Derek Handley discusses companies that mix capital from for-profit and philanthropic sources for social impact

Derek Handley is a social entrepreneur, philanthropist and author who recently launched Aera, a venture capital fund that invests in companies with a social mission. He co-founded Hyperfactory in 2001 and was the founding CEO of the B Team, a nonprofit leadership initiative created by Richard Branson. Handley also recently served as a Nazarian Wharton Social Innovator in Residence. In this Knowledge at Wharton interview, he spoke with Katherine Klein, a Wharton management professor and vice dean of the Wharton Social Impact Initiative, on the importance of vision and what it takes to make a difference.

An edited transcript of the conversation follows:

Katherine Klein: How did you find your purpose as a businessperson?

Derek Handley: I think the common pattern for me has been whenever something really terrible has happened, from a business or a life perspective, I ask bigger questions around what I might be best put here to do. In moments of crisis, a sense of perspective has often opened up new ideas about where I could be spending my time and how I could be using it. That’s one common element from the past 10, 15 years.

The other is experimenting and exploring different places, understanding that it is a journey and you kind of wave in and out of things that you resonate with. The things that I resonate with: really trusting that intuition and that instinct to follow whatever that particular calling or idea is, and giving it the space and time to really grow within my life. That’s some of the ways in which it has manifested itself.

Klein: When you were launching Hyperfactory, this purpose and larger vision for your contribution to the world was less front-and-center. But that shifted?

Handley: Right. I was mostly focused then on how do you build a startup from where I was on the bottom of the world in New Zealand and just straight out of university. I had this idea that I wanted to build a company that went global and to show as a young person that it could be done.

In a sense, the purpose that I was trying to prove was can we build companies as young kids from New Zealand and foot it with the best? It was around innovation, the thrill, the chase, how do you build a company. But when I stepped back and looked at the purpose and the impact that the company’s trying to have, that’s when I looked at a much broader perspective of what was possible. If you’re building a company, what might you try to have it tackle as an issue?

Klein: Has finding that larger purpose been inspiring? Daunting? Tiring? How would you describe it?

Handley: Whenever you’re connecting with something that you feel you’re here to do, it’s really energizing and inspiring. One of the tests I have around this stuff is, if it’s frightening in some way, then it’s probably the right place. If it’s going to be difficult and put you in an uncomfortable position, then I feel like it’s probably where I should be going. If it looks too comfortable and something that you think you could do, then it’s probably not the right thing for me.

“Whenever you’re connecting with something that you feel you’re here to do, it’s really energizing and inspiring.”

Klein: Is your purpose succinct enough that you can articulate it to us?

Handley: I don’t think that I’ve kind of created a slogan out of it. But at the macro level, everything that I’m doing now is somehow trying to contribute in some way to a social or environmental issue that is out there in the world, or some sort of injustice that I think this generation should be trying to transform, whether that’s the way we treat global drug policy or the way we think about what companies that entrepreneurs should be building.

On an individual basis, it’s about helping, and trying to empower and building confidence in every single person to pursue the truth that’s inside of them as to what they should really be doing with their life. I’ve met too many people who make a lot of compromises and don’t pursue the things they know are actually where their dreams lie for an enormous number of reasons that they have created that make it very difficult for them — whether it’s about the courage, or the confidence or practical reasons. Part of the mission we’re on is helping all sorts of people realize the things that they want to do in the world. Investing in entrepreneurs who are trying to create significant change is one expression of that.

Klein: What’s your advice to people who are trying to find their purpose?

Handley: The biggest advice I have in this whole space is taking significant amount of time to reflect and think about these kinds of questions in the course of your ordinary week or month. I think we’re in a world where people operate in a whirlwind, battling with an inbox for their whole day. It seems like it starts and ends, the blur, and then you go home and you kind of just want to get some relief. But for me the thing that’s always worked is carving out several hours a week to think about the bigger picture and always questioning, is this where I feel like I’m making the biggest difference? Is this where I feel like all my strengths are being brought to bear? If the answers are not positive for enough days in a row, then you have to make changes.

Creating that space is what I think a lot of people struggle with because they’ve just got way too much to do. But if you’re doing all the stuff and three or five or seven years later you look back at it and it doesn’t mean anything to you, then it’s far worse than taking time out now to recalibrate and challenge yourself as to whether you’re being courageous enough to really do the things that you know in your heart you should be doing.

Klein: You’ve channeled your business expertise, your love of entrepreneurship and your sense of purpose into a new venture capital fund. What is Aera VC?

Handley: Aera is a new initiative that we’ve been building over the last 15 months. It is spun out of a charitable foundation of mine in New Zealand called the Aera Foundation, aera being the word that describes our era, the things that we should be challenging and tackling.

I looked at the early-stage venture space around the world and saw that there was definitely a need for more early-stage capital and support for companies and founders who were trying to address a particular social or environmental issue that they felt strongly about. And they had chosen to build a venture-backed company to do that.

We’re looking at companies from all around the world and in the last year have backed them from New Zealand, Australia, Hong Kong, New York. We’re trying to create a community of those founders but also a community of families from around the world that want to invest in those companies.

Klein: You’ve talked about the need for VC in this space. Can you describe more about the companies that pass through your screen?

Handley: The first thing is the core mission has to be something to address a social or environmental challenge that the founder has stumbled across or has been living in for a long time. That’s the first kind of test. We have developed for Aera a concept called the Aera Terms, which is like a social term sheet that has three elements. One, the commitment from the founder to build into their organizational DNA their purpose as being around this particular social issue. The second being that they are willing to try as hard as they can to create at least one metric to measure the progress they’re making against the issue. And the third is that they are building in some way. Should they succeed and exit, and develop a successful company, there is some ring-fenced equity that they will pay forward to a nonprofit or an impact investing unit or something like that.

That’s how we first look at the social mission. Then we look at things in the same way that you’d look on an early-stage company. What’s the product? What’s unique about it? What’s the market? What’s disruptive about what they’re trying to do? The most important thing is always: What does the founder and the team look like, and are they going to be able to deliver on the vision that they have?

“The most important thing is always: What does the founder and the team look like, and are they going to be able to deliver on the vision that they have?”

Klein: I’m intrigued by this concept of the Aera Terms. Why is it important to make those as explicit as a term sheet?

Handley: For us, it’s almost like a litmus test. If people buy into that, then we’re on the same page, we’re on the same adventure together. That’s what we believe, that the entrepreneur and Aera believe the same thing, that this is why you should build companies — and that there is some robustness in the level of rigor around how you are going to measure change. If you’re trying to build a business, you measure your traditional metrics: revenue, margin, cash burn. If you’re trying to solve a problem in education or health, you need to put your mind also to how you might measure it. Sometimes that’s very difficult. But at least if you put your mind to it, I think it helps the founders get some clarity as to coming up with some possible way of figuring out whether they’re making a dent in the problem they’re trying to address.

Klein: Earlier, you used the term hybrid capital. I think hybrid organization may be a more familiar term, meaning an organization that may have a for-profit mission and a social mission. What is hybrid capital and why have you found that important?

Handley: The way I think of it is hybrid being the capital coming from both for-profit sources and also from philanthropic sources. It’s not a prerequisite when we look at a company, but we think there’s this interesting time at the moment where nonprofits and foundations are willing to invest or grant to for-profit companies if they believe that that organization is doing an amazing job at addressing the issue that they care about. They don’t worry that it’s not a nonprofit. This is happening more and more.

If we look at a company and they’re getting nonprofit foundation grants, to us it indicates they’re doing a very good job on trying to tackle this mission because some third party has endorsed it in a way that an investor wouldn’t be looking at it. The ideal for us is that a venture capitalist who doesn’t really care about the social issue but also thinks they will consider investing because from their lens the things that they’re trying to check off are being checked off.

If those two things can happen, which is rare, then it means you’re satisfying two ends of the spectrum. And by blending that capital, you’re essentially creating a stack of different ways in which the company can grow and scale. It’s really exciting to find those investments because the grant capital is undiluted, so as an investor you get leverage out of it. The more companies we find like that in the early stages, the more we can get leverage from our early stage investments.

Klein: You’ve been a leader. You’ve worked as the first CEO of the B Team, and you’ve seen a lot of extraordinary leaders. Now you’re investing in leaders. I’ll let you describe what the B Team is and who’s involved, then let’s talk about what you’ve learned about leadership.

Handley: The B Team was an idea that Richard Branson and the Virgin United Foundation had a few years ago, which was essentially this movement of corporate CEOs wanting to figure out how they can create more sustainable, socially oriented businesses.

Richard wanted to build a collection of leaders like that from around the world to help each other, work with each other, advocate and pilot different ideas in their own organizations. I had volunteered a year of my time to help Richard build this idea and essentially scout the globe to find iconic leaders from around the world, like Ratan Tata in India or Guilherme Leal from Brazil, and produce a team, bring them together on the same page to help catalyze a movement that’s picking up pace, which is how does business move from being myopically focused on profit to being focused on people, planet and profit? That movement is what we’re increasingly wanting to see happen, and the B Team is trying to be an icebreaker and at the spearhead of it.

It was all sorts of people, from microfinance pioneer Muhammad Yunus to Arianna Huffington, who’s now pioneering around well-being and sleep and issues in the zeitgeist of how do we take care of ourselves so that we are personally sustainable. These are these kind of shifts that are happening in the world that organizations like the B Team are trying to help tip into more a mainstream movement.

Klein: As you reflect on your own experiences, what are the characteristics and practices that you aspire to enact as a leader yourself?

Handley: Something that I care about, that is a particular thing for me, is what does the future look like? I invest a lot of time and energy in thinking about where are we going, what’s the possible vision of things in society that need to change and systemically should evolve this century. The B Team is a representation of that. Where does capitalism evolve given what we’ve learned and what we’ve seen with regards to the planet and social issues that still are struggling?

That applies to other areas like drug policy, where we’re seeing that 30 or 40 years of a war on drugs isn’t working. There are a lot of challenges with it, and we need to rethink our view on it. That’s one of the things that I like to make sure that I’m always thinking about: What’s behind the next, next corner and where do we need to start thinking about?

“My particular angle on being a leader in a community or a family or with your friends is helping other people make sure that they’re really being bold about how they live their own lives, and that they are making courageous decisions, because life is very short.”

The other piece goes back to the idea of reflection and making sure that in my world I’m doing the things that if I died tomorrow I wouldn’t have any regrets in how I’m spending my energy, my time, any resources I might have or how I might deploy them. That goes also for people I meet or work with, anyone that I know or see, friends.

My particular angle on being a leader in a community or a family or with your friends is helping other people make sure that they’re really being bold about how they live their own lives, and that they are making courageous decisions, because life is very short. I think as the roman philosopher Seneca said, “Life is long if you know how to use it.” The problem is that too often we’re encouraged to be on a mouse wheel and not look back and forward enough to make sure that the ladder’s up against the right wall, because you can climb up it for 20, 30 years and realize it’s the totally wrong wall. It’s a pretty sad thing to do that.

Klein: I’m interested in your description of vision. Why is that important?

Handley: Again, this is just from my point of view. I’m not some kind of leadership expert. But unless someone can inspire a broader mission for me to be a part of, a movement or a mountain to climb, it’s hard to get me motivated and excited about it.

I think about how do you motivate and excite people to push themselves, to be who they are and all that they can be? For me, a large part of that is inspiration and direction. At a point where you don’t feel like there’s a challenge or something inspiring to follow, or a moon shot of some sort, I think it can get ho-hum and people can kind of get into a cycle. But if there is a moon shot, if there is an audacious challenge or a direction that you believe in and can buy into, that’s what motivates organizations and people and teams, whether they’re a sports team or a company. If you can’t articulate and paint a picture or a vision, I think that there is a strong element of leadership that is being left unaddressed.

There are lots of leaders who do not do a lot of that. Leaders of cities and countries sometimes don’t do a very good job of that, and they become more managerial and administrative than visionary. My personal bias is towards leaders who can project, “We’re going there and these are the reasons why we’re going and you should come along.”

Klein: When we were talking about leaders earlier, you mentioned another facet — coachability. I have to say that when I think about leaders who are bold and visionary, I would think that there’s a real risk that they’re not that coachable.

“I think the vision and the boldness, and the conviction of what you’re trying to do — that’s where you want that persistence and unrelenting kind of commitment.”

Handley: It’s this double-edged type of thing, right? I think the vision and the boldness, and the conviction of what you’re trying to do — that’s where you want that persistence and unrelenting kind of commitment. But how you get there and how you go about getting there is where I think you need to be able to be flexible and coachable on your blind spots, or areas where you are might not be strong enough.

When you look at an entrepreneur, you might agree entirely with where they want to go. But if it seems like in the first nine, 12, 15 months like some of the things they’re doing aren’t working, you want the entrepreneur to be able to recognize that, acknowledge a set of external possible advisers and inputs, and then make and synthesize their own decision as to how they’re going to modify their behavior or approach.

If you can’t embody that kind of behavior, then it becomes very difficult for anyone to help you out of a situation. I’ve invested in certain companies where the founder would not change their view on the world, even though nothing was working. That particular company died because they wouldn’t change their mindset and were fully committed to exactly how they were executing, when it was clear to everyone outside that it wasn’t working.

When you’re 60, 70, 80, 90, you should always be able to have a beginner’s mind, because then you can never be accused of being stuck in your old ways, and you can never find yourself in a situation where you’re isolating your perspective on something and that the whole world is totally shifted. People say, “I’m too old to learn new things” or “I’m too old to change my ways.” That’s the antithesis of what life is about. It’s a constant, organic evolution. The moment you think you’ve gotten to a point where you’re too old or you know too much, that’s when a lot of the beauty of life is lost. To me, the biggest challenge of living would be to constantly have or try to have a beginner’s mind.