Philadelphia’s SustainVC sticks with early stage founders in its third impact fund

If you’re the founder of an early stage company with a strong impact story, Tom Balderston and his team of impact venture capitalists want to meet you. Especially if you’re in or around Philadelphia.

 

The team from SustainVC, one of the Philly region’s oldest impact venture firms, is hitting this week’s Total Impact Summit, hosted by ImpactPHL, with fresh capital in hand. The firm has closed on the first $10 million for its third fund, anchored by Pennsylvania’s State Small Business Credit Initiative.

 

“We’ve grown and invested all around the country, but Philly is now at a point where we know there will be opportunities here. We want to continue to network and look for opportunities here in the region,” Balderston, a longtime impact venture capital investor, told ImpactAlpha.

 

SustainVC is looking to raise $30 million to deploy capital in early-stage local tech companies, especially in the broader Pennsylvania region and other US cities overlooked by traditional VCs. SustainVC has kept its funds small to enable it to continue to invest in the early stage of companies’ formation, where the need is the greatest and impact capital matters most (see, “Why early-stage capital matters most”).

 

SustainVC’s growing focus on the Philly region reflects years of groundwork by the broad community of practitioners that has formed around ImpactPHL. The Total Impact Summit will spotlight Philadelphia’s vibrant and diverse impact investing ecosystem. Many of the region’s philanthropies, including the Patricia Kind, Valentine and Barra foundations, are deploying capital locally, and moving to align their endowments with their missions to be able to channel more capital to minority-owned small businesses, affordable housing and community-led ventures.

 

Philadelphia-based advisors like Glenmede and Zenith Wealth Partners are helping these institutions find local opportunities, like the Kensington Corridor Trust, which is reclaiming mixed-use and commercial properties from the speculative market, placing them in the hands of local residents, in North Philly’s Kensington neighborhood.

 

Philly boasts more than a dozen locally-based impact funds. Allivate Impact Capital is raising a $10 million buyout fund to finance employee ownership transitions for small businesses in the US. The De-Carceration Fund is investing in ‘justice tech’ startups. Blue Highway Capital provides growth capital to small manufacturing, healthcare, business and environmental services businesses in rural areas underserved by traditional private equity.

 

Plain Sight Capital, backed by Philly-based family office Spring Point Partners and Ben Franklin Technology Partners, invests in underrepresented tech founders tackling problems that are underfunded by mainstream VCs.

 

“Philadelphia doesn’t lack innovation, entrepreneurs or social enterprises,” says ImpactPHL’s Cory Donovan. “The need, and the opportunity, is to build the plumbing that connects local impact- seeking capital to the investable opportunities that are creating those outcomes right here in our own community.”

 

The ImpactAlpha team will be on stage throughout this week’s Total Impact summit. On Wednesday, Dennis Price joins a discussion on narrative storytelling with Tameka Vasquez of The Future Quo, Urban Institute’s Brett Theodos and Mary Dunaway Cage of Cinereach. Amy Cortese leads a discussion on investing in ‘good AI,’ with Laura Weidman Powers of Base10 Partners, Ravit Dotan of TechBetter and Whitney Shepard of Majority Action. On Thursday morning, I’m moderating a discussion about transforming capital, with Amber Quiñones of Stray, Deborah Frieze of Unlock Ownership, and Norbert Cichon of Spring Point Partners.

 

Impact ecosystem

 

Balderston has spent years building impact investing ecosystems in Philadelphia and beyond. He helped launch the city’s Investors Circle chapter to help angel investors move impact capital locally. SustainVC was started to manage funds for the Patient Capital Collaborative, which backed companies coming up through Investors Circle. Balderston was part of the team behind the creation of ImpactPHL. He was an early investor in SOCAP Global and remains on its board today.

 

“Tom is an OG in our local impact investing ecosystem,” Donovan says. “Before impact investing had conferences, terminology or asset recognition, Tom Balderston and SustainVC were already proving the model, [and] helping legitimize the idea that investors could pursue positive impact and positive returns simultaneously.”

 

SustainVC looks for diverse founder teams with strategies informed by their lived experiences, and whose business models are built around social and environmental impact. That includes sectors spanning climate and sustainability, equality and empowerment, and health and education.

 

With the firm’s founder, Sky Lance, Balderston has recruited a team of young venture capitalists. One of SustainVC’s newest hires is Kendall Bedford, a recent Wharton graduate and a Mosaic Fellow at Impact Capital Managers, a network of fund managers seeking “impact alpha.”

 

“We go out of our way to fish locally,” Bedford told ImpactAlpha. “I’m trying to get more impact investors engaged in the Philly ecosystem overall, because it’s time for the next generation to be empowered about this stuff and get excited about it.”

 

When Balderston told his local venture capital peers he was moving into impact investing nearly 20 years ago, they found the idea of generating both financial returns and impact ludicrous. 

 

“There was always a thought that you must be sacrificing return in order to gain any impact,” he adds. “And so longtime friends in the venture business looked at me sideways when I said this is what I was going to spend more of my time doing.”

 

Balderston and Lance built SustainVC through a series of funds called the Patient Capital Collaborative, focused on early-stage companies solving problems overlooked by traditional Silicon Valley investors. The fund managers drew early dealflow and capital through Investors Circle, the nearly 35-year-old national network of mission-driven angel investors (Balderston holds a lifetime membership).

 

“We had five small funds, which when we started were all Investors Circle members,” Balderston says. “And as things progressed, we gradually incorporated capital from other people that we met, like wealth advisors whose clients heard about us.”

 

In SustainVC’s early years, Balderston brought an Investors Circle chapter to Philadelphia, with local impact investors like John Moore (see “Agent of Impact”). They launched ImpactPHL in 2016 to champion impact investing in the Philadelphia greater region. 

 

Seed funding

 

SustainVC looks for companies in “second- or third-tier” US cities, like Philadelphia, where mainstream VCs often miss opportunities. The firm isn’t hunting for unicorns, it is targeting impact tech startups with scalable business models in large addressable markets, and clear paths to exit. 

 

“It would be great if our investments do make it to that status, but we’re underwriting a bit more conservatively to build a portfolio that’s consistent over time,” says Bedford. The firm seeks companies with potential to fetch around $100 million in the M&A market, she said. 

 

In March, SustainVC secured a partial exit in Findhelp, an Austin-based company that provides software to health systems, governments, payers and others to identify social needs and coordinate services and manage benefits enrollment. “We and other early-stage investors were able to get liquidity for our investment” as part of TPG Rise Funds’ $250 million growth investment in Findhelp, Balderson says. “We left some of our capital in because we think this opportunity could grow further.”

 

SustainVC has backed 50 companies, 20 of which have produced full or partial exits. A half-dozen of the firm’s portfolio companies are based in the Philadelphia-Pennsylvania area, including KickUp, an edtech company that helps school districts provide professional development and training to educators. 

 

“We do look at a lot of investments in Philadelphia and the state. We like making investments here, and we’re really excited to keep looking at the pipeline here,” says Bedford.

 

Sometimes the companies in the local pipeline don’t fit the firm’s criteria. Bedford said she recently participated as a judge for a regional pitch competition in March, hosted by Morgan Stanley Inclusive and Sustainable Ventures, but the Philly company that won wasn’t a good fit for SustainVC’s investment thesis. 

 

The fund looks for companies raising seed to Series A rounds, with capital needs between $2 million and $5 million, where the fund can invest between $500,000 and $1 million per round. “That’s typically when they’re first looking to engage with institutional capital, and they’ve just graduated beyond the angel investing round,” Bedford says. 

 

This time around, SustainVC plans to tap into its network of local VCs to create potential opportunities for founders even when their business isn’t a good fit for the fund. 

 

Pennsylvania’s State Small Business Credit Initiative, a returning LP in SustainVC’s funds, looks to back local fund managers, but does not mandate exclusively local investments. SustainVC is looking to get capital to underrepresented early-stage founders. At least 80% of the firm’s portfolio companies are led by first-time founders; more than half are led by people of color and women. The firm looks for founders who have lived experience tied to their impact mission. 

 

“We always ask for the company’s origin story when we’re meeting them for the first time,” Balderston says. “There’s no question in my mind that we’ll find some interesting opportunities here in the region, because there’s enough things bubbling up and plenty of people really interested in making a difference with their work.”

 

Balderston joked that, as someone who’s been doing this for a long time, less travel is an extra perk for investing in the region. A large share of SustainVC’s portfolio companies have distributed workforces. That means a lot of traveling and Zoom calls. 

 

“That’s one of the reasons why events like ImpactPHL and SOCAP are so great, because it’s a chance to get together with colleagues and make new friends and connections in person,” Balderston says. 

 

“We’re eager to participate in these convenings to renew connections and build new ones,” he said. “Philadelphia has all the ingredients to be a continuing, growing, strong ecosystem for entrepreneurs who want to build companies and make a difference.”