Sarah Millar is an associate at City Light Capital, based in New York. Prior to City Light, she was fellow at Endeavor and worked for IGNIA Partners, a venture capital firm in Mexico City.
What attracted you to venture capital and working with startups?
I came to venture through the impact investing route. I majored in international relations and Spanish with no intention of going into the private sector. I believed public policy would be my way of transforming the world. But after spending some time in the public sector, I realized that government work was not expedient enough for me. I liked fast-paced environments, somewhere that I could problem-solve without restrictive bureaucracy. I decided to dip my toes into the business world. But because I still cared about the public sector, I worked in market research that focused on employment, demographic, housing, and education data.
After two years at ConvergEx (now Cowen Inc.), I knew I wanted social impact to be a bigger part of my day. There’s the adage of doing good while doing well. I hoped that I could be in a position that addressed major social problems while being able to afford life in New York. Then I stumbled across the term impact investing. Using market resources and market forces to drive social, economic, and environmental change… that theory really resonated with me. I’d spent years understanding why businesses gained or lost value. I had explored how markets moved. And now I believed that through venture capital, impact could be a core value proposition.
Why City Light Capital, in particular?
There are lot of impact funds out there. I’ve worked at some in the United States and abroad; I’ve spoken to people at many of them. Part of my journey, when I was interning and working full-time, was understanding how different teams defined impact and which methodologies aligned with me. I discovered that most firms understood impact based on target populations like middle and low-income families, emerging markets, etc. Those companies might generate revenue and jobs in a particular region, but I couldn’t convince myself that their products were actually driving social or environmental change.
At City Light, we invest in product-generated impact. We’re examining ways people use products to achieve higher learning outcomes or accessing better employment opportunities. When I was looking at different firms, City Light was the only one that clearly outlined their thesis on investing forward: combining the right mission, talent, capital, and technology to generate strong returns.
Another big piece was being in New York. I’d worked overseas but I never felt as productive and happy as I did in the city. There aren’t a ton of places that can check off these boxes, so I feel very lucky to be at City Light.
As Millennials, I feel like my friends and I appreciate products and brands that have explicit social missions. Is that going to become a necessary component for startups?
I believe it will be the norm. We won’t have to call it mission or impact investing in the future. Everyone will feel a responsibility to make products that don’t do harm (at the very least) or accomplish a lot of good. I think the way we evaluate and work with our portfolio companies will become the investing standard.
The key difference today is that we focus obsessively on the impact angle. Take an ed tech startup. Another VC might invest because the company has a great user experience that attracts and sustains a customer base. We believe the same thing but specifically because the company expands access to learning while generating profit. We believe that if you focus on impact, you can have a long-lasting company with better financial results. You’re not just playing into the trend of sustainability but leveraging impact as a competitive social advantage. People don’t just remember user interfaces, they value outcomes that touch their lives.
Does City Light you have different return expectations with your LPs?
You can make market-rate returns with impact investments. I think it’s different for firms with stricter mandates; for example, if you can only focus on energy startups in the Midwest, you’re limiting yourself to a small number of deals that may also lack scalability. The chances you are picking winners and making big returns are lower if restricted by diversity of sectors, founder background, and geography. That’s why we focus on product-generated impact. It opens up a wider universe of companies to us.
Our investors also don’t look at us the same way they might look other impact funds because we invest in for-profit companies. We look for a return of 10x revenue in 5 years. Evergreen funds or non-profit funds may not expect huge returns, but they do care about high impact. They’ll support businesses that need time to gestate and aren’t easily scalable.
Our LPs expect returns because our differentiator is the investing forward strategy. If we just pitched ourselves as a small cap VC, there’s a lot of competition and they could look at many other options. Most of our LPs are family offices and high net worth individuals. We’re establishing a track record but as a new fund, we still face an obstacle to prove that we can deliver market-rate returns alongside impact. I won’t say it’s easy. But now that Bain Capital, TPG, and others are launching impact funds, that hurdle has definitely lowered. It’s becoming more acceptable to prioritize impact and make that the value proposition.
What skills did you bring from investor relations at Endeavor?
I should start with a brief overview of Endeavor: it’s a non-profit entity with a for-profit arm. Endeavor, as an organization, promotes and supports budding entrepreneurial ecosystems. The theory is that Silicon Valley and similar regions have lots of mentors who’ve been through the process before and are willing to advise and nurture future entrepreneurs. Endeavor creates that link between new entrepreneurs in emerging markets and experienced entrepreneurs from mature markets in the US, Europe, or Israel.
The way Endeavor defines impact is through the expansion of entrepreneurship and improvements in quality of life and quality of work. They take the approach that economic development is social development. Better paying careers, job security, maternity leave, and healthcare coverage - Endeavor considers these key features of formal, mature economies. They have invested in some of the best-known entrepreneurs to come out of Argentina, Brazil, and Mexico as well as places in Eastern Europe and Southeast Asia.
My fellowship centered on fundraising and investor relations. I worked on an ongoing initiative to ensure that Endeavor never had to raise money again for the non-profit arm. They hoped the for-profit fund would sustain Endeavor based on the successes of entrepreneurs. My role was talking to foundations and high-net-worth individuals to raise the capital goals for this new fund. Comparing Endeavor to City Light, I can say that it was very different talking to people about investing in a fund that exclusively funded businesses in emerging markets. Endeavor also had a funky structure to keep a larger percentage of the carry than most VCs. These made for interesting conversations with a similar group of people that invest in City Light.
You also worked for IGNIA Partners, a venture capital firm in Mexico. Can you describe your time in the Latin American entrepreneurship ecosystem? How was it similar / different to the work at City Light?
Before Endeavor and City Light, I spent time at IGNIA Partners. I’d just worked at a startup based out of Mexico, so it was valuable experiencing both sides of that world between my first and second year at business school. I also helped an environmental impact fund remotely from Wharton.
I worked for Mexican funds for around 7 months. It wasn’t a huge amount of time, but significant enough to understand the ecosystem as it was 3 years ago. At time, I was writing my master’s thesis on methods of venture capital in emerging markets. I noticed several important differences between a market like Mexico versus the United States:
Unfriendly term sheets. In Mexico, the capital stack and investment terms are not as generous to founders. There are fewer VC firms, while the US has a very competitive investing environment. It was standard practice around the time of my research to see 2x liquidation preferences. That meant VCs with preferred stock could cash out massive returns, sometimes to the detriment of founders, their teams, and other common stock holders.
Fewer specialist funds. You might see more specialization around fintech but there weren’t any education specific or consumer-focused funds. I think that comes down to Mexico having a smaller ecosystem. At the time, I observed a culture where the same fantastic entrepreneurs were backed by the same group of funds. One year you’d see everyone in e-commerce, the next year in healthcare. It mirrors the US’s venture ecosystem from 20-30 years ago.
Weaker exit environment. Outside the United States and Canada, the Americas don’t have the strongest public market. We aspire for all of our companies to IPO or sell for millions to companies with the balance sheet to make an acquisition. Mexico has more monopolies. For example, if you are a telecom startup, you have to sell to Telmex. They set your valuation. Because no one else can buy your business, it’s Telmex or bust.
Different risk tolerance. This is a particularly jarring story, but there was an entrepreneur who sold his company for $300M. His son was kidnapped the next day. Fame and fortune can come with dangerous consequences. In Spanish, there isn’t even a word for entrepreneur as we understand it. It means more of a small business owner, a man who owns a food cart. Founders in Mexico created companies and aimed to comfortably provide for their family. They weren’t angling for billion-dollar valuations. Our generation is seeing more ambitious founders and pioneering companies, but the culture is still generally risk averse.
What kind of guidance and support do you receive from mentors in the VC community?
My father was actually a VC for many years. When he started out, the typical investor was an engineer who moved into evaluating businesses. Though he wasn’t the most optimistic about me pursuing VC, I was glad to have his perspective and insight. He’s been a valuable advisor as I’ve grown into my own as an investor.
Interestingly, the funds I worked with in Mexico had gender parity. Though none were partners, there were women in the office and in several management-level positions who were sources of inspiration. They showed me that being a great businesswoman ought to be valued on its own merits, alongside the alternative view point it brings.
In terms of other mentors…my boss from my first job has supported me every step of the way. He’s connected me with people in the impact space and always encouraged me on this path. I’m grateful for the people who shared their time with me and talked about their career in impact investing. Of course, the two partners at City Light - Josh Cohen and Tom Groos - are the best mentors I could ask for. I came into this with very little financial and operating experience. If I were to guess, I was hired because I was very passionate about City Light and its mission. They’ve been patient, teaching me the ropes from sitting on board calls to screening potential deals. I could point to others but I’m privileged to have a strong support structure within venture capital and the impact space.
Have you faced major challenges as a woman in VC?
This happened before I joined City Light, but I was told repeatedly that I needed an investment banking background. Because I didn’t have operating or investment experience, people saw my resume and didn’t know what do with me. They couldn’t clearly map my skills to impact investing. I found that challenging in the beginning.
Going to Mexico was transformative; I leveraged my MBA to work at a startup and get an internship with a VC firm. IGNIA was more willing to take a chance on me than funds in the US. When I returned in search of an impact investing role, I was able to demonstrate how my background made sense without having the classic narrative of finance to venture.
What advice do you have for young women who want to enter VC - on the investing, operations, or platform side?
Be aware of where you want to end up. Even though I had worked in market research, I should’ve had the foresight to focus on market segmentation and modeling since those skills are more transferable to VC. Going back to school helped me reach my goal. As you take the steps towards venture capital, use your time (at school, during internships, etc.) to build the skills for that dream job.
And, as always, continue talking to people in VC. Keep yourself involved in the ecosystem because it’s an entirely network-based industry. Never be scared to reach out to learn more!