University of Michigan Social Venture Fund Comes Out of Stealth, Aims to Invest in Companies at the Nexus of Public and Private

9/27/10Follow @xconomy

“Social shouldn’t be viewed as soft,” says University of Michigan finance professor Gautam Kaul. “Unfortunately, soft and social tend to go together in people’s perceptions.”

But Social Venture Fund, a new investing vehicle out of the University of Michigan that came out of stealth mode just last week, is taking a hard look at social inequality—and is out to prove that investments targeted at ameliorating it can make money. “We want to use rigor in measuring social impact and making investments that are real,” says Kaul, the managing director of the fund.

A handful of students approached him a year and a half ago with the idea for a social venture fund, as a new business model to help solve real-world problems, he says. He made the team formally pitch the idea to him (much in the same fashion entrepreneurs present to investors), to prove the concept went beyond a philanthropic idea, and had the potential to also generate returns.

Social Venture Fund’s team, which is now expanding and could reach a total of 30 students, has been working over the past year to develop the vision for the project and the types of companies it will invest in, Kaul says. The fund adds to the university’s group of student-run funds—the Frankel Commercialization Fund and Wolverine Venture Fund, which has had four successful exits, including an IPO. Unlike the other student-run funds at the university, Social Venture Fund didn’t start with money, Kaul says. “We felt that this was too important to wait on trying to raise money for something.” The 2010 MBA class at the school has already pledged its gift to the Social Venture Fund, which is also working on a big fundraising push.

Broadly, Kaul’s team envisions its investments falling into a handful of sectors: education, food and nutrition, health, finance, the environment, and urban revitalization. He says the team is particularly interested in looking at companies that fuse the latter two concepts, and work on solving problems that are often left to the government.

“We want to create a new type of organization that does not worry only about money making, but worries about policy and impact on society,” he continues. To do that, Social Venture Fund is looking at companies that make technologies such as renewable energy scalable and cheap enough so that they can reach poorer populations. As an example, Kaul cited the work of social entrepreneur David Green—a University of Michigan School of Public Health alum who started an organization that makes medical treatments affordable to populations in developing countries.

Ultimately, Kaul’s team of students envisions Social Venture Fund as investing in companies globally, but for right now, it doesn’t need to look further than southeast Michigan to initiate its mission, he says. “Why go all over the world when you have issues right in your backyard?” he says.

Companies in the local sustainable agriculture sector near Detroit, for instance, will likely be investing targets of Social Venture Fund, Kaul says. The students behind the fund also look to do more than just give startups money, and will serve advisory roles in the companies the fund invests in.

Social Venture Fund has a targeted approach to fundraising, Kaul says. First, the team is looking to charitable foundations as early investors in the fund. And, Kaul says, he’s hoping that one foundation will provide the money for the entire first investment Social Venture Fund makes.

The fund is looking to close two to three deals per year, each worth up to $200,000, and is hoping to make its first investment by next spring, Kaul says. But the team is being ultra-careful about which company it selects for that first deal.

“I really want our first investment to truly satisfy us that it is something that we think is uniquely Michigan, that makes sense to people when they see it, and meets certain hurdles which other ventures may not,” he says. “It has to have social impact and a plan that can survive.”

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