Can a Double Bottom Line Bring Better Returns?

That’s what employ­ees of Inter­net music and DBL port­fo­lio com­pa­ny Pan­do­ra are giv­ing kids in Oak­land, Cal­i­for­nia schools.  Why would a VC firm encour­age its invest­ment com­pa­nies to do this?  To show how com­pa­nies with active com­mu­ni­ty out­reach pro­grams make a dif­fer­ence where they’re based, and deliv­er supe­ri­or finan­cial returns — the Dou­ble Bot­tom Line.

This post in Yale Insights, from the Yale School of Man­age­ment details DBL Part­ners’ approach and why it’s work­ing for a grow­ing num­ber of com­pa­nies that are win­ning their respec­tive mar­kets.  The orig­i­nal arti­cle ran in 2008, but the mes­sages res­onate even loud­er today.

DBL Man­ag­ing Part­ner Nan­cy Pfund

A group of third graders bumped into Steve Hogan as he walked in the door of Futures Ele­men­tary School in East Oak­land on the last day of school. Their eyes got wide. They began jump­ing up and down in excite­ment, say­ing, “Do we have music class today?” After a dozen two-and-a-half-hour ses­sions, Hogan says, “It was grat­i­fy­ing to know they were still look­ing for­ward to it” — even in the last hours before sum­mer vacation.

Hogan is a pro­fes­sion­al musi­cian and the music oper­a­tions man­ag­er for the inter­net radio com­pa­ny Pan­do­ra. This past year, he was among 10 employ­ees of the Oak­land-based com­pa­ny who cre­at­ed and pre­sent­ed a music cur­ricu­lum at the near­by school, which had lost its arts pro­grams to bud­get cuts. The lessons intro­duced the var­i­ous fam­i­lies of instru­ments and even explained some music the­o­ry, using a great deal of live per­for­mance from the Pan­do­ra vol­un­teers, who are all also pro­fes­sion­al musi­cians. The class­es cul­mi­nat­ed in stu­dents singing or rap­ping on tracks that were then mixed into CDs.

It may be sur­pris­ing to learn that the vol­un­teer project was prompt­ed by one of the ven­ture cap­i­tal firms fund­ing Pan­do­ra, DBL Part­ners. Per­haps more sur­pris­ing is the fact that Seth Miller, a part­ner at DBL, par­tic­i­pat­ed in every ses­sion. Miller ral­lied Pan­do­ra vol­un­teers and worked with them to ensure that the pro­gram became self-sus­tain­ing. In the process, he built con­nec­tions at Pan­do­ra. “We get to know our com­pa­nies in ways that oth­er investors may not, so we’re bet­ter able to help and guide them on behalf of our lim­it­ed part­ners, who are expect­ing us to gen­er­ate supe­ri­or returns,” Miller says.

DBL stands for Dou­ble Bot­tom Line. Like any VC firm, its goal is to make mon­ey. But an addi­tion­al focus — its sec­ond bot­tom line — is social, envi­ron­men­tal, and eco­nom­ic improve­ment in the San Fran­cis­co Bay Area’s low- and mod­er­ate-income neigh­bor­hoods. Nan­cy Pfund ’82 cre­at­ed the com­pa­ny when she spun the $75 mil­lion Bay Area Equi­ty Fund off from JPMor­gan in ear­ly 2008.

DBL Part­ner, Seth Miller

Though many of the firm’s invest­ments have an envi­ron­men­tal angle, such as the elec­tric car com­pa­ny Tes­la or Bright­Source Ener­gy, which builds and oper­ates solar pow­er plants, DBL doesn’t use pos­i­tive screens (“we invest only in com­pa­nies that do x”) or neg­a­tive screens (“we won’t invest in com­pa­nies that do y”), as many ven­ture investors with a sec­ond bot­tom line do. Miller says, “Our phi­los­o­phy is that every com­pa­ny has an impact on the com­mu­ni­ty around it. If that com­pa­ny is aware of that impact, proac­tive­ly seeks to improve, and exe­cutes every year, the rip­ple effect is huge.”

“Hope­ful­ly we’re work­ing with com­pa­nies which, at some point, are going to grow to have many employ­ees. We can influ­ence them at an ear­ly stage — make the sec­ond bot­tom line part of their DNA,” Miller adds.

Pan­do­ra was attrac­tive, from a sec­ond-bot­tom-line per­spec­tive, because it is bring­ing good jobs to Oak­land and employs musi­cians, who are typ­i­cal­ly under­em­ployed, with low incomes, and have a hard time find­ing jobs flex­i­ble enough to con­tin­ue per­form­ing. But, DBL founder Nan­cy Pfund points out, the mis­sion-dri­ven part of the work con­tin­ues only if the returns are there. “We made an invest­ment with them, first and fore­most, because we think Pan­do­ra is a game-chang­ing com­pa­ny with poten­tial to be very successful.”

Much of that poten­tial comes from the intel­lec­tu­al prop­er­ty at the heart of the com­pa­ny: a mas­sive data­base called the Music Genome Project. Each of the 600,000 songs in the ever-grow­ing data­base has been ana­lyzed for some 400 attrib­ut­es by Pandora’s staff of 45 head­phone-clad musi­cians, who spend their work­days lis­ten­ing to music, typ­i­cal­ly ded­i­cat­ing 20 to 30 min­utes to each song.

The data­base lets Pan­do­ra users cre­ate free, cus­tom radio sta­tions on their com­put­ers. Sim­ply enter the name of an artist or a song and the Music Genome Project plays music with sim­i­lar char­ac­ter­is­tics in the vocal style, instru­men­ta­tion, rhythm, or melody.

In its third year since launch­ing the web­site, Pan­do­ra is on track to achieve $20 mil­lion in sales for 2008, almost entire­ly from ads. “Ulti­mate­ly our goal is to be the biggest provider of radio in the world,” Joe Kennedy, the CEO of Pan­do­ra, says. He adds that with more than 15 mil­lion users Pan­do­ra is already the largest inter­net radio ser­vice, and has grown quick­ly in recent months, in large part because its iPhone appli­ca­tion is among the most pop­u­lar for the Apple device.

While ven­ture cap­i­tal­ists gen­er­al­ly look for par­tic­u­lar qual­i­ties in invest­ments, it often mat­ters less to com­pa­nies where their mon­ey is com­ing from. Kennedy says, “Every good ven­ture cap­i­tal­ist knows to look for dif­fer­en­ti­a­tion in the strat­e­gy or assets of a poten­tial invest­ment. Iron­i­cal­ly, VCs them­selves are not at all dif­fer­en­ti­at­ed. From the stand­point of a com­pa­ny look­ing for invest­ment, they tend to look and sound alike, at a firm lev­el.” DBL is a ven­ture cap­i­tal group that stands out, Kennedy says. “Seth is the only VC the employ­ees could name.”

From a typ­i­cal busi­ness per­spec­tive, some of DBL’s approach may seem indi­rect, but the firm sees its role as fos­ter­ing a healthy ecosys­tem, includ­ing the com­pa­nies it invests in and their sur­round­ing com­mu­ni­ties. For exam­ple, the dig­i­tal media busi­ness is in a dis­pute with the music indus­try over fair and appro­pri­ate com­pen­sa­tion of roy­al­ties, a fight that has moved to Wash­ing­ton. When Pan­do­ra want­ed to talk to mem­bers of Con­gress, it turned out that the U.S. Rep­re­sen­ta­tive for Oak­land, Bar­bara Lee, had already heard about Pandora’s project at Futures Ele­men­tary School and was eager to meet with the company.

Nan­cy Pfund says that this sort of full-cir­cle impact of the involve­ment with the com­mu­ni­ty isn’t unusu­al. “We have seen it so many times that we’re con­vinced that this is a very pow­er­ful busi­ness tool, as well as a social tool.”

Kennedy explains the busi­ness impact of DBL’s sec­ond bot­tom line this way: “Their social pur­pose makes them much more con­nect­ed to gov­ern­ment and pol­i­tics than a nor­mal VC firm.” One of those dif­fer­en­ti­at­ing skill sets the com­pa­ny offers is the abil­i­ty to work with state, local, and nation­al gov­ern­ment agen­cies. In one case that meant find­ing employ­ment pools for entry-lev­el posi­tions through local work­force devel­op­ment boards. In anoth­er it was help­ing to secure a pack­age of about $200,000 in tax and oth­er incen­tives from San Fran­cis­co for solar sys­tem installer SolarCi­ty to locate a train­ing cen­ter in a low-income neigh­bor­hood as an anchor for revi­tal­iza­tion efforts.

“A lot of what we do is edu­cate entre­pre­neurs about the pro­grams that exist to attract busi­ness­es into these enter­prise zones,” Pfund says. “It’s just not part of the knowl­edge set of the entre­pre­neur­ial econ­o­my. So we do a lot of con­nect­ing the dots.”

“Our whole the­sis is based on pro­mot­ing pub­lic-pri­vate part­ner­ships,” she adds. “It takes a very ded­i­cat­ed and for­mal com­mit­ment to reach­ing out to the pub­lic sec­tor in order to get these things done.” Pfund describes assist­ing Tes­la Motors with gain­ing a pack­age of incen­tives from the state of Cal­i­for­nia worth $15 mil­lion to locate its elec­tric car man­u­fac­tur­ing facil­i­ty there. That prompt­ed a $20 mil­lion offer from New Mex­i­co that was accepted.

“When the com­pa­ny decid­ed to bring the plant back to the Bay Area, we were involved, but they had already learned how to do it, so they didn’t need as much involve­ment from us. They kind of ran with it and got the gov­er­nor to sit down with them. That’s immense­ly grat­i­fy­ing, to see that once you edu­cate and make peo­ple aware of the ben­e­fits of this approach, they can go and do it them­selves,” Pfund says.

The focus on teach­ing com­pa­nies to engage with their com­mu-nities and find solu­tions to com­plex issues through pub­lic-pri­vate part­ner­ships seems to be pay­ing off finan­cial­ly. Four years in, with two liq­uid­i­ty events and sev­er­al com­pa­nies hav­ing com­plet­ed addi­tion­al rounds of fund­ing, DBL’s port­fo­lio is track­ing in the top quar­tile of funds of the same age. Next up, a crit­i­cal issue with­out any glam­or but count­less inter­est­ed par­ties: the trans­mis­sion infra­struc­ture. Bright­Source Ener­gy is prepar­ing to gen­er­ate solar pow­er on a large scale. “If you gen­er­ate hun­dreds of megawatts of solar pow­er in the Mojave Desert, that’s won­der­ful, but if you don’t have a trans­mis­sion grid to take that pow­er to the cen­ters of pop­u­la­tion that need it, that’s a prob­lem. And the minute you start get­ting into build­ing trans­mis­sion infra­struc­ture, you are in a morass,” Pfund says. Refer­ring to the sup­port pro­vid­ed by San Fran­cis­co for the SolarCi­ty job train­ing cen­ter, she says, “That’s sort of Pub­lic Out­reach 101, but trans­mis­sion infra­struc­ture is a post-grad­u­ate seminar.”