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June 16, 2005
The Power of Three: SJF Ventures Sets Precedent in Community Development Venture Capital
    by William Baue

SJF and its partners won all three award categories at the annual conference of the Community Development Venture Capital Alliance, which promotes economic, social, and environmental advancement.


At the 2005 Community Development Venture Capital Alliance (CDVCA) Annual Conference, Durham, North Carolina-based SJF Ventures bagged a hat-trick (hockey vernacular for scoring three goals). First, SJF Founder and Managing Director David Kirkpatrick was named Practitioner of the Year. Second, the Portfolio Company of the Year award went to HDS Cosmetics Lab, makers of Doctors' Dermatologic Formula (DDF), in which SJF invested in 2001 and 2002. And third, Citibank Community Development, a limited partner of SJF Ventures that invested in SJF's first fund, was named investor of the year.

"It is significant for one fund and its partners to have won all three awards," said Kerwin Tesdell, president of CDVCA.

Three is also the number of elements community development venture capital (CDVC) focuses on: generating solid financial returns, strengthening community social fabric (primarily through job creation for low-income individuals), and enhancing environmental sustainability. SJF's first fund (SJF Ventures I, founded in 1999 with $17 million in assets) realized a handsome return upon exiting its investment in DDF in 2004, tripling the capital investment in two and a half years for a 70 percent annualized internal rate of return. Of course, SJF does not expect such stellar returns from all its investments.

"The venture capital model is to expect some portfolio companies to perform very well, some to return a smaller profit or just return the invested capital, and some to be complete losses," said David Griest, an SJF associate. "Given the track record of SJF Ventures I, we expect this model to result in a mid-teens annualized return for our second fund, SJF Ventures II, which was founded in October 2004 with approximately $13 million raised to date."

"SJF Ventures II is still open to both institutional and accredited individual investors--we will conduct rolling closings through the end of 2005, and expect to raise a total of $30 to $50 million," Mr. Griest told SocialFunds.com. "We plan to invest in approximately 20 rapidly growing companies across the Eastern US, mitigating risk by focusing on firms that have begun to prove their commercial viability with at least $1 million in annual revenue."

BB Hobbs, one of the first two companies SJF Ventures II has invested in, exemplifies the other two elements of community development venture capital--social enhancement through job creation and support for environmental sustainability.

"Environmentally, we focus on 'clean technology companies that allow their customers to achieve a competitive advantage by minimizing resource use and pollution and enhancing efficiency," said David Kirkpatrick, co-founder and managing director of SJF Ventures. "Hobbs designs and installs sophisticated irrigation and fertigation systems for commercial growers that drastically improve the efficiency of water and fertilizer usage, reducing water consumption and minimizing fertilizer runoff while substantially increasing crop yields."

"The company is also expected to create over 60 new entry-level positions in the next several years, with a majority paid health insurance coverage, 401(k), and broad-based stock option and profit-sharing opportunities," Mr. Kirkpatrick told SocialFunds.com.

SJF codifies its commitment to social sustainability by signing a "Community Development Covenant" with companies it invests in, for example requiring them to agree to create a certain number of new jobs with competitive wages and benefits for low-income individuals. SJF is further advancing the social commitment of the CDVC industry through its recent report entitled Beyond Paycheck-to-Paycheck. The report points out that the structure of community development venture capital can pit its goals against one another. CDVC seeks to help low-wealth individuals climb the economic ladder, but CDVC funds capitalize by exiting their investments in companies, often resulting in a relocation of the company that pulls the rug out from the workers CVDC intends to serve.

The report seeks to mitigate this negative dynamic by providing strategies for enhancing workers' financial literary, skill transferability, and asset building. The report makes the case for employee asset building and asset ownership through broad-based stock options, employee stock ownership plans (ESOPs), individual development accounts (IDAs) and home ownership assistance, retirement plans and profit sharing. Given that the report surveyed 17 CDVC funds, it promises to drive best practice in the industry.

 

 
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