Direct investment dramatically increases returns over time, due to the effect of compound interest.
As investment professionals, we’re well aware that compound interest drives returns–it’s an immutable law of investing–but seeing an example of the math is still helpful. The Financial Times did a study of Warren Buffett’s fortune which, at the time, was $62B. They asked: what if we modeled the exact same investments Buffet had made, with the exact same returns, but imagined instead that Buffet had run a 2&20 fund?
The results are astounding: if he’d run a 2&20 fund, Buffet would have returned only $5B to his investors, and would have taken $57B in fees. Basically, compounding at 14% rather than at 20% reduces the accumulated pot by over 90%.
It’s counterintuitive, but direct investing is actually less risky and time consuming than investing in funds.
On average, our clients spend at least 80 hours in due diligence on a fund before they invest. It takes so much time to diligence a fund because giving over control for a bundle of investments is risky. Rather, we offer you the ability to spend that 80 hours instead looking at the actual investments you’re going to do, and, likely, actually approving each investment will take a lot less time than that. Social Impact Capital provides you with our full due diligence on each deal, in a packet that is well-organized and entertaining to read. Each deal takes 10-60 minutes to read about in its entirety, and you can make a decision on a case by case basis.
So, you can spend 20 hours on a bundle of 20 investments with Social Impact Capital, and have complete control over the investments, or you can spend 80 hours diligencing a fund to do a bundle of investments where you have no control. Even the best funds in Silicon Valley occasionally make mistakes, and you might find yourself having invested in something like Juicero or Theranos without reviewing whether the fund had done proper due diligence.
Great due diligence is an art: part library research, part gossip, part knowing the right people, part financial modeling, and part spy work.
At Social Impact Capital, we take pride in doing the best due diligence in the business. Great due diligence is expensive, and utilizes a wide variety of best-of-class professionals. However, because we split the cost between all our clients, we’re able to do comprehensive due diligence at a reasonable cost. We’re very open about our process, and are happy to share it with you.
We continue to innovate in the field of due diligence, improving our model, and making it more efficient. Mostly, we pride ourselves on having a due diligence process that isn’t a burden to entrepreneurs, but an asset to them. Entrepreneurs love that we are vetting every bit of their business in a collaborative and open way. Most often, we find some information that helps them make a better company.
We can work with exact needs of your organization.
Every client we work with has different concerns and needs in terms of targeted ROI, time-horizon, accounting & reporting, structuring, and desired social impact. We work with all types of clients, from individuals that care more about social impact than ROI, to large endowments that care only about ROI and are investing in the social impact space because they believe it outperforms.
We work together to create a custom solution that fits the needs of your organization. We can create a SPV so that your investment can look “on the books” like a fund, or you can maintain the direct investment structure so as to more efficiently tax harvest any losses on individual companies. If you think that what we do is interesting, but doesn’t fit the needs of your organization, talk to us, as we usually have the exact solution.
We struggle with what to call ourselves: you can think of us as a pledge fund, an aligned intermediary, or an outsourced direct deal team.
Specifically, we can (1) source deals; (2) do due diligence; (3) negotiate and structure deals; (4) work to make the company successful, using our contacts and knowledge; (5) monitor deals; (6) provide reports on the financial outcomes and the social impact, based on the needs of your organization. We’re happy to do it all or work with your existing team to supplement their resources.
Our ability to work for many clients amplifies our ability. First, we split the cost of management and due diligence among clients, offering a better service for cheaper. Second, there are network effects to being in the group: often deals might originate from one of our clients, and we’re able to do due diligence on it, and offer up the co-investment opportunity to other clients.
The basic process of how we work with clients.
First, we have a meeting to hear about your needs. In this meeting we’ll learn about your existing organization and how we can best work with you. On the financial side, we’ll talk about your desired ROI, time horizon, risk appetite, diversification needs, and checkbook size. On the social impact side, we’ll talk about whether there is any special area that you feel strongly about having an impact on. We’ll discuss structuring the investments and reporting requirements.
Then, over our agreed time horizon, we will find you the perfect deals that meet our agreed upon criteria. If we feel a deal warrants due diligence, we write a 1-page brief and get your approval before beginning due diligence. After we finish our due diligence, you have a one week window to decide whether to invest or pass on the deal. At an agreed upon interval (usually quarterly) we’ll summarize the status of all the deals we’ve done for you, report on the financial returns as well as the social impact, and provide a report on all the deals we passed on and why in order to refine our scope.