Deep Tech Dive #14 | Impact through Capital

Andrew Kirima
Sarah Cone Founder of Social Impact Capital

Meet Sarah Cone, Founder & Managing Partner of Social Impact Capital. Sarah has committed her professional career to invest in the earliest stages in start-ups that can produce venture capital returns and profound social impact. As one of the few females leading a VC firm, Forbes labels her as “a risk-taker who has proven herself,” a contrarian who believes that you can be an impact investor while still producing top venture returns.

Key Takeaways:

  1. “Diligence on science is definitely an art, not a science.” So if you want to invest in a variety of landscapes, you have to read, read, crosscheck your assumptions with domain experts, and do more reading.
  2. “Most of big pharma now was built around a fundamental scientific development: Merck and organic chemistry, Moderna and mRNA therapeutics. Totus is a scientific development for covalent drugs which are the most effective and valuable drugs in the market but represent only 2% of the market as up until now they could only be found by accident.”
  3. Do your work, and show it!

“The world is a very malleable place. If you know what you want, and you go for it with maximum energy and drive and passion, the world will often reconfigure itself around you much more quickly and easily than you would think.” ―Marc Andreessen


This interview was edited and condensed for clarity.

Can you tell me about yourself and your background before Social Impact Capital?

I started my career in impact working at a non-profit focused on technology policy―I am one of those “save the world” type people. Because this work didn’t pay well, I’d always made my “real living” investing in public markets. Eventually, I realized that I could have the same amount of impact I had at a non-profit―if not more―in a career investing for impact.

I spent the next 15 years figuring out how to structure a firm to generate the most impact and performance while gaining experience in private equity: I worked for impact-focused family offices like Omidyar (where I had the good fortune to learn venture investing from Rob Hayes), traditional venture capital firms, and i(x) Investments, a multi-strategy impact investing platform.

I had to start my own firm because no other firms were focusing on the types of start-ups that I wanted to invest in and the way that I wanted to invest.

How did you come to be a Founder of Social Impact Capital?

I then launched a small “fund” with my own money that we call “Fund 0” in order to validate my investing theories in the real world. It wasn’t a series of angel investments: it was a scaled-down fund strategy: small checks but we overlaid fees and simulated everything about the Fund I wanted to run. This fund has performed spectacularly well to date and based on its performance we were able to convince some very sophisticated and brave LPs to invest in our first flagship fund. Some of the best venture capitalists in the world got behind Fund I as well as fund of funds and family offices. We’re already thrilled with the performance of Fund I and so Fund II is in the near-future.

Anything you can tell us about Fund II that differentiates from your prior ones?

We’ll be raising Fund II in the next year or two, and it will be exactly the same strategy, but larger, as our strategy can take a lot more capital.

What are your responsibilities and functions as a Founder and GP?

I make all the investment decisions, manage the diligence team, oversee the firm, communicate to LPs, and dream about the future.

What social initiatives are you most focused on?

We have a generalist strategy because we think the largest social challenges tend to be intertwined in some way or the other. We just want to invest in entrepreneurs that will have an outsized positive impact in many of the areas most important to the world.

That said, we’re living in a period of climate emergency, so that’s one of the areas we focus on, albeit in a very contrarian way.

What things inhibit you and other investors from creating a social impact?

I’m incredibly happy with the impact we’ve made 5 years into the firm. Our portfolio founders have built some world-changing companies already, and many of them wouldn’t have been able to do so without our initial investment.

We’re looking forward to scaling up our impact. We’re very ambitious.

I think you have to demonstrate very unequivocally that there’s financial value to be claimed in tackling different social impact challenges. A great example of this is in our portfolio is Aether Diamonds, a D2C jewelry brand that makes diamonds from carbon removed from the atmosphere. We scoured the earth for companies that could use and sequester carbon profitably and Aether was one of the only companies we found: they can sell about $8M of retail product for one ton of carbon removed from the atmosphere.

How do you add value to your portfolio companies?

We do anything they need. We have an enormous team of over 55 venture partners with a wide variety of both subject expertise and company building expertise, and connections that extend all over the world, so we often utilize them in portfolio support.

What’s your “secret sauce” in finding the next big thing?

“Do the work.” You have to really diligence the companies and also the industries that the companies will operate in. We spend a lot more time on industry structure and incentives than the typical venture firm.

Even with an enormous team of venture partners, a lot of investors will say it’s unrealistic to do good diligence on companies if you’re not focused on one particular area. What do you have to say about this?

We do a lot of pre-work researching and landscaping specific areas, so very often we have half of the “context diligence” done in advance. But in general, we just don’t find it difficult to learn about new areas: you just do the work, you read everything you can, you pick up the phone and talk to your network and the industry. I spend about half my day reading. It’s a lot of hard work but it’s what creates performance. I think most of the venture capital is much too focused on the founder: we also spend a lot of time researching the industry and market. By definition, a good founder will choose a good market.

Any investments you are particularly proud of?

Almost all of them! Our first investment, OpenInvest, just sold to JP Morgan at a great multiple for us, so of course, that one is near and dear to our hearts at the moment. They had by far the most rigorous data analytics in the ESG space, so it was nice to see the best product win and JP Morgan is the perfect place for them to scale the solution across the world.

Another new one we’re quite excited about right now is Charm Industrial. Charm converts waste biomass into fast pyrolysis bio-oil, and in less than a year they went from a new idea to delivering 416 tons CO₂e removal for Stripe, with contracts in progress to deliver more for Shopify, Microsoft and others. For context, 416 tons CO₂e is 2x more CO₂e removal than the entire direct-air-capture sequestration industry to date.

How do you drive ethical thinking into your investments?

We ask all our entrepreneurs for an “impact vision”: how the world will change when their company is at scale, and also an “impact metric”: how they’ll measure the impact along the way. This often changes our thinking about the impact.

In general, we’re trying to invest in companies where the driver of the business is a social good, so you can measure the impact by traditional capitalist metrics. To tell this, we do a thought experiment where we ask ourselves, “What if the most evil company in the world acquired this company? Would they be able to change the business to be more evil without taking the company to zero?” If the answer is yes, then it’s probably not strictly a social impact company.

You have a surprising amount of deep tech companies in your portfolio: which is your most successful or impactful?

Totus Medicines was one of our early investments in Fund 1. Most of big pharma now was built around a fundamental scientific development: Merck and organic chemistry, Moderna and mRNA therapeutics. Totus is a scientific development for covalent drugs which are the most effective and valuable drugs in the market but represent only 2% of the market as up until now they could only be found by accident. Totus’ technology can scale covalency and they’re already generating fantastic data on some important indications.

How do you diligence deals that are deeply technical if you’re not a domain expert?

Why most firms fail at this is because they’re actually too technical: they may have a Ph.D. employee on staff that makes technical decisions, and they’re typically leaky buckets. The nature of the sciences is that the more senior you become, the more specific your knowledge becomes, so a Ph.D. might know everything about the auricular structure of lobsters, but their general knowledge in other areas will be outdated. It’s also the nature of all cutting-edge science that half the people in the field will think a particular innovation can’t be done.

We get on the phone and we talk to lots of different people. For one investment, we spoke with almost 40 scientists! For good investments, the diligence will come back mixed, so you really have to have relationships with these people and listen deeply to be able to put their opinions in context.

Diligence on science is definitely an art, not a science.

How do your Venture Partners participate in your investment process? — I understand that it’s different from most venture partner or scout programs. In what way?

Our Venture Partners, Board Partners, and Advisors (we call them our “extended team”) all have GP-level economics on deals that they work on, so they’re very motivated. On any deal, I will bring together a group of our extended team that has the right domain expertise or company-building expertise to help support the company. It’s sort of like one of those caper movies, where I’m bringing together the explosives expert, the hacker, the master of disguises, the acrobat.

We couldn’t do the work we do without the enormous expertise of our extended team.

How do you identify the appropriate level of influence to have on a company?

We exist to support founders, so we let the founders guide how much influence we have. Some founders want us very involved and other founders want to be left alone.

Any advice to those with an atypical background who may want to follow in your footsteps?

“Show your work.” LPs invest in traction, so you want to do what you can to develop traction. I think a “Fund 0” with a small amount of money is a good way to start, but if you can’t find the money for that, then start with publishing your investment thesis and thoughts online.

How can our readers follow you online?

You can follow Sarah Cone on Twitter at: https://twitter.com/sarah_cone.

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