At Sapphire Partners, we have long believed in the importance of emerging managers in the venture capital ecosystem and more specifically as an integral part of an LP’s portfolio. When we launched our LP investing work a decade ago, we intentionally built a strategy that included investing in emerging managers as a component of our early stage venture fund portfolio. To date 80%⁽¹⁾ of all the US emerging managers venture funds we have invested in (defined as Vintages I – III) have since gone on to raise subsequent funds such that they are now considered established managers (which we define as any vintage IV+). 

Today I am delighted to announce Sapphire Partners is launching a new emerging managers investment program with a sole LP, CalSTRS, the world’s largest educator-only pension fund with 1 million(+) members and beneficiaries. For decades CalSTRS has held a similar conviction in the power and promise of emerging early stage venture managers, making them a natural partner for us. 

As a part of this program, Sapphire Partners will take over the management of five existing CalSTRS “New and Next Generation Manager Funds”, representing $1.4 billion AUM⁽²⁾. Together, we will have collectively partnered with more than 300 emerging manager-led funds. And going forward, we plan to deploy approximately $100M/year into emerging venture managers. This new program complements our existing LP work of investing in early stage VCs in the US, Europe and Israel. (You can read more about the announcement here.)

Emerging managers are a critical part of the VC ecosystem

As much as today is about celebrating our new partnership with CalSTRS, our dual focus is on the emerging manager. It is important to remember that venture funds, even the legendary ones like Accel, Benchmark, Sequoia, Union Square, etc., all were first time funds once upon a time. Like all the emerging managers that have come since, they brought new ways of thinking, investing, grit and the hustle to attract the next great entrepreneur. And while being an emerging manager in no way guarantees your financial success, funds led by emerging managers made up 72% of the top returning VC firms between 2004 and 2016, according to Cambridge Associates⁽³⁾. 

In response to heightened awareness of global challenges such as climate change, social equality and the long-term sustainability of business practices, investors and operators have increasingly focused on the importance of sustainability and diversity. As a result, Environmental, Social & Governance (ESG) frameworks have risen in prominence as a solution for guiding businesses towards responsible practices and enabling them to consider the impacts of their operations. As of 2020, nearly 90% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place.

As more and more publicly traded companies adopt and report on ESG strategies, as soon to be required by U.S. federal regulators, private companies, especially those at the later stage nearing public debuts, are also beginning to adopt ESG frameworks to set themselves up for future success. At Sapphire, we aim to back Companies of Consequence, which we define as enduring businesses that have the potential to become category leaders. The way we see it, an enduring business should also actively account for ESG in its operations and continuously strive for improvement.

As an active participant in the VC and startup ecosystem, we understand the importance of building a more sustainable and diverse environment–both within our firm and at the companies we back. While we hadn’t yet formalized our approach or developed an official framework, our ESG journey started several years ago when we began to incorporate a term sheet rider committing our portfolio companies to diverse recruiting efforts, tracking our internal employee diversity and inclusion and partnering with organizations such as Black Women on Boards, AllRaise, The Mom Project and Screendoor to advance diversity across the VC and startup ecosystem. We also began our sustainability journey by tracking our carbon footprint, incorporating sustainable office practices and purchasing high quality carbon removals from Charm Industrial.

Over the past year, we furthered our ESG efforts by building a comprehensive program targeted at integrating ESG across all facets of our business, including the sustainability of our internal operations, investment sourcing and decision-making, portfolio company governance, monitoring and advisory support, and our local community impact. As a first step in this process, we felt we had to understand where we and our portfolio stood on key ESG metrics. To do this, we developed an ESG framework that we believed incorporated our values at Sapphire and would be most impactful for the companies (size, stage, sector, etc.) in which we invest. It took us some time to gather all of the relevant internal and portfolio-level data and then translate the findings into meaningful results, but after months in development, we are now publicly sharing our Sapphire ESG Framework and inaugural 2022 ESG Report.

In building our report, we focused on five core ESG pillars that we believe are most impactful for our stakeholders: environmental sustainability, executive and board director diversity, inclusive and equitable workplaces, board and LPAC governance, and data privacy and security. Here is a brief summary of our findings:

• Environmental Sustainability: Earlier this year, we joined the Venture Climate Alliance, which commits us to achieving operational net zero by 2030 and encouraging our portfolio companies to achieve net zero by 2050. In an effort to reduce our carbon footprint, last year we conducted our second carbon audit and incorporated new strategies into our operations to reduce it. Although we have not yet achieved net zero, we have made progress by purchasing carbon offsets from Charm Industrial and Pachama to cover our entire carbon footprint for 2022.^[1]
• Executive and Board Director Diversity: For the first time ever, we have published our internal employee level diversity data, portfolio company board level diversity, the diversity of our portfolio CEOs, the diversity of our GPs and the diversity of our investment pipeline. The findings show that there continues to be room for improvement, and we will continue to actively work on measures to address.
• Equitable and Inclusive Workplaces: We believe that equitable and inclusive workplaces where all employees are treated fairly and have the resources they need to effectively contribute are essential for building a sustainable and effective organization. To achieve this, we assess our employee engagement and the equality and inclusivity of our workplace annually, which is disclosed in our report. Additionally, we have expanded our equity program to include more than 70% of our workforce, including many of our non-investment professionals, and at our portfolio companies, 84% of their employees share in equity compensation.
• Board/LPAC Governance: Boards and LPACs are essential corporate structures enabling effective decision-making at the portfolio company and portfolio fund level, respectively. We generally seek board and LPAC representation in our investments and help our companies place independent board directors that are critical for finding balance between investors and founders.
• Data Security and Privacy: Data security and privacy are crucial for ensuring the privilege to serve customers, protecting key stakeholder data and complying with regulation. As part of these efforts, we track company data security policies, as well as critical data breaches.

While regularly reporting on these areas is critical to understanding progress and priorities, we find it equally as important to help support our portfolio companies on their ESG activities. As they embark on their growth journeys, many are starting to think through best ways to implement ESG practices, and we are here to help. Earlier this year, we introduced Sapphire Communities where our team provides portfolio company CEOs and leaders with access to our networks, knowledge centers and exclusive events. Sapphire Communities include: Finance, Engineering, People, IT, Revenue and ESG. The purpose of our ESG Community is to provide our portfolio companies with the tools and resources they need to accelerate their ESG maturity and to help Sapphire continue to evolve our ESG framework. If you are a practitioner interested in joining Sapphire’s ESG Community, please reach out to Sam Procter at [email protected].

We believe incorporating ESG considerations into operations will become table stakes for founders and executives seeking to build Companies of Consequence. We hope that by gathering and sharing our ESG framework and report with the broader ecosystem, we can improve transparency, help our community and stakeholders productively engage on ESG matters, and continue to advance learnings and best practices on these topics. To this end, please don’t hesitate to reach out with any questions or comments – we’d love to hear from you.