Bay Area Equity Fund beams after PowerLight exit

Double-bottom-line investing is as difficult as its name suggests, but the Bay Area Equity Fund is making it look easy. The idea is to produce positive returns in two ways—financially and socially.

“People used to think that being a good corporate citizen meant sacrificing profits,” says Nancy Pfund, a managing director with San Francisco-based Bay Area Equity Fund. “We’re building the evidence to prove the inverse is true.”

Exhibit A: PowerLight. The fund put $5 million into the startup’s $15 million Series C in August 2005 and the deal quickly produced positive results on two counts. One, it met the fund’s social objective by helping the environment through the production of solar power technology and by employing low- and middle-income residents of Berkeley, Calif. Two, it met the fund’s financial objective through PowerLight’s recent sale to SunPower for $330 million.

Pfund declined to reveal the return on the PowerLight deal, but it clearly puts the firm well on its way to returning capital for its $75 million inaugural fund. The exit should also drum up interest when Pfund and her partners go back to the market in 2007 to raise a second fund targeted between $150 million and $200 million.

Social is in

The Bay Area Equity Fund isn’t the only socially responsible fund drawing interest from LPs. The assets of community development venture capital funds rose to $870 million in 2005, up 480% from $150 million in 1999, according to data from the Social Investment Forum. These double-bottom-line funds are particularly interesting to banks looking to fulfill the requirements of The Community Reinvestment Act, a 1977 federal law designed to ensure banks don’t ignore the poor people in their area.

The Bay Area Equity Fund is administrated by employees of JPMorgan, which also invested $6 million in the inaugural fund. Among the fund’s 43 other limited partners are H&Q Venture Management, the Wells Fargo Community Development Corp. and the Contra Costa County Employees Retirement System.

People used to think that being a good corporate citizen meant sacrificing profits.We’re building the evidence to prove the inverse is true.”

Nancy Pfund, Managing Director, Bay Area Equity Fund

To date, the fund has invested in 14 companies. Some of its notable portfolio companies:

• Tesla Motors, an electric car maker based in San Carlos, Calif.

• FivePrime Therapeutics, a biotech company that is developing the low-income area around its office in San Francisco’s Mission Bay area.

• InSpa Corp., a day spa company in the Pacific Northwest that provides full-time employment and health benefits to its workers.

• And Elephant Pharmacy, a Berkeley-based pharmacy chain that emphasizes wellness programs and employs people from low- and middle-income areas.

Bay Area Equity Fund raised its first fund in 2003, before the Omidyar Network went into full swing and socially-responsible investing received much more investor attention. “The idea is catching on,” says Managing Director Michael Dorsey. “The Omidyar group is much more high profile than us and when they endorse this stuff it gets a lot of interest.”

Winning over skeptics

Both personally and philosophically we liked [Bay Area Equity Fund] and they helped enhance an aspect of the company we both cherish.”

Joe Kennedy, CEO, Pandora

Dorsey is quick to point out that the idea of socially responsible investing was difficult to sell to limited partners. “We encountered a lot of skepticism,” he says. But after more than a year of fund-raising, the team secured commitments from 10 banks, seven foundations and a handful of retirement plans.

While its dual-purpose mission made it tough for the fund to raise money initially, it was a selling point for socially minded entrepreneurs and helped it get into some hot deals. For example, the founders of Pandora, a customizable Internet radio station, liked the fund’s commitment to creating community outreach programs. Pandora hires local musicians—many of whom work part-time due to their musical commitments—to classify music to improve its automated music recommendation service.

“We were choosing from a variety of investors,” says Pandora CEO Joe Kennedy. “Both personally and philosophically we liked [Bay Area Equity Fund] and they helped enhance an aspect of the company we both cherish.”

The fund also has a fan in Labcyte of Sunnyvale, Calif. It encouraged the startup, which makes laboratory instruments, to seek certification as a green business. In preparation for certification, Labcyte found it was using more water than seemed normal. The company’s management looked into it, and found it was footing the entire landscaping bill for its office park. Labcyte ended up saving $12,000 a year thanks to the effort to get certified.

In addition to its social concerns, startups like the fund’s connection to “big-time name” JP Morgan, says Kennedy of Pandora. “That’s a comfort to other investors,” he says.

The fund’s ties to JP Morgan led Larry Marcus, a managing director at WaldenVC, to bring it the Pandora deal. “They have a strong digital media investment banking practice at JP Morgan,” Marcus says. “There was some inherent value to adding them from the strategic side.” Marcus also co-invested with the fund in MeeVee, an Internet video search company. “I’d be thrilled to have them on any deal I work on.”

Fund Profile: Bay Area Equity Fund

www.jpmorgan.com
Headquarters: San Francisco
New fund: Bay Area Equity Fund II
Target: Between $150M and $200M
Previous fund: $75M
Management: Led by Managing Directors Nancy Pfund and Michael Dorsey
LPs: JP Morgan, H&Q Venture Management, the Wells Fargo Community Development Corp and the Contra Costa County Employees Retirement System
Focus: Invests in companies that will produce a strong financial return and benefits to society.
Portfolio: Has invested in 14 startups, including Elephant Pharmacy, FivePrime Therapeutics, InSpa, PowerLight and Tesla Motors.
Exit: PowerLight sold to SunPower for $330 million in November 2006.