Unicorn Poop is a Tobacco Flavor
I run by this ad at a bus stop near my home several times a week. I’d never given it a second thought until Sequoia Capital partner Carl Eschenbach’s presentation to our class during Week 1.
One distinctive of venture firm Sequoia is that eighty percent of their limited partners are non-profits and charitable foundations. These organizations invest capital in Sequoia’s funds and Sequoia returns profits to them. Sequoia doesn’t invest in tobacco or firearms companies, and so they passed on investing in Juul, maker of vaping products that are extremely popular with American teens. In fact, Eschenbach walked out of his meeting with Juul early because it was clear Juul wasn’t a fit for Sequioa’s investment philosophy. As Eschenbach pointed out, passing on investments like Juul can mean passing on significant upside. Earlier this week, The Information reported that Juul is raising $600 million from hedge fund Tiger Global at a $16 billion valuation. But to Sequoia, it’s more important that it’s LPs would be “proud” of the investments it makes than to maximize returns.
One of my fellow students cited micro-finance as an example of investing for both social and financial returns. These kinds of investments are loans with limited upside opportunity. Micro-loans may have significant social benefits for their target communities, but they don’t return profits at a level required for institutional investors. Sequoia must target growth opportunities in order to distribute profits to it’s LPs.
So how can Sequoia maximize social impact through it’s investments?
First, as Eschenbach discussed, they should avoid investments that produce collateral harm. Juul would argue that it’s products are aimed at existing adult smokers, and in moving smokers away from tobacco products, yield a net positive societal impact. However, the widespread use of Juul among teens, driven by safe-sounding fruity flavors and easy-to-conceal devices, contradicts the stated mission.
Instead, Sequoia should invest in companies where the by-product of the core service produces wide-spread societal benefits. Lyft is a great example (though not a Sequoia company). In an interview with Guy Raz, co-founder John Zimmer shared that their core mission is to improve cities and connect communities. Positive by-products are more efficient use of resources, lower parking requirements, and increased employment opportunities.
Finally, when evaluating investments, it’s critically important that Sequoia understand what distribution strategies it’s companies will employ. Even companies with positive social missions can cause significant harm when they pursue suspect marketing/distribution tactics. Sequoia-backed scooter startup Bird presents a cautionary tale. Like Lyft, they were founded to pursue positive sustainability and community-oriented goals. However, their success has lead to “scooter pollution” backlash in some communities. Likewise, Juul might argue that increased teen usage was an unintended consequence of producing a vape device that looks like a USB stick and flavored like a Starbucks drink. Intended or not, scooter pollution and increased teen vaping should have been predictable and avoided.
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