The Dual Bottom Line-Is it possible to invest in low-income areas and create jobs–and make money?

At 6 A.M. every Monday the sewing machines begin buzzing at Timbuk2 Designs in San Francisco’s Mission District. A dozen women, most of them Chinese immigrants, sew colorful strips of canvas together and add snaps and shoulder straps. Together they create custom-designed totes that Timbuk2 calls "bike messenger" bags. By each Friday the crew of 25 workers will have finished a total of 400 bags.

By:
Elizabeth Corcoran
Forbes
Silicon Valley, CA

Timbuk2 is a 13-year-old company with more than $3.5 million in sales, way too mundane to catch the attention of Silicon Valley’s venture capitalists. So when it needed financing two years ago, it turned to Silicon Valley Community Ventures, a fund with a twist. It initially invested $250,000 in the company for a 2.5% stake–with the understanding that it would pay a "living wage" of at least $11 an hour to workers and develop a pay incentive program that rewarded them for learning new skills. It later increased its ownership stake to more than 10%.

SVCV is one of about 60 funds nationwide that practice a kind of "good works" investing. They take equity stakes in companies that are improving a low-income community by offering jobs, often with benefits and training. These investors believe the discipline of trying to make a profit is often the best approach to charity. Like any investor, they look for viable businesses and corresponding financial rewards.

These funds manage $460 million in assets, according to New York City-based Community Development Venture Capital Alliance. Most are less than five years old and have yet to fully cash out. One of the earliest such efforts may establish the gold standard. Northeast Ventures in Duluth, Minn. is in the final leg of a 12-year $15 million fund. The crown jewel of those investments has been a software company, Sinex Aviation. Selling out that single investment is expected to recoup the original investment, says Nick Smith, founder of Northeast Ventures, and enable the fund to post an annual return between 12% and 15%.

SVCV was started in 1998 by John (Bud) Colligan of Accel Partners in Palo Alto, Calif. "We wanted to test the idea of whether capital, knowledgeable people and experience could kick-start businesses in low-income communities," he says.

SVCV created a network of 67 free business advisers from companies including Microsoft, Spectra-Physics and Liquid Engines, who spend five to ten hours a month coaching small and promising companies in low-income neighborhoods. Then, after working with a company for several months, SVCV may invest.

The first fund for SVCV was raised in 2000, and it hit $6.25 million with contributions from investors like the Rockefeller Foundation and Wells Fargo & Co. Its second fund, which includes $10 million from California Public Employees’ Retirement System, hopes to reach $25 million by next spring. SVCV has taken stakes ranging from single digits to 20% in ten firms. Its early investments tended to be small, but it plans to make investments of up to $1 million in the future. So far the funding supports companies that employ 560 people, which pay an average of $11 an hour plus benefits.

SVCV became Timbuk2’s first outside investor. The company was started in 1989 by Robert Honeycutt, now 43, who worked as a bike messenger in San Francisco for three years until he decided there had to be a safer way to make a buck. He bought a sewing machine and designed a carrying bag that suited his colleagues. Honeycutt sewed the first bags himself and sold them wholesale. He began hiring, and the business grew in spurts: 10% one year, 70% another.

Thinking bigger, Honeycutt wanted to create an online buying process and started looking for funding to buy computers and such. "We wanted to have a business model like Dell’s, but potential funders just looked at me like I had three heads," recalls Jordan Reiss, Timbuk2’s former vice president. Then he remembered hearing about SVCV while at Stanford Business School. With the funding, Timbuk2 hired 15 people to create a Web site and bulk up its production muscle. The Web site came to the company’s rescue as the economy took a downturn. It began to generate sales in October 2000, and now produces nearly half of Timbuk2’s revenues.

Even do-gooders get hurt in a downturn. Six of SVCV’s ten portfolio companies had layoffs. One closed shop altogether. Another filed for bankruptcy, emerging as a nonprofit. A year ago SVCV hoped it would provide a 15% annual return by the time portfolio companies cashed out, about five years after receiving an equity boost. Now Penelope Douglas, SVCV’s president, reckons the return will be closer to 10%. An unexpected challenge, Colligan says, has been finding investors that will provide follow-up-round funding.

SVCV has yet to cash out any investments via a public offering or, more likely, through a sale to a bigger company. Cashing out, when it happens, could be wrenching. Because SVCV wants to promote local employment, portfolio companies would be reluctant to sell out to a larger firm that would change the employment practices. Some companies have clauses in their financing agreements that promise to give the rank and file a portion of any windfall from a sale followed by layoffs. Timbuk2 has been lucky. In late September the company closed an almost $3 million round of financing led by SVCV that included a major new private investor, a former Cisco executive named Mark Dwight. In the process, Dwight became Timbuk2’s chief executive. As a native of Silicon Valley, Dwight is a fan of sharing the rewards of a successful company with all of its employees.

At Northeast Ventures, Smith is proud of helping to spur entrepreneurship in what have been longtime mining communities. But he cautions against getting too sentimental about jobs. "I’ve seen too much money thrown away when people were focusing on employment while the business was going to hell." In the end, it’s still about the bottom line