It's not the typical language a private-equity fund uses to stoke interest among potential investors:
“The 21st century will see dramatic retooling of the ways we live together on the planet.”
“There must be a philosophical reinvention of where and how capital is deployed.”
This is a new capitalism, coloured green, as envisioned by Vancouver investors Joel Solomon and Carol Newell, scions of American fortunes, his from Tennessee real estate and hers from Newell Rubbermaid. They've spent the past 15 years on the West Coast, putting their inherited cash behind small companies, to make money and to make the world a better place: “investing for change.”
For more than a decade, Renewal Partners Co. only invested the duo's money -- $7.1-million -- in startup companies such as Happy Planet Foods and New Society Publishers.
Now, the small investment firm has opened its doors to outside cash. The call for “a philosophical reinvention” of investing as this century sees a “dramatic retooling” of how society lives was Renewal's unorthodox pitch to potential investors. And it's worked. The Renewal2 fund closed a first round of $18-million a year ago -- raising the money through the worst of the great recession -- and the company is working toward a final close of the fund at the end of May, nearing a total of $30-million.
What it means for entrepreneurs is a different kind of green investor. Unlike most green funds, which generally put money into clean technology such as alternative energy sources, Renewal Partners focuses on organic food, green consumer products and green building products, areas where it says there is significant growth and a dearth of capital available to entrepreneurs.
“There's lots of companies that need capital and very little capital going to it,” said Paul Richardson, president of Renewal2. “Given the number of companies, it's really a funders world, in being able to pick and choose deals.”
In the venture capital world, Renewal2 is tiny, even for Canada's VC business, which for years has been criticized for being too small and too cautious, to the detriment of Canadian entrepreneurs. The domestic VC market is $1-billion, according to the Canada's Venture Capital & Private Equity Association, and the group described the domestic fund-raising environment as “tepid.” The $1-billion raised in 2009 is not much better than the level of the mid-1990s, which is bad news for upstart Canadian companies.
To put the Canadian market in perspective, Accel Partners, the world's No. 1 VC and backer of companies such as Facebook, has $1-billion (U.S.) to invest in just two of its recently established funds.
A major problem in Canada is the lack of institutional support, from the big banks to large pension funds, which haven't significantly backed small firms and funds such as Renewal2. Renewal2 decided not to solicit institutions for money, deciding the size of the effort required wasn't worth it. Renewal2 has more than 40 investors, mostly wealthy individuals, about half of them Canadian.
Renewal2 has already made three investments, the latest of which closed this month, a $600,000 injection into Alter Eco Americas in San Francisco. The nine-person firm sells fair-trade food products in 2,000 stores in the United States and 30 so far in Canada, starting in British Columbia. Sales are expected to double to $3-million this year.
It took a year to raise the money, from Alter Eco co-founder Mathieu Senard first meeting Mr. Richardson at an investors' conference to securing the cash.
“If there is one (piece of) advice I'd give to an entrepreneur, never expect you're going to get a cheque in the next two weeks,” Mr. Senard said.
Renewal2 expects to look at more than 300 deals a year -- its other two investments were also in food companies in the United States. It hunts for firms that are on their feet, having moved beyond the initial startup. Aiming to back companies with annual revenue of up to $20-million (Canadian), Renewal2 makes initial investments of up to $1.5-million -- with the goal to triple the money over the course of a decade. Mr. Solomon calls the extended time line “patient capitalism” -- most venture capitalists think in three- to five-year terms.
Also, because of the relatively small size of Renewal2, Mr. Richardson isn’t looking for companies that’ll need a big jolt of $100-million at some point.
Beyond money, the equally important factor is impact. In the first of Renewsal’s sectors, organic food, for all the recent attention, accounts for less than 5 per cent of all food sales in North America--but the market has grown almost 20 per cent a year in the past decade, according to data compiled by Renewal2 from research firm Datamonitor. The growth is taking a bite out of the ruinous effects -- health and environmenta -- of mass-produced food.
In green consumer products, the market’s grown as much as 25 per cent annually in the past five years, giving people an option to use non-toxic cleaning products. This sector holds one of the original Renewal’s biggest hits, Seventh Generation Inc., a privately held firm that Renewal bought in for 75 cents a share and two years ago sold a third of its stake for $22.50 a share.
In the third sector, green building, the market is worth more than $150-billion and the impact can be vast, given that buildings are responsible for roughly 15 per cent of global greenhouse gas emissions.
Very few venture capital firms focus on the areas where Renewal2 works. An example of a typical green fund is Vancouver’s successful Chrysalix Energy Venture Capital, one of the world’s busiest clean-tech backers. Chyrsalix is closing a new $150-million (U.S.) fund with investors that include oil heavyweights Total SA and Kuwait Petroleum and financial giants such as Credit Suisse. Crysalix focuses on energy generation, energy use, transmission and storage, and resource management.
There is also the “ethical” investment sphere but there, while the goals are laudable, the money goes to companies such as banks and telecommunications plays -- but also to oil sands miners such as Suncor Energy, on the basis that Suncor has made efforts to cut greenhouse gas emissions per barrel (even as its total emissions surge as it expands production).
In the United States, where the VC market is far more developed, there aren’t many green funds like Renewal2 either, with Good Capital (another investor in Alter Eco) among the small number of players.
In Canada, Toronto-based Investeco Capital Corp. is similar. It has investments of more than $40-million (Canadian) in 10 companies, a group that includes a logging firm, a biofuels developer and an organic food distributor (Horizon).
Like Renewal2, Investeco is raising money for a new fund, its third, with a goal of $15-million. It was six years ago when the company closed its first fund, $12.4-million, and raising the money was a slog.
“When we started, it was before there were the words 'clean tech,'” said Andrew Heintzman, president of Investeco. “For many people, the idea that you could invest in environmental companies and make money was a strange idea. People had a hard time understanding that the environment wasn’t just philanthropy.”
It might be patient capitalism with a mission but money has been made, too.
The first Renewal fund has generated an annual return of about 12 per cent, according to the company.
It all began when Mr. Solomon and Ms. Newell met on Cortes Island northwest of Vancouver, known for its hippie-environmental feel. Mr. Solomon, who grew up in Chattanooga, Tenn., had money from his family's shopping mall development business and was looking for something more meaningful, having done work such as national youth co-ordinator for Jimmy Carter's successful 1976 run for the presidency. Ms. Newell had similar inclinations with her wealth, an inheritance estimated at $50-million from Newell Rubbermaid, the consumer and commercial products company.
“Eventually,” said Mr. Richardson, “the world will get to the point where larger institutions start looking at our type of fund.”