Interview with Durg Kumar and Allen Bryant, Founder and Partners at Knightsgate Ventures
Knightsgate Ventures is a Houston and NYC based venture capital firm providing the intellectual and financial capital for seed-stage technology and software startups to drive actionable social impact while disrupting industries.
What is “socially responsible investing”? Why is socially responsible investing increasing so rapidly?
Socially responsible investing produces competitive financial returns while demonstrating positive social change.
Socially responsible investing is trending upward, especially among millennials and younger generations, and is expected to continue Knightsgate Ventures engages in socially responsible investing by backing startups that are: Creating a level playing field for women and minorities, democratizing access to information for underserved groups and communities and disrupting markets that make them better for society as a whole
Broadly, socially responsible investing (SRI) is also known as impact investing. A core part of our investment thesis is driven by impact investing as “doing good is good business”. We’ve seen and experienced the trend of investors of all ages wanting to have a deep connection with their investments. Investors not only want a financial return, but they want to know that their money has a purpose and is bringing about positive social change for society. This trend is especially important for millennials, whose persona can be characterized by their actions. For example, millennials favor employers not just for a paycheck, but also for the impact that the individual can bring to the team and workplace. Consumer trends have also shifted from the cheapest products to buying quality products that support fair wages, such as ethically manufactured retail products and coffee. So it is not a surprise that these trends are showing up within the investing world as well. As education about SRI expands, we expect that the impact investing trend to grow as well.
Are there any trends you have seen within socially responsible investing? How has this changed in the midst of COVID-19?
The focus on socially responsible investing has been increasing in the private markets with some Family Offices allocating over 10% to the category.
Socially responsible investing has been a shining beacon in the midst of the pandemic, showing the persistence of the strategy. The pandemic has accelerated and exposed market inefficiencies and social inequalities, providing an opportunity for startups to dive deep and drive change in society.
Socially responsible investing (SRI) is a relatively new space with the term “impact investing” coined in 2008 by the Rockefeller Foundation. We’ve seen SRI growing in popularity in both public and private markets and performing very well. If you look at the US today, annual charitable giving is about $400 billion, but assets under management for SRI are about $40 trillion! There’s a huge opportunity to drive both financial and social returns, and we see that in the way funds are allocated. On the private side specifically, family offices have been increasing their allocations, with 10% of their portfolio focused on SRI.
The interest in SRI is very much founded in the data. Over the last three months, through the pandemic, we’ve seen the strategy do very well in the public markets. Since SRI is relatively new and we’ve been in a bull market over the last decade, SRI was thought to be a bull market phenomenon. Now, we see the persistence of the strategy even in a down-turn. In fact, more than anything, the pandemic has exposed social inequalities such as access to healthcare, education, and the ability to work. We see this as the perfect opportunity for startups to dive deep into these inequalities and effect change. For example, one of the biggest, if not biggest problems in the US right now is student loans. Student loans are a $1.6 trillion issue right now, but also an opportunity to effect change. Say you have $100 million to use towards student loans, you may have different options to deploy those funds such as paying off the entire balance, educating those with debt how best to manage and pay off the loans, or creating a platform that helps users allocate their savings in a systematic way to pay back into the system. The last option has high potential impact by creating a habit and opportunity for a multiplier effect by bringing that money back into the economy in a sustainable way.
Overall, the last example illustrates the types of opportunities we are most excited about. As we continue to bring the best practices we know to be true within business to societal issues, we can drive greater social impact in a sustainable fashion.
What are you looking for in businesses that you invest in? How do you measure the positive social impact within portfolio companies?
Knightsgate Ventures is focused on early stage investments in startups that are driven by technology and have a positive social impact.
At the early stages of a business, the biggest component is working with extraordinary founders who have a “failure is not an option” mentality. Since the field of socially responsible investing is so new, there are not many established standards, but we tend to measure social impact at the startup level with key performance indicators that make sense for each of our portfolio companies.
At a high level, Knightsgate Ventures is looking to invest in early stage (pre-seed and seed stage) startups that are driven by technology and have a positive social impact within the channels and communities that they serve. However, the biggest component for us at the early stage is the founder and their vision. We strive to partner with leaders who are truly passionate about their startup’s mission; they see a vision for the world where their startup is needed and they don’t stop until they see their vision to reality. However, we want to work with someone that is willing to adapt and learn – the COVID-19 pandemic is a perfect example of the need to be agile and ask for help. Many times there are factors that are out of the startup’s control, but having the ability to ask for help and follow through on advice is key to leveraging others’ experiences. Finally, honesty, trust, and transparency are very important as it is the cornerstone of all business relationships.
In terms of social impact, this varies based on the business. For example, our student loan repayment platform can measure the number of students helped, the value of student loans repaid and interest saved. For our recruitment platform that eliminates human bias through artificial intelligence could measure increase in diversity within workplaces that have used this system. Measuring outputs and company specific KPIs is the best way to have actionable impact and data.
How will COVID-19 impact venture capital? How has your focus on technology helped or hurt you during this time?
Venture capital will be more important now than ever!
Technology has been a key enabler, especially now technology is reducing barriers to entry, making it easier to network and share ideas, and drive innovation. While public markets are inherently at the mercy of public perception, private markets bring financial outcomes back into the hands of investors and provide protection from extreme market conditions and volatility. Specifically in private equity, the “wait-and-see” investment strategy implemented by investors in the ’07 – ’09 financial downturn caused many to miss out on some of the highest returning funds of the time (Preqin notes buyout firms from vintage ’08 and ’09 have a median net IRR’s of 13.4% and 14.0%, respectively – higher than the preceding three years). A WSJ survey re-enforces the strength of private equity investments by those who know these investments best: 70% of private equity limited partners noted the coronavirus outbreak is affecting their investment plans, while 52% indicated they believe private equity investments are the most attractive asset class at the moment.
While earlier-stage private investments and venture capital offer many of the same benefits as private equity, they also provide an opportunity to further capitalize on the rapid-changes currently underway. Many of the most successful businesses today were birthed in the midst of (and even in response to) an economic downturn, including: Apple (2001), CNN (1980), Microsoft (1975), Burger King (1953) and Disney (1923). The reality is innovative and disruptive ideas seen within venture capital need funding during times of economic declines – even more than in times of economic prosperity.
Within the broader venture capital market, are there any key trends you are seeing? What are the advantages / disadvantages of being an early-stage investor?
Venture capital is a key part of driving innovation, which is more important now than ever in driving change and job growth.
There is still large amounts of uncalled VC capital and later stage dry powder available, helping the private market stay afloat. Early stage capital has outperformed other asset classes over the last 25 years, and we see this trend continuing.
Venture capital has been a key part of the economy, helping drive innovation. Now more than ever, this is an important function as we see structural changes in the economy due to the pandemic. As with the Great Financial Crisis (GFC), there are going to be creative solutions to everyday problems, and in particular inequalities in society. The data from the GFC also points to small business and startups bringing jobs back to the economy and we believe this trend will be seen post pandemic as well. From a more strategic point, we see several interesting thematic areas including artificial intelligence and robotics, virtualization, e-commerce, and tele-medicine as areas of growth.
These areas are especially exciting as an early stage investor as we can drive change and help accelerate the economy’s recovery. It is exciting to be able to work with founders from the ground up as an early stage investor. Investing at the early stage also has outperformed other asset classes over the last 25 years, providing the financial returns to LPs. However, there are always two sides of a coin and early stage investing is risky by its very nature. Many times you will see a lot of investors in the cap table at the very early stage to hedge the risks which not only provides a financial hedge, but also a validation. If there are other investors that believe in a company at the early stage, it’s a strong signal that the founder and team have the ability to be successful. Another challenge is finding the “diamonds in the rough” or companies that are hidden and off most radars. At Knightsgate Ventures we overcome this challenge by partnering with local organizations around the country and building relationships with later stage venture capital who often pass us deals that are not widely publicized.
Please share some examples of successes within Knightsgate Ventures and your vision for the firm’s future.
In 2018, Knightsgate Ventures invested in an online marketplace for ethically and sustainably produced clothing – To The Market (“TTM”). The Company provides a platform for businesses and retailers to further their social responsibility, sustainability and/or environmental goals. In the midst of COVID-19, TTM and founder – Jane Mosbacher Morris – identified and quickly adapted to provide key medical equipment which was severely under-supplied. By leveraging its pre-existing supply chain consisting of over 100 suppliers in 20+ countries, TTM has been able to provide timely resources for medical care professionals at a scale that few others have been able to achieve.
Knightsgate Ventures worked closely with To The Market to secure working capital funding from several foundations and maximize the social impact the Company has been able to achieve while driving 1H 2020 revenue growth of 1,000% vs. prior year. We are incredibly proud of Jane’s ability to quickly adapt her business to this global pandemic, while both supplying millions of PPE medical products to US healthcare systems and creating jobs within communities that have been most negatively impacted in this pandemic. At the end of May 2020, the Company received nearly $3M of orders for hospital-bound PPE.
Not only have we been “boots-on-the-ground” with our portfolio companies, Knightsgate Ventures has also been investing through the crisis. Another portfolio company, LALO, which stands for “Love All Little Ones”, designs and manufactures extraordinary baby products including strollers and high chairs. LALO is led by Greg Davidson, a tenacious and determined founder that stops at nothing to help parents navigate the confusing baby product market. LALO prides itself on growing with parents, especially first-time parents to guide them through their child’s first few years of
development. Even before the pandemic, LALO had been making great strides, but has seen amazing sales growth through the last 3 months. Along with the sales growth, LALO has been growing partnerships with large retailers and other baby products. Given the increased reliance on e-commerce as a main sales channel and LALO’s growth, Knightsgate Ventures decided to “double down” and increase our investment in the company.