. I would really like to get a perspective from you in terms of where you see the field and particularly where you see the role of venture capital at this moment.
Speaker 2: Yeah. Well thank thanks, Rodney. It gr really appreciate you having me and ⁓ Lucas, really excited about about this conversation together. ⁓ so I think the challenge is not that there's too much VC. I think that there's not enough of ⁓ of much else. so so the market is to some extent sort of barbelling right now. With obviously, you know, some concentration in VC, which is normal because that's the capital that the market needs. This is an an innovation sector. VC supports innovation. It's the first part of the market that was built appropriately within impact. But the rest of the market needs to catch up. And so as the market has become more institutional, and it has, you know, the data from the Global Impact Investing Network shows that. ⁓ that around thirty percent of impact capital is now managed by by larger institutions. That's up from about nine percent just five years ago. So this is a tripling of the share that institutions account for. They are all piling into the more tested and proven parts of the market, right? Later stage private equity, real assets, infrastructure. So we're getting a barbelling of the market, ⁓ which I think then gives the perspective that VC's not working when in reality we just don't have the the sort of scaling pathways ⁓ that that that are sort of giving the impression that VC's not working when in fact, you know, the rest of the market needs to catch up. So ⁓ so that's my perspective, Rodney.
Speaker 1: I really appreciate that. And and Ben, I'm curious, as you have conversations with like your clients, I mean, because again, you're not, you're not an investor, you're you're a thought partner and research strategist ⁓ working alongside these institutions. ⁓ what are some of the things that are questions that sort of pop up for for your clients as it pertains to VC and actually the broader private markets?
Speaker 2: Yeah, yeah, yeah. So so I mean they, you know, LPs need certain things, right? And we ⁓ this is research that ⁓ we we did a piece of research, I think you alluded to it, Rodney. We we have a partnership with the Institutional Limited Partners Association. We're looking at some of the elements of a functioning market that LPs require to become more active. So they need good data, they do need scale and liquidity. ⁓ you know, they need infrastructure to to transact, ⁓ you know, and they need networks and resources and and that type of thing. That is what they're asking for. And and they are struggling with certain aspects of that in in impact. ⁓ you know, obviously track records, ⁓ d distributions, secondary markets, paths to liquidity that exist in other parts of the market but not necessarily in impact, I think make it more difficult for them. ⁓ so again, they're kind of concentrating their investments in more proven parts of the market. And I think that is that is leading to a market that feels a little imbalanced. ⁓ so ⁓ it's just that LPs are not going to become active in a market where they don't have you know they don't have the data and visibility that they need, the trust they need and the support from intermediaries they need. And so it's ⁓ it's more a case of that. Rodney, I think it it It ⁓ so it constrains where in the market they can play ⁓ and and create some some ⁓ inefficiencies.
Speaker 3: Maybe we could just double click for a second on that point about liquidity, because I thought that was a really great piece of the report that you just highlighted. And just to give some some quick framing to folks that haven't read it, and to pull in other recent research from the Financial Times, you know, secondary transactions as a market reached about 240 billion globally last year. ⁓ and that's a six-fold increase in the space of a decade. This is not just for venture, this is for all private markets, but ⁓ I think it it highlights a broader concern, which is folks are wondering. Where will I get DPI? And Venture as an asset class hasn't been producing the kind of DPI that it has in over the last decade in the last couple of years. So I guess the question to you, Ben, is just from your vantage point, you know, what what do you think needs to evolve or what LPs want to see in terms of liquidity? And how do we ⁓ make sense of this growing secondary landscape?
Speaker 2: Yeah. I I so you can ⁓ so in impact you can almost count the number of secondary funds on on one hand. ⁓ you know, so so the the the the challenge that creates is that every time we're thinking about liquidity or an exit, ⁓ it's almost always a more painful experience, a less efficient experience, you know, and and it it's possible, it's feasible. But without secondaries, without as many strategic buyers in the market, it just means that that transacting becomes more burdensome. Like the transaction cost that LPs are ⁓ you know incurring are greater. And so LPs have a choice of the markets they can they can invest in, right? And so these kind of things that add cost and inefficiency, ⁓ that that obscure ⁓ what's happening in the market. ⁓ really, really can create barriers to participation. And so that that is what we're seeing. It's not that it's not possible to exit. It's that to exit is like twice as difficult. And and just that difference between an impact and a non-impact opportunity, that transaction cost, that time and effort required, it just turns turns them off. You know, it makes it harder for an LP to participate in certain parts of the market. So that's That's more the situation that we're that we're seeing.
Speaker 1: No, I really appreciate that perspective, Ben. And you know, you you said something that I think, you know, you answered that sort of provocative question about whether or not there are too many VCs. You gave a very nuanced ⁓ and clarifying response to it, which I would expect nothing less. One thing though that you you shared though was that you don't have the perspective that there's necessarily too many VCs, but there's not enough of any other options, is what I heard. And, you know, Luke is kind of going You know, turning back to you, ⁓ I'm curious about how you might respond to that question because you're someone ⁓ you know, as the audience probably knows, who's been in impact investing from a range of different perspectives, from a consulting perspective, community development finance, you know, catalytic capital. And you spent the last, what, five or so years ⁓ plus in the venture capital space. And so just curious, how do you think about that question?
Speaker 3: Well, a couple of things come up. One is that I think VC really lives large in the consciousness of of many investors, and that includes impact investors, because it's it's thought of as this kind of ⁓ you know, risk on playland where any idea on a napkin can get a billion dollars and go out and and and flame out. ⁓ and I think that's not, you know, th there are examples of that, but that's not ⁓ my experience in the industry. I think the other thing that's kind of important to note is how the industry has changed. So like I, I'm sure, like Ben and like you, am kind of a a student of venture capital and have read about how it's evolved over the years. It went from being, you know, you think about the early days of Y Combinator, you know, 10 ⁓ founders sitting around a long table having dinner at Paul Graham's house to now what I would call is more like kind of the money ball version of venture capital. You have firms trying to scan 5,000 opportunities or 10,000 opportunities using data, using really complicated flagging systems, and then running down opportunities in a very quantitative way as opposed to kind of the relationship-based cottage industry that that started ⁓ the space. And so, you know, I think where we are now, there's a number of specialist funds, and the the early pioneers of the field have evolved to become largely multi-asset mega funds. and I think I there's a real question that I don't claim to have the answer to, which is have we oversaturated the field? Are there enough opportunities, ⁓ true returning opportunities, ⁓ that you know that that all need to get funded. What I can say is I think there may be too many folks hanging out in one end of the pool, which is the early stage. I I can say that pretty definitively. I think ⁓ to the earlier point around liquidity, we we need ⁓ as sophisticated ⁓ of a field i at later stages in growth equity, in buyout, in in in other, in other areas. So ⁓ yeah, I think I'll leave it there in terms of my initial thoughts.
Speaker 1: Yeah, I, you know, one of the questions I always have, and you know, Lucas, I'll stick with you for a second, and then we'll love to hear ⁓ you know, some perspective from Ben. ⁓ because I I hold this tension myself, you know, because particularly over the last few years, there's been a significant push, at least from rhetoric ⁓ perspective, is of like how do we better support emerging fund managers? And often what that really means is how do we support emerging fund managers in and the VC venture capital asset class. And Yet to your point, Lucas, there's ⁓ a multitude higher number of venture capital funds and firms that have been started s in comparison to like say the 80s, right? The 1980s. ⁓ and this question around the ability to source and identify, you know, those outsized, those outliers from a venture capital perspective that are going to create, as you noted, Lucas earlier DPI that's actually aligned with what you know limited partners LPEs are looking for, it gets really challenging. And so, you know, I I'm even I had this question about, you know, how we're actually sort of encouraging folks to move into the venture capital space. And and to your point, Lucas, and actually what Ben had pointed out earlier, there's a there's a there's much more latitude and and opportunity. to enter into other asset classes. But we don't see, at least from my vantage point, I don't see folks pushing those asset classes as an opportunity for emerging fund managers. And I'm just curious, like from your vantage point, if you have any perspective on on why that is.
Speaker 3: Well I think I think one thing is like sort of like I said, it it it lives large in the imagination because I think there's also an association around like the lifestyle that people think VCs are living. And some some of that is true, right? Your your dinners are comped and and that's part of the job is meeting folks over food and drinks and and that is often, you know, paid for by your employer. So that there's there are perks to the job, but I think part of it is people thinking about do I want to be an Excel jockey who's who's stuck in a cubicle doing doing math, or do I wanna be out in the world meeting people? So that so there is that part of it. ⁓ I I do think though that there's there's something else at play. but I I guess I I want to pause and get Ben's reaction before I I go further.
Speaker 2: Yeah, I I I it's it's a great question, Rodney. And I think we often think the logical starting place, not just for a company, but for an investment professional, is, you know, that at that, you know, at the VC stage. I sus I suspect, and I'm not an expert on this, that there are many more biases that that ⁓ are built in to the system as you even sort of go further along the the sort of you know the capital journey. and and so I I I think I think we need to acknowledge that. You know, there's probably a lot of explicit and implicit bias in those in those parts of the market too. I th ⁓ typically as you become you know move more into growth equity, you are talking about larger institutions, right? Like larger managers, larger intermediaries and they come with, you know, I I like the way Lucas described the different experience for an individual, you know, as an Excel jockey versus being out in the world. In addition to that, there's all the cultural norms and ⁓ and ways of doing things at those at those larger at those larger places. It is it is hard to be a an emerging manager when you're talking about a growth, a later stage investment strategy. so I so I think there are some biases there we just need to need to acknowledge as well. But I do just just to validate something Lucas said, you know, the pitch book data shows that 60% of impact P funds are less than $100 million. So I just so you know, and you know, the gin data shows that even though you know 12 to 14% of impact assets are in early stage investments, seed and venture. about fifty percent of investors are sort of active in that in that space. So to Lucas's point, there is a lot going on in that at that end of the the the continuum. And probably ⁓ you know, we need to see more diversity. We need to see a a a bigger spread there of activity and capital, you know, across other stages of the of the investment cycle.
Speaker 3: Just add maybe one more point, which is I think when you think about those emerging managers, Rodney, who are trying to find those outliers, I just want to highlight that there are kind of two ways that those folks can be successful. One is they can find those unique startups that are true outliers that they stumble across and are able to shepherd from seed all the way through Series D and beyond and an exit that they found and they build syndicates around. That is great when it happens. And I will say it's somewhat rare. ⁓ what I think happens maybe more frequently, people realize is Some venture funds create their own luck. They are of such size and scale that they build syndicates with the leading firms in the industry. And it basically they they they're writing the destiny of that founder by introducing them to their key customers, by helping them accelerate from C to Series C with a funding ecosystem that they know well and that that supports that founder. ⁓ and I I say that not to say that those companies don't have some sort of market proof, but that they are a little bit insulated from some of those. you know, market realities because of the backing they might have from some of the tier one venture firms in the industry. And I the the point I want to take away from all that is that if you're an emerging manager, you may not benefit from some of those same networks or economies of scale or ⁓ customer relationships in in a way that these tier one very large firms are able to.
Speaker 1: Yeah. That really makes a lot of sense. And I appreciate you like naming that. You know, I I'm curious, Ben, you know, as you have conversations with with your clients, I I when you point out, and obviously the the report that you the two of you have already referenced, you know, spells this out in terms of the opportunity set for increased investment in asset classes outside of venture capital. I'm just curious how sort of as you have you as you have conversations with your clients, you know, what's the response to that? You know, what are Are there opportunities for for shaping and influencing more diversity from a perspective of of LPs?
Speaker 2: Yeah, I I I f for sure. I think we need to ⁓ yeah. I I the there are some important things that we need to prioritize within the market in in in in my view and and and they all have to happen together to to have this work. And I've I've I've written about this. You know, I think one is the idea of segmentation and pragmatism. Like we have to acknowledge That impact will look different from where you sit as either ⁓ either by asset class as ⁓ in terms of the strategy actually being deployed. You know, intentionality is different if you're a public markets manager versus a private markets manager, or you're in the US, or you're in, you know, the global the global south. You know, so we need a diversity of investment opportunities that are available to LPs, right? So we need pragmatism and segmentation. You know, at the same time, we need ambition and we need folks to ⁓ to take risk in terms of where they're sitting, right? Now that may look different for someone investing in the earlier stage, where as we know, VC is not always the right fit for impact business models. And I think the whole world of innovative finance and and ⁓ you know all of the new kind of Ways to provide capital in an early stage are really, I think, important. And we need investors to be ambitious about that. But we also need institutions and LPs to take risk. It may be a different kind of risk. It might be a professional risk. It may be a vehicle risk. It may be a duration risk. It may be a geographic risk. It's a different kind of risk when you're sitting where the LPs sit. But but what I have found, I've I've got to tell you, you know, that that the investment professionals that I that I work with, you know, they they are ambitious in their own way. You know, they they they do want to invest in in emerging managers. I mean, we've we've advised institutions hundred plus billion dollars, and they are investing in first time and second time funds. Because they want to generate outsized return. They want to generate alpha. But you know, they do it through their lens, their, you know, their portfolio construction box and algorithm and and in ways that are comfortable to them. But but we are seeing like LPs really step up ⁓ in their own ways, even though when when you're thinking about it from where the entrepreneur lives and that early stage of the market, you might look at the big end of town and think that. You know, th there's nothing happening there or there's no ambition. I think there is in their own ways. And so I'm I'm encouraged by that, Rodney. Yeah.
Speaker 3: One just quick follow-up question on that, Ben, is I think also you have a great perspective on LPs globally. You know, you're working with with some folks in in Europe and other markets. And I I got exposure to this in business school because I was working with a a small Moroccan venture capital firm, and they told me there there's a lot of seed stage money, there's no series A money, there's no series B money. So I say that to say that some of those investors are, you know, may think differently about venture as an asset class because of the ⁓ sort of nascent stage of the market than we do in the US. So what what are some global LPs? thinking about the impact VC space.
Speaker 2: Yeah, yeah, yeah. I I think that ⁓ yeah the so so the investors we've worked with I would I would are obviously impact motivated to some extent, right? Like I'm thinking of a of a Tomasek as an example. You know, they are a serious investor, ⁓ really focused on ⁓ on longevity and and aligning with their own fiduciary responsibilities, right? But they are ⁓ they recognize that the area of the world they're focused on and the themes that they're focused on, and specifically Tomasek's focused on emerging markets and they're focused a lot on social impacts like access to health, education, financial services. They are two kind of gnarly like constraints, right, on a portfolio, right? Like a geographic constraint and a thematic constraint. We have to recognize that. 80% of the LP capital has been going to climate the last few years. So you choose to prioritize social impact and you choose to prioritize emerging markets, like you're already, you know, doing something that's pretty ambitious. In order to make that happen, they've had to do some really creative things. So an example would be the ⁓ the partnership with Leapfrog Investments, where they said to Leapfrog, look, We know your next fund is not bigger enough for us to write a $500 million check. And remember a lot of large LPs need to write checks that large, but we're gonna back your next three funds. So we're literally writing you a check for your to guarantee that we're underwriting your, you know, future investment opportunities. So those kind of partnerships, I think that partnership mentality is really front of mind for for institutions that are operating in those kind of places. You know. Maybe more outside the US, I I I I found I think there's more of a partnership mentality around this sector because there's more of a market building motivation. I think in the US it's a little bit more transactional. That that that's okay. You know, again, I think that leads to a more concentrated market with more capital going to the TPGs of the world, which is okay. ⁓ it's just different. So I think that I think that partnership mentality ⁓ outside the US is a is a characteristic that is ⁓ that is an interesting one.
Speaker 1: Now I really appreciate that, Ben, because I gotta say I think about this quite often in terms of what is the role of LPs to be as entrepreneurial and future forward as the GPs that they're looking to invest into. So that example of Temasek in terms of saying, hey, you know, we need to be able to write a certain check. We can't write that into this individual fund, but we're gonna we're gonna commit to three of your next funds such that you're gonna in aggregate get the financing that's required, right? Which, you know, it, it's, it's, it seems like a simple ⁓ you know, outcome. And yet I'm sure that it was very, you know, a series of conversations and difficult and challenging in its own ways. But that's the sort of thing that I I I think a lot about in terms of what is the role for LPs to be able to do something like that, right? You know, to be able to ensure that the impact Private asset class can continuously grow, have the alpha, both from sort of an economic standpoint, but importantly, obviously, from an impact standpoint.
Speaker 2: Yeah. Yeah. I I mean what you know, we we coming out of that report we wrote with IlPA, we we've had some sort of round table discussions with LPs about what they're doing proactively to be able to innovate, you know, again within the constraints of their own norms and algorithms and cultures and and and and requirements and and expectations as a fiduciary, right? And Yeah, there are some cool things happening. I think, you know, secondary markets is one, but I think also, you know, co-investment is a big, is a big one that I think many institutions are focused on. The interesting thing about the a co-investment opportunity is that the opportunity itself can be an in inverted commas impact investment. The intermediary that brings the opportunity to them does not have to be an impact investor in inverted commas. So What a lot of LPs are doing is saying we have relationships with hundreds of GPs. You know, maybe ten of them would be labeled impact investors. The rest are just our usual whatever, growth and buy out buyout managers. But they say to those managers, bring us deals that are impact deals. And on a co investment basis, you know, they start to build a portfolio. And so I think, you know, again, LPs are getting creative in different ways and and ⁓ Yeah, we're we're we're we're really encouraged by that.
Speaker 1: No, I'd love to hear that. You know, Lucas, I'm curious. You've been working in venture capital the last few years, and you know, you've got firsthand experience as an investor. And I'm just curious about like sort of how you think about this question between the relationship between LPs, GPs, and sort of some of like the structural dynamics that are at play right now.
Speaker 3: Yeah, I mean, I think coming out of twenty twenty, when I first started getting introduced to the space, ⁓ there was a lot of money flowing into backing underrepresented managers. And a lot of that money ⁓ wasn't permanent. And so I think of the the kind of the phrase, you know, when when America gets a cold, black America gets pneumonia. I think you can say the same thing about, you know, VC and emerging managers, right? When VC gets a cold, emerging managers get pneumonia in terms of not having that fund two, fund three, fund four commitment. So think that's that's certainly one trend. But I think more specifically to your question, Rodney, like I get excited by LPs who show up as customers, you know, for for these companies that are getting backed by by managers, LPs who think about kind of their market-making ⁓ power in addition to their just check writing power. ⁓ that's something that that I know we we see at building ventures, is a lot of our LPs are really excited about how they can partner with the companies in our portfolio and ⁓ give them that. critical early feedback on what works and what the market needs and then become some of their largest customers. So I think that's that's an interesting way. But I I love the point that Ben made about co-investments too. I think ⁓ there are so many folks who are investing in things that could be labeled as impact legitimately without any impact washing, but are not, because it the thesis is energy or the thesis is ⁓ you know, a better maritime industry. And and we don't think of some of those spaces as ⁓ under the traditional impact umbrella. So I I I just Yeah, I I really resonate with that last point Ben made.
Speaker 1: That's really great. No, I you know, one of the things, you know, I ⁓ you know, Ben mentioned this earlier, and we actually kind of touched on this a bit in terms of like the the structural challenges of liquidity. But, you know, Ben mentioned innovative finance, ⁓ which folks in the audience may have some perspective or understanding of innovative finance. ⁓ and and there's a direct connection, I think, to the structural liquidity issue. Right. And so I want to spend a little time just sort of like, having a conversation around effectively what are alternative structures and models within private asset investing in private assets. You know, there's the traditional 10, you know, 10 year plus, you know, model that, you know, venture capital, private equity, private credit, you know, utilize. But when we're thinking about, when we're thinking about innovative finance, there are various models and structures at play. And You know, one of the things that, you know, from my vantage point in the work that I do is, you know, I hear from institutions that, hey, you know, it's not that we don't that we don't have appetite for, you know, a long-term hold, like a 10-year plus hold. It's that within particularly the venture capital spaces, you're asking me to both have a 10 year plus hold and effectively for me to achieve DPI, there's a concentrated model around exiting companies, right? And we've seen like from a market perspective, you know, that being installed. ⁓ and that might be a long-term structural dynamic. And so I say all that to to to kind of say there are other models, right? ⁓ that kind of are bucketed to Ben's point as innovative finance. And so I'm just curious, you know, and Ben, I'll maybe I'll start with you actually. Like, how do you see sort of like the evolution of innovative finance as it relates to like the work that you do?
Speaker 2: Yeah, yeah, yeah, yeah. I mean I mean I think again I'll come back to this point about segmentation, right? And and it it it has been something I've I've I've written about for a for for a long time. So it's ⁓ because I think it is ⁓ you know LPs are gonna large LPs, you know, Tight Lines clients are gonna have a different view on this, right, compared to folks who are who are really deep in the innovation market and the early stage market. And so I just want to make I just want to make that clear that ⁓ w when I talk about this, I'm thinking more about, you know, the families and the the the foundations and you know sort of public private partnerships that that ought to be active, you know, in this in this conversation, right? That have more flexibility and ⁓ and ⁓ should have more of a risk appetite for you know this this type of innovation. So I I think that we yeah I I'm excited about some of the innovations around sort of long term, you know, long term capital for sure. you know catalytic capital has been tricky. I think it ⁓ it it's complicated to get everyone on the same page. Really I think the ⁓ you know I I think prototiquical Tip typical example of an an excellent organization that space, I think, is Prime Coalition. And and the main reason that worked, I think, and maybe the Catalytic Capital Consortium is doing this to some extent, but the main reason it worked is they convinced a group of investors to to some extent subserviate their own idiosyncratic objectives into an agreed overarching commitment to early stage. early stage tech investments that have more of a hardware, you know, kind of vibe to them and therefore were not being funded in the same way software was being funded. And so, you know, I think it's probably hundreds of investors now have kind of through Prime, you know, aggregated that goal, that outcome that they care about, that impact outcome. But but that is that that is challenging to do, you know, so the sort of Blended finance has been difficult because you know aggregating people's idiosyncratic impact preferences is is hard. But I think there are some good examples and Prime Prime is one of them. ⁓ so yeah, I think I think it ⁓ yeah, again, we don't do as much work in that space, Rodney, but ⁓ but I definitely think I I'm encouraged by that work and and and it it's an open question in my mind, the same question you asked, Rodney. Like, are we now seeing some common characteristics of impact businesses that could allow us to standardize and scale certain vehicles that are more responsive to that need? So now that we've been doing it for a while, like are there some common models, just given what impact businesses typically look like? Again, I'm not the expert on that, but that's the question I would have.
Speaker 3: I want to ask you a question too, Rodney, building on this theme, but just to to lift up something you just said, Ben, because what I like about that is it's thinking about sort of bottom-up ⁓ responsiveness to to the the engines of this productivity. I think what's often the the paradigm is thinking about sort of top-down and and how we all have to inherit the models and the preferences of LPs. And that that point made me think about the importance of like LP education, LP coordination to to to drive the kind of opportunities that we want to see at the GP level and at the company level. But I guess the question to you, Rodney, 'cause you're you're also seeing the full chessboard is, you know, what what are you where do you think there's opportunity maybe to to educate LPs or what do you hear them kind of yearning for in your conversations with different asset owners and financial institutions?
Speaker 1: Yeah, you know, it's what's interesting about it, Lucas, and like, you know, thanks for the question because, you know, my experience has been, and I don't have a judgment on this, but it's it's it's I think it's true, is that oftentimes asset owners want their cake and want to eat it too at the same time. Which I think, you know, there's a lot of reasons for that. And and a lot of that's just human dynamics, right? And so the reason I say that though is, you know, to some of the points that Ben has already raised. You know, on one hand, folks want to see long-term impact, right? Really want to see that. And at the same time, they want to have differentiated alpha as well. ⁓ which there's if you look at it from like a wide spectrum, there's a lot of opportunity for that, but or and rather, there is a lot of opportunity for like an edge or alpha impact that would require different sort of structures or relationship to sort of return profiles. That I think there's still a lot of room for, right? And I say all that to note that I hear with a lot of consistency that asset owners, you know, LPs are looking for, they want, they want significant impact. They want to be able to demonstrate to their investment committees, ⁓ and other kind of stakeholders and decision makers within, you know, the entity that. there's not necessarily like a ⁓ you're not trading economic returns for impact. And so one of the things that I think is really interesting is this space of like structural innovation. And maybe it's not even honestly, I wonder if it's even structural innovation because a lot of these things have been in market for some time. It's maybe like applying them with a different lens or connecting the dots on a particular asset, like how something's done in one asset class and can you actually port some of that over you know, into another asset class. And an example of that would be is that even in a venture capital space, you know, obviously as you pointed out earlier, Lucas, that like folks are let's just say disappointed with the lack of DPI. And so there have been, you know, first time early, you know, emerging fund managers that have tinkered with the model. They'll say, hey, actually we're going to incorporate profit sharing. as well. So we're not just going to underwrite a deal, an early stage investment predicated on, you know, some MA transaction or an IPO, you know, seven, 10 years from now, that we're actually going to encourage these companies that we're investing in to get the profitability so that we can actually be able to utilize cash flow as a means to distribute and you know returns to our LPs. And and that's like a tweak of the model, though, you know, a series of tweaks in the model. And to your question about LP education, because a n from my experience, a number of LPs aren't you know, they haven't had up close experience with even those what I think are like modest tweaks, right? They they understand it as one way. There's one way to do this venture capital investing. ⁓ and but there's there's models, there's examples of even those small tweaks. And so I think a lot of it has to do with like being able to bring in LPs to like these models that have actually succeeded. ⁓ and sort of, you know, being able to demonstrate that in ways that really don't kind of ⁓ I hate to say it, but don't, you know, require so much change from the asset owners. Now, from my vantage point, I would love to see more shifts in behavior from asset owners. And I recognize that there's actually several opportunities that only require modest tweaks, right?
Speaker 3: Well, I wanna I want to build on that and maybe offer a bit of a spicy take and then a sort of question to Ben, which is it seems like almost in the impact VC world, folks are even harder on themselves than they are in the traditional VC world in terms of like trying to avoid looking like a bleeding heart, going the extra mile in terms of impact measurement, and and not allowing themselves to take the kind of big swings and big bets ⁓ that that some folks in venture, non-impact venture, are very comfortable making. ⁓ I'll I'll pick on a company here in Cambridge where I'm based, ⁓ Suno, which is You know, AI for making music, you know, like that's a company that I doubt would pass any impact IC, ⁓ where they would be hemming and hawing about like how much is this kind of a lark or how much is this just for fun. And even if you could make some argument about educational benefits or something, it wouldn't, it wouldn't pass the level of scrutiny that I see on impact ICs where folks are going really deep on, you know, IMM and and so I and I like that example you gave, Ben, of of Prime and the work that I know Azola is also doing, because those are focused on hardware investments, you know, companies that have A different path to maturity that require different amounts of capital, different amounts of of risk than a than a traditional SAS bet. So so I guess taking all that context, my question for you, Ben, is just ⁓ you know, in the world of impact in private markets, like do we have a bit of science envy? Are we a little too hard on ourselves with the measurement side of things? Like what what's your perspective on on that broad question?
Speaker 2: Yeah, great ⁓ that's a great question. I think it's good to have a disciplined and consistent way of, for example, just understanding impact characteristics of a company or or if you're sitting in the LP seat, a manager, right? So I do think ⁓ frameworks to to reveal those characteristics and to assess them are important. I think that that the bigger problem is around. Purity tests in impact. And my my point being that ⁓ we we have to understand that impact can be generated in different ways. You know, coming back to my my point about being being more pragmatic, I think it is, and investors probably have to ease up a little bit on their on their expectations of what it's possible to do with. Private capital. mean, we know that private capital is not a silver bullet, you know, to creating social change. Clearly, you know, it's a it's a tool. And so often we find ourselves, Lucas, creating frameworks that that look like a dartboard. You know, like we we get it that you want to be in the bullseye, you know, from an from an impact perspective. But but really, you know, the concentric circles that are sort of adjacent to that. That's okay. You know, it's just a different kind of impact. Now, you're not getting the perfect alignment with your mission, but you know, like this is having impact in a different way. You know, it's it's ⁓ I mean, I'll give you an example. And ⁓ this is the the, you know, big end of town. I mean, this is CalPurs, right? CalPurs, we worked with ⁓ many years ago. They had something called the California Initiative. They'll try to create impact in California, like economic. benefit in California. And and this when I share this story, it kind of blows people's minds because even California was not a big enough market with enough liquidity and enough opportunity for them to think that they could deploy a a the a private equity strategy that was comparable to any other private equity strategy that they would invest. Even that big a market, right? And so The way we defined Inverted Commerce like a California economic benefit was sure, it's a company headquartered here, but it's also a company that employs a fair chunk of people here. It's a company that sells a fair number of products to California. So we defined an adjacency to California or a nexus to California in a way that allowed CowPas to get the money out the door and get the performance they needed. So I think all investors. Need to be thinking about that concept of a nexus. Like, what is the nexus to the issue I really care about? We understand that you want the bullseye. We get that. But but look, that's really hard to get in this market. So, what's the nexus? What's the adjacency? What's the concentric circle for you? So I think having a disciplined process to assess impact, I think, is good. The key is transparency and discipline, you know. But But as long as you know what you're getting, it's not impact washing, right? Like you can make an educated decision because you have the information, but just broaden your aperture a little bit and I think this market will kind of move move more efficiently.
Speaker 1: That's really well said. You know, Ben, I, you know, just one, maybe two questions to close us out here and really appreciate you taking the time with us today. But listen, Ben, you've you've been in the impact investing space. I mean, you're like I said, you're one of the original folks. You're you're a luminary. ⁓ and I'm curious as you think about the future. Like even when I say future, next three to five years, ⁓ because once you get past that, it's really hard to kind of see into. ⁓ but I'm just curious. You know, what you're what you're paying attention to, what you're looking out for over like I said, the next three or five years.
Speaker 2: Yeah. Yeah. Well, Ron, it's very kind of you to to to very generous in your in your compliments. I don't ⁓ I I I quite like standing behind our clients and and playing a sort of quieter research role in the market. So it's kind of you to to call me a luminary, but but I
Speaker 1: It's really important work though, Ben. So that's why I call it out.
Speaker 2: I enjoy I enjoy being playing that sort of guide guidance role. ⁓ look, I I think if you look at a place if if you look at places that are more conscious of the the ⁓ the challenges that they're experiencing, right? Like in America right now, we're just in a d it's it's like a denial. It's a culture of denial, right? Let's just be honest about it. You know, like climate's still climate change is still real. Inequity is still real. It's just a culture of sort of just enforced sort of ignorance, right? Like in places where that's not the case, like in Europe, you know, where there's more of a sensibility about what's happening and a true understanding of the challenges connected to like climate resilience, right? And access to resources and ⁓ social cohesion. And similar in Asia where, you know, where in Asia countries are going to be really severely impacted by the effects of climate change sooner than we will in in in the US, you know, you see a growing commitment to and focus on sustainability and impact. Like, like make no mistake, the only thing that's happening is America in America is we're giving up our leadership. I mean, it is and ⁓ and Europe is emerging as, you know, as probably the the the the main market now in in impact. So those places give me hope. that even in times like this that are challenging, and they're challenging in Europe as much as they are here, you know, economically and socially and environmentally and politically, you know, they're they're facing the same challenges we are, but they remain centered on on the long-term realities of of of inequity and climate change and and needing to, you know, make sure they have a resilient economic system and financial system, right? Which is sort of motivating institutions to to continue to be active in this space. And in Asia we're seeing tons of growing interest. You know, the largest institution in the world, you know, the Japanese ⁓ p pension fund has just announced that it is exploring and will begin a journey in impact. So look, it it's ⁓ it makes me sad, right, that we are giving up that that leadership position, which I think we did have at impact. But you know, that that's ⁓ th that that's not the rest of the world's problem. So I'm I'm optimistic, Rodney. I think I think this is this is you know, we need to use all the tools at our disposal to address major challenges we're facing as a society and capital will continue to be one of them and an important one. And so I think that as as soon as we move past this period of sort of denial and enforced ignorance I think that we will come out the other side and ⁓ and we'll we'll get back on the right track.
Speaker 1: No, I I really appreciate that. And, you know, Ben, I think what you just shared with us to end this conversation, this, this, this discussion that we've had, ⁓ was was so poignant. And really to me, ⁓ is, you know, I know you're you're you're being ⁓ quite modest about you know the impact you've had in the space. ⁓ and at the same time, what you just share with us is one of the reasons why you're such an important voice, right? Because you you're able to kind of deliver in in ⁓ an honest. perspective that's really grounded in a lot of hard earned work and so much appreciation to you for that. And Lucas, appreciate you joining us for this conversation as well. ⁓ you brought a lot of ⁓ insight ⁓ that is really appreciated and can go a long way. So I just want to thank both you and Ben, ⁓ Lucas, ⁓ for this conversation today. It's been great.
Speaker 2: Well, th thanks so much, Ronnie. Thanks, Lucas. Really enjoyed being on with you, man.
Speaker 3: Yeah, thank you for thank you for coming on, Ben.
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