Opportunities are growing for ethically minded investors to buy into pioneering companies that haven't yet gone public. To play in this court, deep pockets and a strong stomach are often required or strongly suggested - but not always.
Consider the high-stakes world of community development venture capital (CDVC) investing. Here, institutional investors provide much of the juice for young companies to create hundreds of jobs for a particular region, frequently in impoverished areas. They invest - with no guarantees - on growth-stage start-ups for the chance to earn 10 to 15 percent or more per annum over 10 years, to bankroll an innovative social model in the marketplace, or both.
Yet as the field expands, individual investors are also taking notice, learning lessons from the sidelines and sometimes jumping into the game themselves.
Numbers tell of a growing universe, at least for qualified or "accredited" investors with net worths of at least $1 million (not including personal residence) or annual incomes above $200,000. In 2000, 55 CDVC funds were either established or raising money for a launch. By 2004, that number had grown to 82. Over the same period, capital under management in CDVC funds grew from $400 million to $870 million, according to the Community Development Venture Capital Association, based in New York.
Association President Kerwin Tesdell estimates that about 40 funds are open to individual investors who qualify. Yet because these investments are inherently risky, regulations require most funds to admit only accredited investors. And unlike mutual funds traded on a stock exchange, these funds normally raise cash only for a limited time and then stop taking new investment.
Still, opportunities are emerging in this sector for smaller-scale investors who need stability and don't meet all the usual criteria. And even for those who would rather sit back and watch, the arena has much to teach about the dynamics of ethical investing.
"This allows you to reach rapidly growing companies and communities that are in the process of starting up and creating significant numbers of jobs," Mr. Tesdell says. "They're also companies that need this kind of capital, and they don't have access to the capital market.... It's providing this very rare [resource], almost unattainable. For these companies in lower- income areas, it's gold."
To dabble on this frontier, the most practical route for mom-and-pop investors runs through the CDVCA's Central Fund. Here, investors can commit as little as $10,000 for a 10-year period. Rates of return are negotiated when the agreement begins; Tesdell says they're usually competitive with going rates for certificates of deposit.
But unlike most banking arrangements, investors here know the companies they're helping to finance through what is essentially a loan to CDVCA. Then, in accordance with the Central Fund's charter, at least half of the jobs created by these firms go to the poorest one-fifth of area residents. Other social benefits accrue as the fund seeks businesses owned by women and minorities to finance as well as environmentally friendly products to shepherd to market.
And although the loan is not FDIC insured, Tesdell says it is relatively secure as compared to direct equity shares in start-up companies.
Those with more dollars and higher risk tolerance can become limited partners in a venture. Here, accredited investors normally commit at least $100,000 and put down 10 percent at the outset. Then, over the first five years, investors answer periodic "capital calls" until they've reached their commitment. Stakeholders reap their harvest - for gain or loss - when a company goes public or, more commonly, when the business sells to another firm.
Unlike a mutual fund or certificate of deposit, "you can't pull [the money] out," says David Kirkpatrick, cofounder and managing director of SJF Ventures of Durham, N.C. It is currently raising cash for an East Coast fund with a focus on eco-friendly technologies. But potential gains for ethical investors, he says, go beyond the projected 15 percent annual returns.
Instead of "accepting the field of public companies that's out there, and screening them," the way mutual funds commonly do, "here's your chance to kind of create some new things," such as companies that bring new energy sources to market or hire thousands of workers on the hurricane-ravaged Gulf Coast, Kirkpatrick says.
"That's the promise," he adds.
Investors are sometimes drawn to the challenge. Jay Baldwin of Cambridge, Mass., for instance, jumped on board with SJF Ventures about a year ago with the minimum investment of $100,000.
"It puts you on the cutting edge of where technologies and this [environmental] movement is going," Mr. Baldwin says. "I've always been an entrepreneur myself, so I like to support those efforts."
On the social side, venture investing leaves little to chance. Influence is far more direct than that which investors have through socially responsible mutual funds that add their voice to a chorus of others at shareholder meetings.
Example: TRF Private Equity in Philadelphia provides human-resource consulting to local companies owned through its two venture funds. In this way, financiers directly shape management's policies, from wage-setting to benefits allocation in strategies intended to minimize turnover. The firms take advice well, says managing director Linda DeJure, because their investors have what is known in the industry as "skin in the game," that is, assets on the line.
"To have influence is to take risk with them," Ms. DeJure says. "If you're on the board with them, that means something."
Some argue investors pay a premium for social clout in this domain. Brookline, Mass., venture capitalist Henry Newman, for instance, says social criteria make an already difficult investing challenge even harder.
"There's only a certain number of options out there, and to put an extra restriction on it is limiting," Mr. Newman says. "You're heading toward suboptimal returns."
But Baldwin takes the opposite view, noting that ethically minded investors like Kirkpatrick might instead beat the bushes for investments that turn out to be rare gems.
"I think he's putting capital in places where others might not be looking" because they're focused on big cities or technology "plays" such as software, he says. Retaining a social standard "is going to expose you to opportunities that others would pass over quickly."
Handicapped or not, venture funds tend to attract true believers, whether their hearts lie with particular business models or a geographic area. Ray Moncrief, for instance, is looking this fall for accredited investors who share his confidence in the Appalachian countryside.
"The traditional venture capitalist says there are no deals to be done in rural America. I disagree with that," says Mr. Moncrief, fund manager at Kentucky's Meritus Ventures. It is about halfway to its $10 million target. To support his point, he cites an 18- percent average rate of return over the past 21 years at Kentucky Highlands Investment Corp., the nation's first community development venture fund (est. 1968).
Even so, maximizing returns is seldom the primary draw to this sphere. Even a 10 percent payoff would satisfy Charles "Kip" Moore, a Portland, Maine, investor who has $250,000 in a fund from that city's Coastal Enterprises Ventures. He says he gets plenty of exposure to higher fliers in his technology holdings, which stand to reap the biggest returns. With Coastal Enterprises, he likes knowing his cash stands to grow at a respectable rate while it helps employ, for instance, 15 seafood canning workers at Look Gourmet Foods on the Maine-New Brunswick border.
"This has diversified my portfolio, and it's done it in ways that to some extent are just fun," Moore says. "Learning about canning lobster, and making fertilizer out of the debris from canning lobster and mussels and everything else, is fun."