Impact Investing | "Impact Investors are Catalysts"​- Interview with the Founder of Dao Ventures

In this series, we invited the founder of Dao Ventures Group, Tao Zhang, for an interview focusing on sustainable investment in China.This interview aims to examine how impact investment can influence the economic model through sustainable development finance.

Dao Foods, an impact investing subsidiary of Dao Ventures, is dedicated to developing plant-based and cultured meat products in China's agricultural market. As the pandemic raised social awareness regarding physical health issues, China has been carried into the emerging trend of plant-based diets and alternative protein foods, reducing the mass consumer's dependence on traditional animal farming.

A remarkable sustainable investor, Tao Zhang, has been involved in impact investing for ten years. His company, Dao Ventures, is specialized in Sino-U.S. cross-border investment with a primary goal of achieving environmental harmony and sustainability. It provides critical financial support to environmental small and medium-sized enterprises (SMEs).

Tao Zhang was the Global COO of WRI's New Ventures program (New Economic Program) and a significant figure incubating the China Impact Fund. He later spawned the Green Ventures Hub based on New Ventures China (Interview with investor Ge Yong), as he is one of the earliest pioneers of impact investing in China.

He firmly believes that China's impact investing has been steadily increased in the past decades. In his words, he said that

"impact investors should be the catalyst to incubate their businesses and compromise at least eight years of dedication to seek returns."

Main Takeaways from this Interview:

• Impact investing remains a slow development in China, as there is a lack of convincing business cases for the past ten years.

• The international market has a stable social structure with companies highly aware of environmental crises and public welfare issues compared to China.

• China lost the essential attraction from foreign investors due to a rapid economic development and miscomprehension of reduction in the bottom of the pyramid (BOP) poverty population.

• Climate change and environmental projects are two critical factors that emphasized the need for impact investing in China.

• Successful business models require market segmentation while ensuring precise and effective strategies for each sector.

• The "Missing-Middle" in Chinese markets refers to the insufficient capital that helps small and medium-sized startups grow.

• Entrepreneurs should acknowledge a long-term commitment of time and efforts to seek returns in impact investing, as impact capital is framed as "patient capital."

• Evaluating impact is equivalent to establish the original initiatives in the company's culture and philosophy by remembering the intention of solving public welfare problems.

• There is a trade-off between business value and impact, as companies are looking for limited partnerships (LPs).

• Emerging entrepreneurs should follow the Three C's Standard, including contentment, compromise, and commitment.

Business Initiatives of Starting Impact Investing

SUA: Under what circumstances did you get interested in impact investing?

Tao Zhang: After graduating from college, I once worked as a journalist at Xinhua News Agency, focusing on economic reporting for the European Union. After this experience, I decided to finish my MBA degree and received systematic trainings about business in the United States.

Since then, I have worked in different startups, multinational companies, and investment institutions in the technology sector, with which I was involved in some clean energy projects. Ten years ago, I conducted a Hebei project and noticed a particularly serious haze in local areas. Hebei is one of the most seriously polluted regions in China. Since Hebei is my hometown, I have been deeply concerned about its environmental crises and hoped to change the environmental situation through my business.

After identifying my career path, I participated in the Mason Scholars program at Harvard's Kennedy School of Government. From this experience, I first acknowledged the concept of impact investing during my graduate studies in Public Administration. After graduating, I joined the World Resources Institute (WRI) as the Global COO of New Ventures (New Economy Program) and began working on impact investing. Until now, I have been working in impact investing for more than ten years.

SUA: How did you decide to create businesses, such as Dao Ventures (Dao Capital) and Dao Foods?

Tao Zhang: I was asked the same questions by my former colleagues, who could not understand why I chose this path. Some of them suggested that if I continue to work at New Ventures, I would have obtained substantial financial gains compared to my current business. However, I was attached to environmental issues and problems of the Hebei Province, as I mentioned previously. What is rooted in my determination is my ambition to change the current environmental situations as I continue to dive deeper into impact investing. This field dramatically changed my perspectives in business. From my realization, business is no longer a tool to seek financial interests. It should be a way to improve people's living conditions and have a broader scale of influence on society.

When we worked on new economy projects, our organization facilitated the incubation of two impact investment funds, China Impact Fund and Adobe Capital, where it is based in Latin America. The Green Venture Exchange, which you interviewed in the last issue, is also a spin-off from this project. The program had six regional centers in six different emerging markets, including China, India, Indonesia, Mexico, Colombia, and Brazil, for over ten years. Then the organization decided to let these centers operate independently, and I left WRI along the way to focus on the China Impact Fund.

For two or three years, I witnessed some cross-border impact investment opportunities and established Tao Capital. Tao Capital is a consortium of several impact investment, incubation, and consulting organizations to serve impact ventures at different stages in various sectors.

A Glimpse of Industry for the Past Ten Years

SUA: From your experiences, how has the impact investing industry changed in China for the past ten years?

Zhang Tao: I would say that the past ten years is a decade of slow progress. Many industrial conferences discussed impact investing and raising social awareness concerning this issue. But there are still very few convincing cases.

But many related organizations are emerging in these years, which gradually built a foundation to facilitate real changes. For instance, organizations like the China Alliance of Social Value Investment emerged during these years.

Our shared goals are to figure out our next steps. Taking examples from my previous impact investments, I involved in cross-border environmental programs to promote sustainable food. Through my dedication, I hope to accumulate more capital investments and attract world-leading experts in this industry, along with the initiatives to optimize case performance in the mainstream business organizations.

Increasing fundraising symbolized the revolutionary changes in the past ten years, as it gets more and more accessible in the market. For instance, the environmental sectors are capable of attracting commercial investment despite the impact of investment nowadays. With an international influence, environment companies that were previously incubated by the New Economy project have been acquired by state-run enterprises.

The Differences between Chinese and International Markets

SUA: Since you have been doing cross-border communications and investments between China and the United States for a long time, what is the most significant difference between the Chinese market and the international market?

Zhang Tao: The difference is noticeable. Impact investing is not yet mainstream in China. But international markets have already taken a few steps forward.

In terms of the reasons, the stages of economic development and social structure are different. Europe and the United States have a well-functioned social system. The United States has a large middle-class population. Many of the limited partnerships we have contacted are not necessarily from the elite class but from middle-class backgrounds. This phenomenon allows enterprises and employers to acknowledge social injustice and environmental issues, further stimulating their initiatives to solve these problems. Referring to Maslow's hierarchy of needs, the Chinese public has only satisfied the safety and physiological needs but commonly lacks environmental protection awareness.

In addition, China is a country with the largest population on earth. It results in the imbalance of the distribution of resources, shaking the existing vulnerable social structure. Many entrepreneurs in China, especially the middle class, have a sense of crisis daily and are still more concerned about their own interests and less likely to think about impact investing than the US enterprises.

From the industry's perspective, many international companies generally do not label themselves as "social enterprises", but their projects will somewhat relate to social innovations, environmental protection, or social problems concerned the public interest. But Chinese enterprises aim to attract more impact investors or public interest funds by labeling them in such away.

Lost Competitive Edge in Attracting Foreign Investors

SUA: Due to the Chinese economy's rapid development, many impact funds are no longer invested in the Chinese market. How do you perceive this trend?

Zhang Tao: The main reason why many impact investors are shifting to Africa, Southeast Asia, or South America is that they look more at poverty alleviation and want to get immediate results.

Firstly, they deem that China has been an increasingly powerful nation that does not need their investment. Secondly, when they came to visit China, they mainly stayed in the metropolitan cities with less population with poverty issues. From their insufficient acknowledgment, China has far less so-called bottom of the pyramid (BOP) people struggling from poverty. That is why international investors have favored less in our nation, mainly due to the narrated overviews of our state.

Thirdly, at this stage, many investors think that Chinese investors and investment institutions are still more focused on business returns, and impact investing is mainly a catalytic role. This assumption creates an illusion that even if they invested, the projects they support would not sustain if there are no apparent financial returns in the future. If local investors lose interest in those projects, international investors will fail their investment while showing negative profits in those projects.

Why does China still need impact investing? Two things are highlighted: Environmental protection and climate change. These two issues are severe and hard to overcome completely. International Investors would lose in their tracks, namely how to conduct impact investment and maintain positive results through complicated procedures to alleviate these problems.

But issues like climate change have life-saving impacts on poverty alleviation. For example, in Bangladesh, due to the rising sea levels, there were often floods in the coastal cities and exacerbate the poverty issues. This situation indicates the significance of a macro-level of impact investing while ensuring the functional operations nationwide.

Successful Companies Required Industrial Segmentation

SUA: Take the environmental industry as an example; how does impact investing fit into the mainstream business system? What is its unique role and value?

Tao Zhang: First of all, impact investing still has to play a catalytic role. We attempt to play a catalytic role with added value from the China Impact Fund to the cross-border impact investment and Dao Foods.

Plant-based diets have a huge environmental impact. According to statistical reports, about 15% to 20% of greenhouse gas emissions resulting from food consumption. It also relates to other environmental issues, such as allocating fresh-water resources, exploiting arable lands, and livestock farming. All these issues associate with food. This is the main reason why I founded Dao Foods as a catalyst in the market to raise social awareness from both investors and the public.

Secondly, taking a glimpse of the industry, we have established more detailed subdivisions in the New Ventures' environmental sectors. It includes seven major environmental subfields, individually solving problems in a particular area.

One of the greatest weaknesses of enterprises is their lack of focus in the industry. Some companies identified their goals in various sectors, including poverty alleviation, retirement, and environmental protection. Once they blindfolded themselves in kaleidoscopic businesses, they lost track and failed their original missions. That is the reason why mainstream investment institutions have industrial segmentation. Only a team may focus on one or two industries to spot excellent business opportunities and construct strategic models.

What is the "Missing Middle"?

SUA: In the 2012 report, you mentioned the concept of "missing middle". It summarized that the impact investing should be used as a structural complement of business capitals to help small and medium-sized environmental companies to thrive. Can you specify this aspect?

Zhang Tao: Environmental companies have business values. However, even if mainstream venture capitals acknowledge their business values, from their perspective, it may not be as attractive as Internet or technology companies. China's mobile internet and technology sectors have always had opportunities in the past decade with eye-catching projects.

The environmental field requires a substantial amount of time to establish and consolidate. Unlike some rapidly developed companies, such as Netflix, environmental sectors have been known for their slow progress of accumulating capital investment. Therefore, environmental protection does not limit in a commercial realm but also should be promoted by national policies and governmental supports at the same time.

From a financing perspective, our company will help environmental companies connected with mainstream investment institutions and lending loans from commercial banks. The latter solution does not require dilution of shares and will be a more favorable financial boost for some companies.

The Future of Plant-Based Market

SUA: In recent years, Dao Foods focused on the plant-based market. Why did you select this area for impact investing?

Zhang Tao: Now, there are hundreds of companies in this field in the United States. There are a lot of impact investments in US companies like Beyond Meat and Impossible Foods. For consumer upgrading, we consider the US market is suitable for us to engage and develop.

The stage of development is different between China and international countries. Approximately one-third of the US population is aware of plant-based diets and life habits, even though some consumers are not necessarily vegetarians or vegans. But they will have a high conscious of pursuing fresher and healthier foods in their diets by adding vegetables and fruits in their recipes. This social phenomenon brings great business opportunities for plant-based startups.

But the mainstream consumers in China far less care about plant-based diets. Dao Foods is an incubator institution to attract impact investments for plant-based startups and expand the mainstream consumers. Based on years of experience, we realize that we can't stringently impose environmental ethics on consumers. Instead, we should discover what consumers care about the most and purchase in the market.