The Beginnings of a Social Capital Market

One of the key things necessary to fundamentally change our ability to solve social problems is the creation of a social capital market.  By social capital market I mean that financial tools and vehicles of a significant size, volume, variety and usefulness are made available to social entrepreneurs and ventures.  Nonprofits and social businesses are sorely undercapitalized.  In order to really change their ability to scale and attack problems at their root cause we need to create significant social capital through various means (philanthropy, equity, debt, etc).  This past week highlighted some exciting developments in the social capital market space.

First, late last week the Senate passed the Serve America Act, which the House and President are also expected to approve, which, among other things, creates a A Social Innovation Fund Pilot Program.  The Pilot Program will pool government and private investments into a venture philanthropy fund to scale successful nonprofit programs. It would make $50-million available in 2010, growing to $100-million in 2014, with matching funds required from other sources.

Second, Root Capital, a nonprofit social investment fund that provides capital, financial training and market connections to grassroots businesses that build sustainable livelihoods and transform rural communities in poor, environmentally vulnerable places announced last week their launch of a $63 million growth capital campaign, in partnership with the Nonprofit Finance Fund (another leader in the creation of social capital vehicles).  The growth capital will allow Root Capital to:

• establish a sustainable social enterprise and fully self-sufficient lending program by 2013
• accelerate its ability to impact global poverty by linking rural small and growing businesses with capital markets
• triple its loan portfolio, enabling it to lend $121 million each year to more than 350 grassroots businesses, representing one million households

The campaign will be a combination of philanthropic equity and debt capital.  They expect their investors to include foundations, corporations, socially responsible investment firms and individuals. Funders and investors already committed include The Kendeda Fund, The Rockefeller Foundation, and the Skoll Foundation.

And finally, last week was the Skoll World Forum on Social Entrepreneurship, the annual gathering of leading social entrepreneurs.  Among many topics of conversation was the creation of a social capital marketplace to support these great social entrepreneurs.  Nathaniel Whittemore captured amazing video interviews with some leading attendees.  Two of these interviews focused on the creation of social capital markets and gave some very interesting insights on how this marketplace is being created and what remains to be done.  First is his interview with Shari Berenbach, the President and CEO of the Calvert Social Investment Foundation.  Shari describes how the Calvert Social Investment Foundation creates a marketplace for investors interested in social innovation:

SWF09 Interviews: Shari Berenbach from Nathaniel Whittemore on Vimeo.

Second is Nathaniel’s interview with Steve Hardgrave, head of Gray Ghost Ventures, which makes early stage equity investments in social ventures.  Steve has a really interesting perspective on the creation of the social capital marketplace and encourages those involved to think much bigger about what is required:

“We need to dream bigger. To think that $100 million is a lot of money, in real world terms it’s not, it’s a drop in the bucket.  So all of us making strides to take this, not to millions or 100 millions of dollars, but billions of dollars is a challenge that we can’t let up.  The urgency of that challenge needs to be very real for us.”

SWF09 Interviews: Steve Hardgrave from Nathaniel Whittemore on Vimeo.

Very true.

Tags: Calvert Social Investment Foundation, Gray Ghost Ventures, Nonprofit Finance Fund, Root Capital, Serve America Act, Skoll World Forum, social capital market, Social Entrepreneurship

Innovation Cities in a New Economy

Innovation often comes from chaos and crisis.  In this month’s The Atlantic magazine, Richard Florida, author of The Rise of the Creative Class and director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management, wrote an interesting prediction of how the recession will change the landscape of American cities.  He argues that the financial crisis will create “great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them.”  He includes Austin in the short list of mega-regions which also includes Boulder, Research Triangle and Silicon Valley.  He sees the innovation that is happening in these areas as key to the next iteration of the economy.  He argues that a reshaped America will be focused on these “mega-regions” and be “a landscape that can accommodate and accelerate invention, innovation, and creation—the activities in which the U.S. still holds a big competitive advantage.”  It seems, at least to Richard, that Austin is key to this new economy.

Along the same lines, McKinsey recently did a study of the world geography of innovation, how cities compare in terms of innovation.  The results, in a pretty interesting interactive map, place Austin in the “Silent Lake” category (in the middle between “Dynamic Oceans” and “Shrinking Pools”), which means we have “slow-growing innovation ecosystems backed by a narrow range of very large established companies that operate in a handful of sectors. These clusters are frequently the source of a steady stream of “evolutionary” innovations and step-wise improvements.”

Taken together, then, it appears that there is a bright future for Austin.  What neither the article nor the study take into consideration, though, is social innovation.  I would love to see a similar analysis of hotbeds of social innovation, areas where sectors are converging and new ideas, products, services which include a social element are emerging.  That would be fascinating and would probably mirror the mega-regions Richard describes.  Because I believe that at the end of this restructuring we are undergoing, we will have an economy where social and financial returns are fundamentally integrated. And those cities that understand and leverage this change will be far more successful.

Tags: Austin, Boulder, Economy, innovation, McKinsey, Research Triangle, Richard Florida, Silicon Valley, social innovation

The Critical Alignment Discussion

I’m back from Spring break, which came right as the flurry of discussion about my blog post The Critical Alignment of Mission, Money and Competence was winding down.  I really appreciate the great comments and discussion from Sean Stannard-Stockton (of the Tactical Philanthropy blog), Nathaniel Whittemore (of Change.org’s Social Entrepreneurship blog), Kjerstin Erickson (founder of FORGE) and Sasha Dichter (Director of Business Development for Acumen Fund), among others.

The great discussion happened and was then picked up by others (such as the Social Capital Markets blog, and the Nonprofit Assistance Fund blog) and taken further by others (Sasha kept going) because of our good friend, Twitter.   For all the jokes and rolled eyes, Twitter has a tremendous amount of value.  The discussion itself didn’t happen on Twitter, 140 characters can only do so much.  But rather, it created a space for a thoughtful discussion about a topic that seems to be of interest to many in the social innovation space, among people who otherwise would not have connected, let alone been able to have a conversation of such depth.

I’m a fairly recent convert to Twitter (aren’t we all?) and at times it can feel like an albatross (one more thing on my very long list of things to keep up with), but if you can keep up with it, even just marginally, it can hold tremendous value. (You can follow me on Twitter @nedgington).

But what came out of this great discussion?  What were the takeaways?  I’m sure the battle rages on, but for me, the key points were:

1. Although mission, money and core competencies must be in equal alignment in a nonprofit organization, funding must mold to mission, not vice versa.
2. A sustainable revenue stream is one that is sustainable not because it is based on sale of goods or services (“earned income” is often used interchangeably with “sustainable revenue stream”, which I, like Sasha, really disagree with) but because it is based on a funding mix (whatever that may be) that can be counted on for years down the road.
3. Finding a sustainable revenue engine is often about creating a context or a “market” for your work.
4. Nonprofits have to be more analytical about their funding sources and how sustainable, and aligned with their mission and core competencies, they are and will continue to be.
5. The funding community is best positioned to help with revenue misalignments.

I’m sure nothing was changed by this discussion. But the more that these kinds of discussions happen and the more that some of the assumptions of nonprofit operation and finance are challenged the more apt we are to restructure how nonprofits work so that great missions with great delivery can become sustainable.

Tags: Acumen Fund, Change.org, FORGE, mission, nonprofit, Nonprofit Assistance Fund, revenue, Social Capital Markets, Tactical Philanthropy, Twitter

The Critical Alignment of Mission, Money and Competence

It occurs to me in my work with social impact organizations that the struggles and challenges they face all come down to one key problem:  a misalignment of mission, money and core competencies.  For any organization (nonprofit or social business) three things must be aligned:  1) their mission, or reason for existing 2) their core competencies–what they can do better than anyone else in the world, and 3) their revenue engine–all the ways in which they sustain themselves financially.  So that an organization, at equilibrium looks like this:

The mission is supported by the organization’s core competencies which both feed into how it generates money.

Jim Collins calls this the “Hedgehog Concept,” Mark Moore, a professor at the JFK School of Government at Harvard, calls it “The Strategic Triangle.”  It’s such a simple and powerful concept, but it seems to be one that is often left on the bookshelf, a better theory than practice.  But how transformative would it be if this concept were dusted off and applied to the challenges an organization faces? When one or two of these three elements are out of alignment, chaos can ensue.  For example:

Mission is misaligned: An organization that can generate money and operates great programs, but can’t bring it all together in a coherent single purpose, this is otherwise known as “mission creep.”

Core competencies are misaligned: An organization that has a great, clear idea of what they want to do (mission) and can raise money around it, but can’t deliver. This is reminiscent of the dot com era when there were countless businesses with fabulous ideas that successfully raised VC and angel money, but didn’t really have a core competency or product to deliver and eventually went bust.

Revenue engine is misaligned: This final misalignment is probably the one nonprofits are most familiar with.  An organization has a great mission and can produce great results, but they can’t find a way to make the organization financially sustainable.  FORGE, a nonprofit working with African refugee camps, which I wrote about earlier this Fall, is a great example of this misalignment.  Their mission and programs are solid, but they struggled with the right revenue engine (switching from individual fundraising to web-based fundraising without having the core competencies to make the switch). The end result was a $100K deficit.

And there are various other combinations of misalignment where two, or all three, areas are out of sync.  But I think often it is the revenue piece that causes the most problems. Revenue misalignment is so difficult for nonprofit organizations to overcome because the sector is undercapitalized.  It can seem impossible, at times, to nonprofit EDs, who tend to be focused on the program and mission they are trying to deliver, to integrate a sustainable revenue engine into their work.  And indeed, many foundations and government funders will pay for programs and mission, but not a sustainable overall organization.  The incentives do not reward an organization in alignment.

But there are solutions.  If an organization can take a step back and look at all three elements and how they fit together they can start to make strides toward better integrating all three activities.  The mission of an organization needs to be one that they can generate financial support around, but it also needs to be something that they can deliver on better than anyone else.  And the financial support that an organization generates needs to complement and support, not detract from, the mission and core competencies.  And they need to integrate what they can do really well with what their reason for existing and ways of raising money are.  No longer can the fundraising staff be sequestered in a separate part of the building, only spoken to when there is a new program the organization decides it needs to raise money for.  No longer can a board of directors say that fundraising is not their role.  No longer can a strategic plan be created without a corresponding financial plan that is sustainable.  All three voices must be at the table finding a way forward together.

Tags: Fundraising, Jim Collins, Mark Moore, nonprofit

Finding Investment Capital for Social Impact

RISE finished up late last week.  It was great to see all of the energy and excitement around social entrepreneurship.  Indeed it seems that Austin has caught the tide of interest in social entrepreneurship that is sweeping the nation in the wake of the economic meltdown.  Even the New York Times got on board last week with an article about how social entrepreneurship might be the best business model for some market opportunities.

In all of the interest in social entrepreneurship, one serious hurdle (among others, surely) is investment capital.  Good Capital is planning their second annual Social Capital Markets Conference for this coming September.  This is an opportunity for venture capitalists, philanthropists, social entrepreneurs and others to get together to talk about how we create a marketplace for capital interested in social impact.  SoCap is a great thing, and I’m really hoping it will continue to expand the conversation and get people thinking, talking and experimenting with investing in these new entrepreneurs.

But a social capital marketplace hasn’t hit Austin yet. I do think, however, that there is tremendous potential for some of the wealth we have here to be turned into investment capital for social entrepreneurs. With that in mind I hosted a session at RISE on Wednesday about finding Growth Capital for Social Entrepreneurs.  The session discussed two kinds of investment capital for social entrepreneurs: growth capital that helps an organization grow to scale (however they define scale), and capacity capital that helps an organization increase their capacity and sustainability.  Both types of investment capital BUILD organizations instead of BUYING services.  And both kinds of capital are difficult for social entrepreneurs to find, particularly in Austin.  However,  I laid out a plan for social entrepreneurs that takes them to their boards, major donors and friends to secure capital, much like a traditional business secures investment capital from angels and VCs.  I think there is a lot of potential in this model, which even suggests PRIs (Program-Related Investments) as a vehicle to use to increase the capacity (particularly the fundraising function) of an organization.
The session ended with a comparison of Austin’s versus the rest of the nation in the social innovation movement.:

As you can see, when compared to similar cities, Austin’s use of these new tools is low.  There is tremendous room for Austin to embrace social innovation.  And I think the excitement around social entrepreneurship evident last week at RISE is a great place to start.

Tags: Austin, capacity capital, growth capital, investment capital, RISE, SoCap, social entrepreneurs

Accelerating Austin’s Social Enterprise Conversation

This is RISE week in Austin.  RISE (Relationship and Information Series for Entrepreneurs) was started by the Sosa crew–Roy and Bertrand Sosa (brothers) and Roy’s wife Suzi.  The brothers immigrated from Mexico in 1986 and started a company called NetSpend, selling prepaid credit cards to recent immigrants.  Netspend went on to be very successful, and they sold the company in 2006 to launch MPOWER Ventures, a double-bottom-line venture capital fund whose mission is to empower the world’s underserved, and MPOWER Labs a research and development incubator and business accelerator.

The Sosa’s are firm believers in entrepreneurship and are a testament to its power to transform people and communities.  They launched RISE in 2007 as a way to ensure that “Austin continues to be a leader in developing top level entrepreneurs who transform their vision into successful businesses that greatly contribute to our local, national and global economy.”  They believe that Austin has been and will continue to be uniquely positioned to foster successful entrepreneurs:

There is no better place on earth than Austin, Texas for an entrepreneur to gather the tools they need for success. As a unique intersection of the academic, public and private sectors, our city has proven itself to be an environment for entrepreneurs to succeed. Austin is home to household names such as Whole Foods Market, GSD&M Idea City, A Glimmer of Hope Foundation, Silicon Labs, The Lance Armstrong Foundation and Sweet Leaf Tea.

RISE differs from most entrepreneurial conferences, though, in that it includes a social entrepreneurship track.  The Sosas believe very strongly in social entrepreneurship, as they themselves are social entrepreneurs.  There are many great sessions on the schedule this week from Philip Berber’s (founder of A Glimmer of Hope) session on his journey from entrepreneur to social entrepreneur, to Kala Philo’s session on Muhammed Yunus’ social business model, to Doug Ulman’s (CEO of the Lance Armstrong Foundation) session on social entrepreneurship, and several others.  These sessions have all been standing room only.  It’s really exciting to see such an interest in this topic in Austin.

My colleague Jessica Shortall and I even got in on the game by presenting Startups with Social Impact, an overview of Social Enterprise, which we define as “An organization (business or nonprofit) that achieves significant social impact as a product of market-based activity.”  And then broke it down into three types, which is our modification of Venturesome‘s 3 Models of Social Enterprise:

• Subsidized: Business activity operated by a nonprofit–profits are funneled back into nonprofit
• Trade-off: Business balances between the level of profitability & the creation of social impact. An increase in one decreases the other.
• Lock-step/Social Business: Direct social impact increases or decreases in parallel with financial returns.

Social Enterprise can be viewed along a spectrum like the one below, where potential for profit starts at the first Trade-Off model:

Then, two great Austin examples of social enterprise spoke to the standing-room-only group.  First, Missy Nathan, co-founder of Blue Avocado discussed how their green grocery bag system has taken off in just 4 short months through Wholefoods and other distribution channels.  Their Lock-Step business model has a triple bottom-line:  profit, environmental and social return.  They even give 1% of sales to Kiva.  Their supply chain is diligently monitored to ensure that they are environmentally sound, and they closely track and report on the number of plastic bags being reduced.  This team of three smart, tenacious women has huge goals and appears prepared to deliver on them.

Our second social enterprise was English at Work, a nonprofit that teaches English at the workplace to Spanish-speaking company employees.  Founder Maile Broccoli-Hickey discussed their unique business model which charges their company clients (large hotels, restaurants and other employers) to provide on-site English language classes to their employees.  Although they are currently charging the companies only 25% of the costs of the class, the goal is to move closer to 50% and beyond.

The session ended with a vigorous discussion of what is holding Austin back from becoming a leading social enterprise city.  Some thoughts included:

• Lack of capital–investors don’t understand or aren’t familiar with double-bottomline companies, so are unwilling to invest
• Low media interest in/attention to social enterprise
• Few events that bring together social entrepreneurs and investors
• Unclear understanding of the current social enterprise eco-system, and what is lacking compared to other thriving cities like San Francisco, London, Toronto, Pittsburgh

Some suggested the first step may be a wiki that lays out the current social enterprise ecosystem.  Once we understand what we have and where we are, we can determine what it will take to evolve.  Also, many are excited about the possibility of Brewster McCracken becoming our next mayor.  He has expressed a real interest in this area, especially as it pertains to the green economy.

There are many more sessions on tap for today and tomorrow and many more conversations to come.  But the energy and excitement for social enterprise is palpable.  I hope to see it grow.

Tags: Austin, Blue Avocado, Brewster McCracken, English at Work, Kiva, Social Enterprise, social entrepreneur, Venturesome

Resetting the Capital Approach

There is concern lately about how much worse it is going to get for nonprofits because of Obama’s new budget proposal, which will limit the value of the tax break for wealthy donors, from 35% to 28%. Many nonprofits are even more worried than they were before about revenue, for example the nonprofit Executive Director whose comments to the Daily Dish caused a firestorm of replies:

A couple of our usual big donors have indicated we should be prepared for smaller donations this year, and possibly none in the next couple of years.  They are mentioning Obama’s tax plans and their need to save money now in anticipation of that.  A lot of my colleagues in the not-for-profit world are really scared right now, and we are not happy with Obama…Organizations are going to be killed under Obama’s plan…Frankly, this sucks.

All of this talk about a deepening poor revenue picture for nonprofits makes some, like Perla Ni, founding publisher of the Stanford Social Innovation Review, think there will be a shift in how nonprofits raise money.  Perla wrote recently that nonprofits should shift their appeals away from metrics and towards emotion:

During these difficult economic times, when all of us know someone who has or is at risk of losing their job, it’s much easier for us to relate to the appeals to our conscience and our heart. That’s not to say that there is no room for “expert” evaluations and quantitative metrics. It’s about degree and balance of the heart and the head.

Seriously?  We’re going to squander this opportunity that the crisis in our financial system affords and go back to the tin-cup mentality of nonprofit revenue generation?  I completely disagree with this notion.  Nonprofits may think that appealing to emotion is the way to go, but that will only set them back.  To me, it is akin to Marty Linsky’s recent piece about hunkering down versus resetting in these difficult times.  As Linsky puts it, we have two choices and the “hunkering down” option looks like:

Stephanie Strom’s piece in the Times on Friday of last week showering sympathy on the well-intentioned charities going belly up, rather than seeing this moment as an opportunity to rethink their priorities, eliminate duplication, introduce good management practices, and get rid of programs and people who are not performing well.

Whereas resetting is about understanding how systems are changing and that we have to adapt to the longterm.  We must embrace the change and move with it:

Here’s what Reset might look like…(1) Funding risk-takers, creators, and inventors, small and large, in manufacturing, financial services, nonprofits, and even academia…(2) targeting…spending and investing now for the long term, like…supporting new faces and burgeoning success stories in education, people and ideas to help rescue the current school-age generation…

Focusing on emotion and heart-strings in order to try to keep a fledgling nonprofit operating might be appealing, but it is a hunkering down mentality. These times call for a complete resetting of how we do things.  Nonprofit fundraisers and Executive Directors don’t have the luxury of “appeal[ing] to our conscience and our heart.”

Nonprofit leaders and board members often tell me that XYZ nonprofit is easier to fundraise for because their cause is an “easier sell,” for example children and puppies.  I don’t think that a particular cause is inherently easier to sell because it has more of a pull on heartstrings. Rather, those organizations that can demonstrate, yes through metrics and outcomes, that they are positively impacting and reversing a disequilibrium will have much more success at appealing to donors.

But also, and more importantly, organizations that demonstrate their impact are better positioned to attract new kinds of revenue which this financial crisis will create.  I truly believe that the “resetting” that is occuring in our financial markets will create an opportunity and demand for more social impact capital, which is money that used to be channeled purely towards financial profit, but now is looking for a more complex blending of profit and social impact.  I don’t mean just social enterprises, I’m talking about a complete restructuring of capital markets that allows philanthropists, venture capitalists, angel investors, foundations, wealthy individuals, traditional nonprofit donors to be more innovative with their capital and invest in organizations that are proving social impact, again through metrics and outcomes, and are willing to understand, address and appeal to those who want to see more (social returns) done with their money.

By going back to the heart strings and the tin cup, social impact organizations miss out on the great opportunity that lies in this capital market restructuring and the greater resources that will follow.

Tags: angel investors, Foundations, nonprofit, Obama, Philanthropy, social capital, Social Enterprise, tin cup, venture capital