Andrew Karsh and Bay Bridge Ventures Take on VC and Sustainability
posted by Marsha Vande Berg on April 22, 2022 - 9:45am
(Marsha J. Vande Berg is CEO of MJVGlobal Insights, serving as an educational resource to corporate and investment executives about sustainability, governance and political economies. As CEO of Pacific Pension and Investment Institute, she worked closely with global pension executives, particularly in the Asia Pacific. A Stanford Distinguished Careers Fellow, she teaches, writes for international publications and is a frequent forum and webinar speaker. Reach her on LinkedIn or Twitter.)
SAN FRANCISCO — It takes guts to leave a secure job investing on behalf of the largest public pension fund in the U.S. and hang out a shingle with the name of your brand-new venture fund some 50 miles from Sand Hill Road in Silicon Valley, the epicenter of private capital. Guts, yes, but also smarts, deep experience and what might be called investment empathy.
Andrew Karsh, founder of Bay Bridge Ventures in Berkeley, Calif., together with partners Kim Kolt and Joe Blair, understand in rare combination the increasing interests of today’s institutional investors in linking fiduciary responsibility to return on investment and impact.
What’s more, he and his partners intend to apply their considerable knowledge to overturn a prominent perception that sustainable investments are immaterial to the winning venture calculus.
Did I neglect to say Karsh also is ambitious? Yes, he is, rightfully so. He and his partners will kick off their first round of fundraising in coming weeks though he declined to offer details due to what he said are regulatory constraints. But in an interview on March 21, Karsh outlined the rationale for Bay Bridge Ventures, its investment thesis and the investment acumen that will drive the fund’s trajectory and its contribution to sustainable finance.
It may well be that the mark Bay Bridge Ventures leaves is as much about upending the indifference to ESG in venture capital as it is about piggybacking purpose on profits.
In a recent report on venture capital from the UN-backed Principles of Responsible Investment (PRI), its author and PRI senior specialist, Peter Dunbar, wrote that while interest in sustainability is growing, “overall, there is a lack of formal, standardized ESG incorporation across the venture capital industry.”
What’s unfortunate about that bit of news is that venture capital is in fact a vital part of the financial ecosystem. It’s a major engine for job creation and has outsized influence on how we live our lives. It’s underwriting the next generation of business leaders and leading companies worldwide by funding advances, notably in technology that may help some of society’s greatest issues. While momentum and practice are stronger in Europe than in the U.S., ESG incorporation too often is viewed as a box-ticking exercise. Skepticism as to its value remains widespread.
It is at this intersection of venture capital and sustainability investing that Bay Bridge Ventures intends to make its mark and overturn perceptions, such as ESG issues not being material to early-stage companies dependent on venture backing. Also, that GPs’ influence on investees is generally limited, and that LPs who conduct ESG due diligence are a nuisance with little influence over GPs anyway.
Karsh and his colleagues also are targeting diversity in financial services. Their intention is to lead by example, illustrating what a truly diverse business culture in financial services looks and acts like. The organizational structure they are building will be in sharp contrast to that of Silicon Valley where funds still are led by a highly uniform group of leaders — overwhelmingly white and elite educated men.
This overwhelming lack of diversity, notes the UN-PRI report, has produced what Emily Chang described in her book Brotopia as a “self-reproducing, chauvinist and racist culture of exclusion.”
Still, change is in the air. Giant institutional investors from CalPERS and CalSTRS to BlackRock, Vanguard and State Street are hard-driving capital to sustainability investments as risk mitigation. They also are holding corporate boards and C-suites accountable to diversity and ES-factors at the proxy voting booth. Small activist investors like Engine No. 1 are winning against corporate behemoths like ExxonMobil.
If Karsh and partners have their way, Bay Bridge Ventures will take its place in the vanguard of private finance driving capital to sustainability on multiple fronts. Here’s what Andrew Karsh had to say in the interview with Sustainability Stars’ editor Marsha Vande Berg about how his fund intends to accomplish its mission:
Question: The SEC recently set in motion the adoption of a rule mandating climate disclosure by companies listed on US exchanges. How might this rule, if enforced, affect the privately held companies you will be investing in?
Karsh: The SEC took this action for a number of reasons, including current circumstances where reporting is inconsistent company to company. In listening to SEC Chair Gary Gensler explain his intention, my understanding is that the focus is to achieve consistent reporting protocols among listed companies. That’s what is important. The rest is about helping shareholders get up to speed on the risks associated with climate change in particular.
The SEC’s move is also a step in the right direction for private organizations. Gensler’s focus also is to ensure transparency and consistency in reporting in ways that allow investors and other stakeholders to make decisions on an apple to apples basis. If additional reporting is required, then private sector shareholders will tend to support it — which creates additional incentive for their underlying investments.
Even if a privately held company intends to remain private, that company still will be relying on future investments from venture capital or private equity - who in turn are beholden to their own underlying limited partners (LPs). It’s starting to happen, although the industry is still in its infancy in terms of know-how. This in fact is where Bay Bridge Ventures comes in.
Question: So, what is Bay Bridge Ventures, and what is your competitive advantage?
Karsh: For years, the venture capital business held to a perception that companies in their early stages of development were too focused on building a successful business to be required to deal with topics such as climate impacts. There was also a perception historically that a business model focused on purpose and profit wouldn’t be scalable enough to meet the return targets of institutional LPs.
So, I started looking at this more than three years ago, and it occurred to me this perception may be wrong, that there are ways that venture capitalists can in fact be more forthcoming about their investment thesis — and promote a model of investing that supports critical challenges like climate mitigation, health innovation and inclusive capitalism — and generate top-quartile profits. And this is what Bay Bridge Ventures really is about.
We are creating a new paradigm for institutional investors who want to deploy capital with an institutionally credible manager with a robust track record of exits and a scalable strategy. This is unusual in the space where we are focused as it requires an investment history that goes back at least five or six years to when many of the now successful companies were still out of fashion or in niche industries.
As fiduciaries, LPs want top quartile returns to meet their wider financial requirements. Through our proprietary strategy and experienced team of investors, we created a new model which has been purpose-built to provide transparency across ESG factors, produce positive impact and also generate top-quartile returns. We are intent on replacing the notion that investors can achieve either profits or impact, but not both.
A central point is that Bay Bridge intends to help institutional investors generate returns on both ends of their fiduciary responsibility — meeting their commitment to stakeholders to address climate change and satisfying their governing boards’ mandate to realize returns.
Question: So early on when you were mapping out your venture fund, a key piece of that was identifying a gap in the market, namely a dearth of qualified managers, and then realizing that your experience and that of your partners was your competitive advantage. What led you then to design the fund the way you did?
Karsh: There were two or three people who were key in my early thinking about Bay Bridge Ventures. Anne Simpson, who until earlier this year was responsible for CalPERS ESG, sustainability and diversity efforts, was singular among them.
When we both were at CalPERS, we would talk at length about how CalPERS, a fund with nearly $500 billion in assets, has a difficult time finding managers who can handle the size investments that the fund requires and still meet these other critical stakeholder goals. We also talked about what CalPERS’ and other pension boards have been saying for over a decade, and that is mitigating climate change and providing for diversity and inclusivity should be reflected in the investment portfolio.
I also spent two years working with 30 of the largest financial institutions globally as CalPERS’ representative in the UN Global Investors for Sustainable Development (GISD) working group — focusing on how to incentivize capital allocation to support the 17 UN SDGs (Sustainabile Development Goals). From there, building a fund was about getting a plan in place and building a team whose composition reflects the intentionality of our concept with regard to diversity and institutional investment experience.
We recognized from the start that we had an opportunity, and that was we were starting with a blank slate. We didn’t want token diversity . . . Instead, we have been intentional about establishing a fully inclusive culture across the investment team, starting at the general partner level and then committing to 30% diversity in gender and an additional 30% under-represented community members.
We now have three general partners — myself, Kim Kolt, a fantastic investor who worked in the Goldman Sachs’ technology banking group for 10 years before she launched For Good Ventures almost eight years ago, investing in cleantech and women-led initiatives, and Joe Blair, who is a member of BLCK VC, educated at Harvard Business School and who worked for 15 years at three highly credible and venture capital firms before joining Bay Bridge.
Question: Did your own background influence you in making these decisions?
Karsh: Yes, to be sure. I spent 25 years managing money for many of the largest institutions in the world. Before CalPERS, I was at Credit Suisse running a $5 billion portfolio in their alternative investment group. Our investors were pension funds, sovereign wealth funds, and endowments. I left when I was recruited by the late Joe Dear, who was CalPERS CIO at the time. Joe asked me to join the fund and help build out a number of the fund’s more complicated direct investment strategies. At the time, CalPERS wanted to reduce the billions in dollars they were spending each year in manager fees.
There was also another piece, and that was my meeting in 2012 with a fantastic fellow at a Stanford event for non-profit directors — Kevin Barenblat who had just sold his company to Adobe. We got to talking and then brainstorming how we could use technology to create scalable change that benefits philanthropy. Fast Forward was the result. Today it is the largest technology focused, non-profit accelerator globally, and operates a fellowship program which averages 200-300 applications each year for nine to 10 slots. To date, we’ve helped more than 100 million people globally using technology to create scalable positive impact.
Since then, what I wanted was to be intentional about applying my 25 years of experience working with and then inside of the institutional investment community. This meant that I could live the utopian scenario of combining my professional investing expertise with a personal passion for leveraging capital and technology towards scalable change. From there, it was a natural progression to Bay Bridge Ventures.
Question: You use a phrase — institutionally scalable or scalable institution. What do you mean by that?
Karsh: Yes, scalability is one of the biggest challenges that venture capital funds face. Take Bay Bridge. We would be considered to be emerging managers since this is our first fund. But individually, the partners have been managing money for more than 25 years on behalf of the world’s largest institutional investors. So by institutionally scalable, I mean we have the capacity to scale our fund size so that institutional investors can comfortably write significant checks and not worry about owning more than 10 or 20% of the fund.
Many new fund managers don’t stop to consider this. If a fund has $25 million in assets, for example, that means a pension fund like CalPERS, CalSTRS or Texas Teachers can’t write that fund a check. The fund is too small, and doesn’t have the capacity to move the needle in ways that these big funds need that to happen.
Question: So, are you saying that Bay Bridge will be an attractive manager to LPs at both ends of the spectrum — the sophisticated investor with an ESG policy in place and institutional investors without that expertise?
Karsh: The short answer is, yes. We are taking a barbell approach — and foundations and endowments are in the middle, also the private banks, family offices and high net worth individuals who have been deploying philanthropic capital using traditional methodologies for years, decades even. We intend to be especially responsive to the next generation who is moving into leadership roles with these investors, and who want to leverage their allocations in favor of scalable change in ways that also can be monitored in transparent ways. Again, their challenge is identifying credible managers.
Bay Bridge Ventures also is intentional around an LP’s transparency needs as that pertains to how their investments align with mission together with their commitment to stakeholders as part of their broader fiduciary responsibility. When it comes to due diligence and ESG investment, an LP often will disregard or overlook these more traditional aspects of an investee’s ESG policy or what an organization is doing to realize a strategy. But that is changing, and we intend to be responsive with our combined expertise and by raising the bar on what’s possible.
Question: Bay Bridge has a proprietary strategy called “ESG Plus.” What is that, and how is it to be applied? Is this a software which also has applications for advisory services?
Karsh: No, we will not be offering advisory services. ESG Plus is an internal system that we spent nine months creating. It allows us to perform in two key areas, generating top-tier returns and facilitating LPs’ reporting transparently on the impact of their investments. ESG Plus uses high-performing, technology-based assessment tools and will also support LPs engagement with their boards and other stakeholder groups.
It’s a proprietary system and reflects our views about what is achievable at different stages in an investment.
Question: Doing more than 100 interviews with key institutional investors in preparing to set up your fund is an impressive undertaking. What did you take away from these conversations?
Karsh: We talked about the challenges institutional investors are facing given all that the world has gone through, particularly the pandemic, and how they’re just now trying to size up their respective ESG and sustainability assessment profiles — which is turning out to be a moving target.
They want to know how best to measure their investments’ progress on the goals of returns and impact together with how well the investments align and are consistent with the organization’s broader goals and mission. Many are using the TCFD framework (a widely used framework for assessing climate change impact) as well as other voluntary reporting standards.
Also many are not yet fully vetted when it comes to knowing what they want from an evaluation process — which is challenging for us because we are trying to understand how we can meet their needs.
Question: Fast-forward to today, what is your investment thesis at Bay Bridge Ventures?
Karsh: We are focused on investing in companies that are leveraging advancements in foundational technologies, such as artificial intelligence, sensors, IoT, energy storage and others through a scalable and profitable business model in a way that directly or indirectly supports climate technology, health innovation and inclusive capitalism.
An example of leveraging technology for positive change might be helpful: One of my partners is investing in a company called Natural Fiber Welding, which has a unique process to make mushroom-based leather. As consumer demands began to evolve, BMW Ventures got interested in the project and made an investment to support a climate-friendly strategy that also met their own needs for non-animal-based products. Now BMW is offering car seats made of mushroom leather in their upcoming line of electric vehicles.
Question: Will your target investment be late-stage, given your emphasis on leveraging technology as core to the investment thesis?
Karsh: Our investments are focused on early to mid-stage companies where we can leverage our internal expertise and institutional capital base to help these companies scale and become ready for growth-equity investors. We have also built a deep bench with our advisory board and a panel of expert advisors who will support our internal process and also our portfolio companies through deep industry knowledge and connections to potential customers.
It’s also important to be clear about this: We’re also investing in technology companies that use disruptive methods and strong business plans to also directly or indirectly address climate change, health innovation as well as diversity and inclusion. For example, the last three companies we looked at used sensors and artificial intelligence to address climate change in a unique way.
Question: An emphasis on diversity is core to what Bay Bridge Ventures is about. Will you expect the same of your investees?
Karsh: For now, our focus is on building our team. But as we begin our work with portfolio companies, we will be intentional in supporting their recruitment of diverse candidates. Our expectations will be clear.
Question: You’ve had a front-row seat as a practitioner in the evolution from clean tech in the early 2000s to today’s emphasis on sustainability and ESG investment. Earlier you told us that it was Joe Dear who in his capacity as CIO of CalPERS brought you to CalPERS. I can recall a quip Joe made when on the dais of a Pacific Pension & Investment Institute Roundtable in 2007-2008 in southern California. Cleantech is a noble way to lose money, he remarked memorably. What about the evolution you’ve witnessed?
Karsh: The reality is that the context in 2007 was very different from that of today. Back then, CalPERS had decided to defund their ESG investment, and that was the right decision at that time. Everyone had invested in Climate 1.0, and it hadn’t done very well at all. Joe’s point was that an organization like CalPERS is a public organization with the capacity to use its clout as a shareholder — and to change its mind. Today, an organization like CalPERS is every bit as public when it comes to investing money to effect change.
A case in point was CalPERS’ active engagement alongside Engine No. 1, a tiny activist investor that last year led a successful challenge to install three of its own directors on the ExxonMobil board.
There are other differences between then and now. The attraction of cleantech 1.0 was in part related to the success venture capital realized at the time with their investments in software — investments that built impressive track records with big returns in customer acquisition strategies, for example. Today, an investor probably won’t know whether a product or service will make a dollar, let alone sales until after the first five years. Today’s version of a deep tech company also relies on a range of technologies rather than a single solution like software.
Question: Who do you see as your chief competitor?
Karsh: As far as I know, we are the only ones in this space. We are building teams from scratch who align with our investment thesis. Our management and ownership reflect the same principles as our investment philosophy, methodology and approach. From day one, Bay Bridge Ventures has been about building an institutionally, scalable ESG and sustainability fund with deep expertise.
We are hoping to effect significant change — and change the way that people perceive sustainability.