Second-year Wharton MBA student Nathan Krishnamurthy spent his summer internship at Accion Venture Lab, one of the world’s leading VC groups dedicated to social impact — and in the meantime gained perspective on what it will take to grow the student-run Wharton Social Venture Fund.
Social impact investing is an industry that uses private capital to create social change, and on its frontier are a handful of investors seeding social enterprises with venture capital.
At the University of Pennsylvania, we built a venture group called the Wharton Social Venture Fund, one of the first student-led initiatives to make seed investments in startups focused on social impact outcomes. As we shape this new fund, the chance to learn from professional investors in the field is invaluable, and my internship this summer was just this sort of opportunity.
I had the pleasure of working at Accion Venture Lab, one of the leading venture capital groups focused on social impact. Accion is a non-profit microfinance organization dedicated to fostering financial inclusion globally, and Venture Lab is its seed-stage venture capital arm, mandated to invest in startups both domestically and abroad.
Often, financial inclusion goals seek to address problems in the developing world. But it is also important to consider the social challenges here in the United States.
One third of the population is unbanked or underbanked. Consumer credit alternatives tend to be predatory and manipulative. And the cost of transferring money, especially overseas, is highest for those with the lowest incomes. Financial services innovation poses the opportunity to solve big, tangible problems, right here in our own backyard, as well as in the developing world.
As startups play an increasing role in private sector innovation, venture investment poses a growing opportunity to achieve these financial inclusion goals.
At Accion Venture Lab I got to see the venture investment process first hand.
New investment opportunities are pitched at a weekly meeting affectionately called “the shark tank,” a reference to the anything-goes yet highly-structured format of the eponymous television series. At this meeting, anyone from directors to interns can pitch a new startup in the pipeline. A lively discussion ensues over opportunities, risks, and gut feeling. Inevitably, the relationship owner leaves this meeting with a trove of important questions to investigate with the company.
As the investment process progresses, the team begins due diligence. Unlike with later stage investments, in a venture deal the due diligence process is a careful balance between requesting enough information to mitigate concerns, while not so much as to impede management’s ability to run the company.
At the seed stage there is rarely concrete information to rely on, so diligence is focused on understanding and pricing the risks, particularly those around the management team. The goal is to gauge all the possible triggers of failure, and the probability of each.
At Accion Venture Lab, this process culminates in two progressive hurdles: a first and second meeting of the investment committee. At these meetings, the investment team pitches the deal to a larger group of Accion stakeholders. This is not only a sanity check on the investment team’s work, but it ensures that the scope of potential impact is in line with Accion’s social mission.
Working at Accion Venture Lab taught me how much we are already doing right at Wharton Social Venture Fund, but it also demonstrated how much room our student organization has to grow.
First, we need to better define our social mandate and the results we are seeking to achieve. We need to actively build, manage and track our deal flow. We should strive to be empathetic in our interactions with entrepreneurs, but structured in the way we report these meetings back to the fund. And finally, we need to look several moves ahead on the chess board, and understand all of the risks inherent in each of our investments.
While we never want a risk to become a reality, it is worse to be blindsided by a problem we never saw coming. Perhaps most importantly, as student leaders and practicing investors, we need to think about long-term outcomes, and how the success of an investment might create a durable social impact down the road.
Nathan Krishnamurthy (@nathankrish) is a full-time Wharton MBA student. He has worked in impact investing, at a startup incubator, and in investment banking, and is interested in the ways startups can be channeled to address social challenges.