The Third Wave: An Entrepreneur's Vision of the Future (12 page)

The Third Wave and impact investing are not the same phenomenon, but, like the rise of the rest, they are happening at the same time and reinforcing each other. In fact, the emergence of the Third Wave is one of several reasons why impact investing will continue its transformation from an idea on the margins to a genuine global trend.

Indeed, because of the impact Third Wave industries have on our lives, the most successful startups will already consider social benefit as a core tenet of their missions. That commitment to impact will make them attractive to those who are seeking to reshape the world with their investments. And the influx of “impact” investments will only further encourage other companies to adopt a similar model.

Much like the Third Wave, impact investing is being driven largely by the preferences of the millennial generation. As investors, millennials, when compared with other age segments,
are far more committed to creating positive social change with their investment decisions. As employees, members of this generation, which is the fastest-growing part of the workforce, report actively choosing jobs because of the impact of the company they work for, and see investments as a way to demonstrate their values. And as customers, millennials want to make a positive impact with their purchases. Increasingly, in order to attract the very best people, keep customer loyalty, and bring in investment, companies are going to have to do well and do good at the same time.

Impact investing has also been encouraged by policymakers. In June 2013, the governments of the G8 created the Social Impact Investment Taskforce to help develop an impact-focused marketplace. In the U.S., dozens of states have passed laws creating a new governance option for such companies, known as benefit corporations, or B corporations. A benefit corporation builds purpose and impact into its corporate charters so its executives and boards are able to manage based on a series of metrics—such as job creation or environmental impact—and not focus exclusively on maximizing profits. By 2015, there were more than 1,500 of these B corporations, including Kickstarter, Warby Parker, Patagonia, and Etsy.

Perhaps most importantly, impact investing is on the rise because it’s been proven to work. Most investors still subscribe to the Milton Friedman view that companies should focus solely on profits. These critics of impact investing worry that trying to manage with an eye on purpose as well as profits
will create confusing incentives and will result in suboptimal financial performance. In the words of one skeptic, impact investing is kind of like a houseboat: It’s not a good house, and it’s not a good boat.

But the facts say something different. The Wharton School released a report in 2015 that evaluated fifty-three private equity funds and found that impact funds were able to achieve targeted returns and successful, mission-aligned exits. The report is encouraging and suggests that impact investing is less like a houseboat and more like brunch, as I once heard it described: better than breakfast, and better than lunch.

My wife, Jean, and I are longtime believers in the maxim that to whom much is given, much is expected. As part of our effort to live by those words, Jean left AOL in 1996 to start and run The Case Foundation, which we founded together in 1997.

At first, we assumed we had to follow a specific formula: quietly writing checks to important causes. We didn’t even have a website, preferring a more below-the-radar approach. The irony—that the foundation made possible by the Internet didn’t use the Internet—wasn’t lost on any of us. We funded dozens of organizations such as Special Olympics and Habitat for Humanity, and we’re proud of the impact our dollars had. We also launched a handful of our own initiatives, such as PowerUP, to bridge the digital divide.

But over time, we started having a different kind of conversation with organizations. They told us that, while they appreciated the money, our real value wasn’t in the checks we were writing but in the visibility and credibility we were providing. It was the people and networks we could connect people to that mattered. Over time, we realized that we could have a greater impact if we focused less on what we earned in the private sector and more on what we learned from our experience. We started leveraging the skills that had made us successful—building coalitions around causes we cared about; developing partnerships across sectors, among companies, nonprofits, and government. It sparked a different way of giving back.

Impact investing was a natural fit. As traditional funding streams for social impact began to come under pressure, Jean started making the case that we needed “all oars in the water.” She argued that the only way to attack social challenges was to do it together—business, government, philanthropy, and nonprofits working in tandem. We made a commitment to accelerate the growth of impact investing, and we’ve been working on it ever since.

Sometimes our impact investing has been financial in nature. We’ve invested in impact funds that are working on everything from the diagnosis and treatment of brain diseases to creating startup opportunities in the Palestinian technology sector. But most of our work has been about fostering partnerships. When the White House wanted to launch an initiative called Startup America, aimed at accelerating regional
entrepreneurship, they didn’t need our money; they needed our help. In partnership with the Kauffman Foundation, we built a coalition with broad support from more than a dozen corporations, and launched it in dozens of startup regions. When impact investors needed help changing rules to allow retirement funds to invest in impact funds, they needed an advocate. We joined with the National Advisory Board on Impact Investing to push for changes, and a key rule was altered in 2015.

When we do invest money in this space, we work across sectors. While The Case Foundation builds support for impact investment, we have become impact investors ourselves. I remember Jean giving a talk at the South by Southwest conference in 2014. She was there representing The Case Foundation, and I was in the audience representing Revolution, my investment firm. As she walked through her presentation, she came to a set of slides that highlighted some high-impact companies that were poised to break out in the space. As she talked through her list, she landed on a company I was particularly intrigued by—Revolution Foods.

Revolution Foods (of no relation to my investment firm) was founded in 2006 by Kristin Groos Richmond and Kirsten Saenz Tobey. Both worked in public schools, and both were understandably frustrated by the cafeteria offerings. As entrepreneurs,
they saw an opportunity to change the system of providing food to schools, particularly in underserved areas. It was a chance to have a positive impact on student health in a $20 billion market.

What they were witnessing was the outcome of a deeply dysfunctional food system, one in which “big food” companies spend billions of dollars to feed our kids fat, salt, and sugar to pad their bottom lines. The school system was a victim of the greater food system failure, which has led to the highest rate of obesity among children anywhere in the world—an entire generation put on the path to chronic disease before they’re even old enough to make healthy choices for themselves.

“This is an obesity crisis,” Betti Wiggins, executive director of Detroit Public Schools’ Office of Nutrition, told the
New York Times.
“And we’ve gotten rid of health classes and P.E., so we’re back to the lunch lady and the tray.”

To fight this crisis, Revolution Foods’ founders started a school meal company. They were convinced it was possible to provide healthy and affordable food that kids actually liked, and they believed they could also expand this promise to families by distributing their food into grocery stores. They set out to prove it.

As we were leaving the SXSW conference, I decided to reach out to Revolution Foods to see if they were planning to raise money. Their initial investor was Nancy Pfund, a longtime friend of ours and a pioneer in impact investing. On the foundation side, we were eager to showcase impact investing
as a new frontier. And on the investment side, we had made a strategic decision at my investment firm to focus on the future of food. I emailed Nancy that afternoon, and she connected us to the company. A few months later, our Revolution Growth fund closed on a $30 million investment. In 2015, we invested another $15 million.

Impact investing is still in its infancy. In 2013, an estimated $50 billion went toward impact investing, while global wealth sat at over $150 trillion. But a change is afoot. One projection suggests that impact investing will rise twenty-fold by 2020, to more than $1 trillion. It’s also become the focus of some of major institutional players. The world’s largest asset management firm, the ten largest investment banks, and several major private equity investors have all recently developed specific teams, funds, and pools of capital devoted to impact investing. It’s no longer a boutique affair.

Instead, what we are seeing is the convergence of three powerful megatrends—the Third Wave, the rise of the rest, and impact investing—and the chance for a supercharged result. As market incentives continue to drive each of these phenomena, the landscape will change profoundly. Because if Third Wave entrepreneurs, funded by committed impact investors, build successful companies in rise-of-the-rest cities, an economic transformation isn’t just possible; it’s inevitable.

T
OWARD THE
end of 1999, AOL was in an enviable position. We had more than 22 million subscribers,
¹
up from only 1 million in 1994,
²
an exponential growth rate matched only by our rising stock price. When we went public in 1992, our market value was about $70 million. By October 1997, it was $8 billion.
³
Nine months later, we were worth three times as much.
⁴
And by the time we announced the merger with Time Warner in January 2000, a mere eighteen months later, we were valued at $163 billion.
⁵
AOL ended up being the best-performing stock of the 1990s.

The market was declaring us the victor of the Internet, and to the victor went the spoils. The surge in value gave us ample capital. We decided to use stock to make a number of acquisitions. One of the highest-profile among them was our purchase of Netscape for $4.2 billion. The Silicon Valley–based
company had rocketed to a leadership position on the strength of its web browsing software. Its wunderkind founder, Marc Andreessen, had become one of the most successful young entrepreneurs of the time. After AOL acquired Netscape, Marc moved to Virginia to become the CTO of AOL, reporting directly to me. He stayed for a year, then returned to California, where he would start a software company and later a venture capital firm with Ben Horowitz, a fellow Netscape executive. Acquiring companies like Netscape improved our overall market position, but we soon realized we needed to do more. We needed to lock in the value we created, while further diversifying the business.

After some lengthy deliberations, we came up with a few options for our next move. We decided to go big—to try to pull off a large, transformational merger while our stock was riding high, to lock in shareholder gains while we expanded our strategic reach. We spent months analyzing a range of options.

We could expand further into content, we concluded, by acquiring a company like Disney. We could deepen our communications offerings by merging with a company like AT&T. Or we could double down on the Internet by acquiring companies like eBay and Electronic Arts. We pursued all of those paths simultaneously—having merger discussions with each of those companies, along with many others.

Financial considerations helped guide our hand. Our stock had skyrocketed twenty-fold in less than three years, and we worried that the Internet mania might end. So buying other
businesses that would expand our portfolio and put a floor under our valuation was key. But we didn’t just want to hedge any potential financial downside. We also wanted to maximize our strategic upside.

Buying more content had appeal. We believed that as broadband took hold, the value of media brands and especially video would increase. Hence the interest in Disney. But while we were intrigued, we were concerned that as barriers to entry lowered over time, content would become commoditized, leading to an eventual decline in the value of media brands.

Expanding our communications offerings made some sense. AOL had always been, first and foremost, about connecting people. Our success with AOL Instant Messenger made us the dominant player in online messaging, and we figured we could leverage that into a full suite of communications offerings (remember, this was years before Skype and more than a decade before WhatsApp was released). A storied American brand like AT&T would also enhance our credibility as we expanded globally. But the communications path seemed risky. We expected AT&T’s core revenue stream—long-distance calls—to be eroded by new technologies, including our own.

Acquiring other Internet companies had its appeal, although it felt like the safe path. We would have partners who were culturally aligned and who shared our conviction about the Internet’s potential, making the post-merger company easier to manage. We initiated M&A discussions with eBay and Electronic Arts. In fact, when we were negotiating with Time
Warner, Meg Whitman, who had taken eBay from startup to global force in just a few short years, was waiting in an adjacent conference room at our headquarters in Virginia. Had the negotiation deteriorated with Time Warner, we were prepared to close an acquisition deal with her.

But doubling down on the Internet was counter to our goal of diversifying. These other Internet companies were highly valued, too, and if the stock market took a turn against tech, our combined company would likely be eviscerated.