Learning from the VC past, betting on our climate future
The venture capital ‘power law’ describes how a small number of successful companies in a venture portfolio deliver the majority of the fund’s returns. ‘Eight die and two fly’ is the same concept—that most venture investments won’t survive, but very big wins can make up for the losses and generate outsized fund returns. Of course in reality, investors don’t know for certain who those winners will be at the outset. We believe in the quality of the team, the size of the market opportunity and the need for the product/customer value proposition for every investment we make—but we don’t go all in on any given company at the initial investment—we wait, observe and support as companies grow and then make follow-on investments when we have conviction that the company is a winner.
Five and a half years into Fund I and two and a half years into Fund II, Active Impact is faced with a relatively unique ‘problem’ for a VC manager: every company we’ve invested in is still operating. We set the big hairy audacious goal that we wouldn’t let any startups fail. We provide active post-investment support (pun intended) to every company and we don’t give up on companies even when times are tough. So how do we continue to serve all founders and important climate solutions in our portfolio while maximizing potential fund financial outcomes?
We’re being strategic about increasing our ownership in portfolio companies as early as possible when we have conviction that the company has unicorn potential. Our average ownership across Fund II companies has increased steadily over the last few quarters and is now 7.4%, and with Fund III we are targeting 10%+. Over the last 3 months, we’ve chosen to be aggressive with three of our portfolio companies and proactively increase our ownership percentage. By being proactive with follow-on investments we are doing everything we can to ensure that when/if a company is a big winner that our investors have enough ownership of the outcome to generate huge returns. As they say, you lose in VC not by having losses in the portfolio, but by not having enough of your big wins.
It’s a challenging economic market, but it’s a more challenging climate reality. The present moment requires guts and rigour. We are confident that we see the best seed stage climate tech deals in the market, and when we see teams with a unique solution gaining momentum we’re leaning in. With over 50% of Fund II still to deploy as follow-on capital into the existing portfolio and the first close of Fund III upcoming, we are being disciplined about how we allocate dollars to ensure we achieve the best financial and impact return possible while also being unapologetically bullish about supporting scalable climate solutions now.