Here Comes Conscious Capitalism (Part IV)

Conscious Capitalism has already arrived in the private equity world. The pioneer fund, Dallas based Satori Capital, boldly incorporates the tenets of Conscious Capitalism into its investment philosophy. The firm’s co-founder, Sunny Vanderbeck, is a successful entrepreneur who brings execution capital to the table. Sunny co-founded, ran and took public Data Return, a provider of managed services and utility computing. Before serving as Data Return’s CEO for 11 years, Sunny worked at Microsoft after having served as a Section Leader of the 2nd Ranger Battalion (U.S. Special Operations Command). Satori has consummated the first closing of its current fund and has more than 20 professionals across its investment and advisory committees.

Satori calls its investment philosophy, which emphasizes the tenets of Conscious Capitalism, Sustainable Investing. In addition to the typical analysis performed by private equity firms, Satori adds sustainability as a perspective in due diligence and portfolio company operations. Satori’s approach is based on the belief that sustainably run companies are “better managed, more innovative, less risky and better positioned to deliver superior performance over the long-term.” To support its investment philosophy, Satori cites recent studies performed by leading sustainability experts like David Wolfe, a co-author of Firms of Endearment, investment banks like Goldman Sachs and M&A advisors like Deloitte which reveal that sustainably run companies outperform their same sector peers by more than 70% over a two to ten year investment horizon.

Satori is not only a leader and pioneer in Conscious Capitalism but is also an innovator within the private equity industry. Satori’s initial fund has the traditional ten-year life with extensions but has created the ability to hold certain portfolio companies beyond the term of the fund by designating them as “Core Investments”. This innovation solves the conflict that often emerges between a fund’s need to sell a portfolio company to provide a return to limited partners and a founder or family’s desire to continue to run the business to create long-term value. In addition to expecting substantial cash dividends during the initial holding period, limited partners may remain invested in a Core Investment or exit the investment based on an independent third-party valuation. During this process, Satori will convert some or all of its carry into equity in the Core Investment. This strategy gives Satori a competitive advantage by allowing it to become a credible long-term capital partner with its portfolio businesses.

Satori’s innovative model could be applied to the venture capital industry. For the last decade, public companies have been disappearing faster than we can grow new ones. Venture capital firms often force their portfolio companies to exit before they have attained the full potential of their enterprise value because the average time to exit for a venture capital financed company is between 8 and 9 years. Satori’s innovation could solve the conflict that emerges between a venture fund’s need to sell a portfolio company to provide a return to its limited partners and the need to give the company more time to fully develop the potential of its business. Secondary funds, like Industry Ventures, partly address this structural problem in the industry by providing liquidity for partnership interests and positions in individual portfolio companies. Satori’s innovation, if applied to the venture capital industry and coupled with the secondary market, could help the industry overcome the twin hurdles of Sarbanes Oxley and the need to provide limited partners with a return to start replenishing the universe of public companies with more successful new ones.

Conscious Capitalism has also arrived in the private equity world for consumer products. The food and beverage industry is at the vanguard of Conscious Capitalism and sustainable business. It is no surprise that one of the first funds to specialize in sustainable investment focuses on organic foods, healthy personal care and household products and sustainably focused consumer businesses. San Francisco Bay Area based Mindful Investors has a portfolio of leading companies like Seventh Generation, the pioneer in healthy, non-toxic home cleaning products, that are aligned with the principles of Conscious Capitalism.

Mindful Investors is also one of the first private equity firms to become a Certified B Corporation (see Certified B Corporations are certified to meet rigorous standards of social and environmental performance. The community of 300 Certified B Corporations is leading policy efforts at the local and federal level to provide tax incentives for certified sustainable businesses. Philadelphia, for example, recently granted an annual tax credit for businesses meeting the certification standards. Several leading institutional investors have begun to use the certification standards to identify potential high impact portfolio companies. We’ll talk more about B Corporation and the emerging impact investing movement in the next column.

In the interests of full disclosure, Montgomery & Hansen, LLP became a Certified B Corporation in February 2010. Industry Ventures, LLC and Working for Good, LLC, co-founded by Jeff Klein and featured in a prior column, are clients of the firm.

John Montgomery is a partner with Silicon Valley law firm Montgomery & Hansen. Read his prior posts here.