James Kim, MBA/MA Education ’18, nervously dialed the number, unsure how to begin the conversation. He waxed general. “So,” he began, “tell me about your product.”
It was winter quarter of 2016–17 and Kim had called Brendan Finch, founder of an educational technology startup called RocketLit. “I kind of floundered,” Kim recalls. “These calls can be pretty nerve-racking.”
Kim was a first-year MBA student participating in the Stanford GSB Impact Fund, a program that teaches MBA and MSx students how to invest in socially or environmentally focused for-profit ventures. The screening call with Finch was to gauge whether RocketLit’s mission aligned with Kim’s team’s definition of impact and whether his company could be a candidate for funding.
The Impact Fund kicks off in the fall, when participants split into teams and begin researching companies. Kim, a former high school math teacher pursuing a joint degree at the Graduate School of Education, thought technology could play a larger role in classrooms. He and his team were interested in RocketLit's mission, which is to rewrite science and history texts to match students’ comprehension levels.
“The company recognized a pain point for teachers who have students at different reading levels, and that covers just about every teacher I know,” Kim says.
Impact investing, the practice of making positive change alongside actual market returns, is one of the trendiest practices in “doing well by doing good.” A report from the Global Impact Investing Network estimated that nearly $26 billion has been put into mission-driven companies this year, up 20% from 2017. For many investors, it’s a forward-thinking approach to traditional philanthropy. And for budding venture capitalists, it’s an increasingly coveted career path: A study by BlackRock found that 67% of millennials seek investments that reflect their social values.
Students Asked for the Fund
Three years ago, five MBA students were the catalysts for Stanford GSB staff and faculty to start the Impact Fund. They, along with many of their peers, wanted hands-on experience, not just a class project using “Monopoly money.”
“Students take it much more seriously because it’s actual investing,” says Paul Pfleiderer, the C.O.G. Miller Distinguished Professor of Finance at Stanford GSB. “They’re front and center, probing financials, researching competitors, and evaluating impact. In a traditional classroom setting, they’d be taking a backseat.” Pfleiderer, along with Kenneth Singleton, the Adams Distinguished Professor of Management, began advising the program three years ago. Since its inception, the fund (which comes from private donors, including members of the Stanford GSB Advisory Council) has grown from deploying $50,000 per year to deploying $150,000.
Ventures are chosen by the Impact Fund’s investment committee, which is made up of two faculty members, three impact investors, and the students in the program. In the 2016–17 school year the committee voted to support RocketLit and another edtech company called Upswing. The startups won out over other ventures in areas of urban development, energy/environment, food/agriculture, and health care/wellness. Both RocketLit and Upswing received $25,000.
“It’s a drop in the bucket compared to Silicon Valley investments, but for an early stage company the amount can be the bridge that gets them to the next round of fundraising,” Kim says.
Lessons in Leadership
Another key component of the Stanford GSB Impact Fund is leadership. Students are challenged to lead teams and motivate their teammates, who all have competing priorities. They work on specific development goals they set for themselves in other courses. In the fall quarter of 2017–18, Kim and his team began screening CEOs over the phone. This time Kim wasn’t nervous. After the previous year’s experience with Finch and RocketLit, plus a summer internship at Owl Ventures where he’d made more than 40 of these calls, Kim and other students had refined the script:
What was your journey to entrepreneurship? Tell me about your product and business model. Describe your team and your traction so far.
By the spring, the education team narrowed it down to two startups and began analyzing each. The next step for each team was to draft investment memos — detailed 10- to 15-page documents proving why this company, why this model, why now.
“We basically had two weeks to get from nothing on paper to two full-fledged memos,” Kim says. He estimates that he and his teammates spent anywhere from five to 15 hours each week on the Impact Fund, on top of normal coursework. They often worked on the fly. He and his team, for instance, had to write the investment memos the week of spring break. With the deadline looming, Kim was in Japan, awaiting his U.S.-bound plane after a trek with classmates. He worked from the Tokyo airport, adding comments to the groups’ shared Google Doc. Other classmates signed on to edit from Kenya and Rwanda, where they’d been traveling on a Global Study Trip examining global value chains.
“We had a stellar team and all pushed to get this through,” Kim says. “There were many late nights hammering it out so we would end up with a polished product.”
Unlike a summer internship, the Impact Fund gives students experience in each stage of the process, from cold calling entrepreneurs to managing portfolio companies. By the spring of 2018, Kim had been through the cycle nearly twice. Only presentations to the investment committee and final votes remained.
Asking Tough Questions
But, as with any investment firm, getting the committee on board isn’t easy. Teams often arrive at what feels like the finish line, only to be sent back to the start. Last year’s food and agriculture team made the case for the committee to invest in a venture that created grazing software to help cattle farmers. The startup seemed like a great fit: potential for growth, lasting impact, innovation in the industry. But the committee disagreed, insisting anyone would have difficulty proving the company makes significant environmental impact, because, after all, it was still beef production. The committee advised the food and agriculture team to look into companies in the alternative protein space.
Kim and his team also met challenges when they argued the case for PenPal Schools, an online learning platform that connects students across the globe. Committee member Heidi Patel, a partner at Rethink Impact and lecturer in management at Stanford GSB, challenged the team’s projections of a 12%–13% return. Other committee members questioned the platform’s capacity to create real change if it was based predominantly in affluent schools around Silicon Valley.
“How do you measure impact? That’s a billion-dollar question,” says Loretta Gallegos, associate director of the Center for Social Innovation at Stanford GSB. “It’s a real-time issue the industry is wrestling with right now and a question students must discuss at length.” Gallegos works with each team throughout the year and helped create the program.
Kim and the education team countered the committee’s questions. The projections were their own conservative estimates, Kim says. They also pointed out that impoverished students in African and Latin American countries waited in line for hours to use their school’s computer and write their pen pals in Palo Alto.
The committee ultimately voted to support PenPal Schools. The venture received $75,000. It was the third edtech company to receive money since Stanford GSB Impact Fund’s inception in 2015.
After graduating in 2018, Kim accepted an offer at Reach Capital. He says the transition to a firm that invests in education technology has been smooth. “It’s rare for a junior team member to have experience leading an investment, from sourcing right down to cutting the check,” he says. “Being able to go through the process not once, but twice, has really set me up for success in my current role.”
— Jenny Luna