Venture capitalists are getting so picky these days that soon they may have to cater to investors with special demands on where or what type of investments are made.
The issue came to the forefront recently when the California Public Employees’ Retirement System (CalPERS) announced plans to pull out of four controversial countries. CalPERS, which currently has $151 billion under management, recently said it plans to stop investing in Indonesia, Malaysia, the Philippines and Thailand because they don’t meet its investment criteria and lack proper market regulation.
Although CalPERS invests only a small portion of its fund in venture capital, its clout is considerable. Indeed, some industry observers believe its move is one that will send reverberations throughout the fund management community. And they believe it could give renewed vigor to so-called socially responsible investing in today’s scandal-tainted market.
“VCs in particular used to say Oh, there’s only a couple of these creepy ethical funds and we don’t want their money anyway because it has too many strings attached’,” says Lucy Marcus, managing director with U.K.-based Marcus Venture Consulting, which consults with both U.S. and European venture capitalists and start-ups. “But CalPERS is not some creepy sideline, funny fund. It’s a real fund of real amounts that puts money all over the place.
“Other pension funds will follow suit because their pensioners are watching more carefully than ever where their money goes and when it comes to this corporate social responsibility stuff people really care about how their money is spent and where it is spent,” she adds.
In her daily dealings with fund managers, Marcus says more and more of them are waking up to the realization that to keep investors backing their funds means keeping them happy and acknowledging political and social concerns. As an example, she points out that the State of Connecticut pension fund does not invest in anything that has to do with the development, manufacture or distribution of rubber bullets. “These are used [by police] in Northern Ireland and this is a concern of theirs because they have so many Irish-American residents,” she says.
A U.S. VC fund manager says that the trend started in Europe and has only started picking up steam here. “I still think that a lot of the VCs here are out for the best possible return and it doesn’t matter what industry or where they do business,” he adds.
Other U.S. VC fund managers acknowledge, however, that the market’s overall instability is contributing to fund managers’ willingness to go to greater lengths to keep investors happy between fund-raising rounds.
“Overall, the vigilance a lot of pension funds have, as far as their direct investments, has risen,” says Joe Tischler, a general partner with Still River Fund, a Boston-based VC, who attributes the change to problems at companies such as Enron Corp.