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Austin Ventures

Taking Philanthropic Risks: An Interview with Chris Earthman

Chris EarthmanIn this month’s Social Velocity blog interview, we’re talking with Chris Earthman, Executive Director for the Aragona Family Foundation. For the last 8 years Chris has also worked for Austin Ventures, the largest venture capital firm in the Southwestern US. Chris has over 15 years of experience at the intersection of nonprofit and for-profit enterprises, including helping to establish the Micron Technology Foundation (NYSE: MU), the corporate social responsibility vehicle for the largest private employer in Idaho.

You can read past interviews in our Social Innovation Interview Series here.

Nell: As head of a regional family foundation, how do you and your board view some of the innovations happening in the social sector like impact investing, social entrepreneurship, etc.?

Chris: I find it refreshing that innovation is happening in our sector, though I’m a little surprised at the slow rate of uptake among funders. The family foundation I currently run is a spend-down foundation, and that’s a decision our trustees made consciously in order to see the fruits of social investments now vs. spending significantly less in order to maintain a corpus indefinitely. There is ample discussion out there among funders, but (and I’m as guilty as anyone) very rarely much action to back it up. We’re trying to selectively dip our toe into the water in terms of funding social innovations, infrastructure, ecosystem improving organizations, selective M&A activity among our grantees and discussing the idea of mission-related investing.

Nell: Speaking of mission-related investing (where a foundation invests part of their corpus into for-profit social enterprises that give both a social and financial return to the foundation), it’s a pretty radical concept for most foundations. What do you think it would take for the idea of mission-related investing to take off for smaller foundations across the country?

Chris: Let me preface my comments with the fact that we are a spend-down foundation and therefore have not made a meaningful investment allocation to mission-related investing, so I’m by no means an expert here. However, I think there need to be more visible intermediaries and investment products targeting the social impact market. We’ve seen some great progress over the last few years with groups like Sonen Capital, but it’s still a very nascent industry. One of the biggest barriers we’ve come across is the difficulty in quantifying the social return in a format that is comprehensible to trustees. That is starting to change with ratings intermediaries like GIIRS, but recognition and uptake are essentially non-existent among most of the foundations that I interact with. I know that you and many others have opined on the progress here, but it’s still not something that is on many regional/ smaller Foundation’s radars. It may take a few forward thinking Foundation trustees to step up and take a chance to show others that it’s ok to think outside of the endowment model mindset.

Nell: Much of your non-Foundation time is spent working for a venture capital firm where the idea of Mergers and Acquisitions is second nature; however this is a fairly uncommon concept in the nonprofit world. Do we want to see more of it in the nonprofit sector and if so, how do we make that happen?

Chris: Given the fragmentation of the nonprofit ecosystem across the country and the large proportion of small organizations , I think there is certainly an opportunity for more instances of Mergers and Acquisitions (M&A), particularly in cases where organizations need to grow above the $500K/ yr threshold. However, my experience is that TRUE collaboration—the accretive kind where you can quantify cost savings and/or program growth and ultimately better outcomes/ social change—is very rare in the nonprofit world simply because there are few external catalysts to get the discussion started and ultimately finished.

We’ve funded a few different M&A efforts over the last couple of years and my takeaway is that the M’s work much better than the A’s. I hate to keep pointing the finger back at myself and fellow funders, but there is a certain level of risk aversion where we’d rather ensure a successful purchase of additional direct services vs. really giving organizations what they need to grow. I’ve seen too many truly innovative nonprofits unable to successfully scale past the $300-500K/yr revenue threshold because of the required organizational capital required to make that pivot.

But I’m by no means idealistic here. While M&As sound sexy, there are many times where poor execution, interpersonal dynamics, Board conflicts, bad timing, or any number of external factors out of your control result in an outcome that may actually harm the organizations seeking to gain efficiencies through scale and collaboration. There are integration costs, donor overlap, brand/ identity battles, etc. that always take much more time, effort, and money before you see any of the accretive results that initially drove the decision to bring the organizations together. The same goes for the appetite of funders to backstop Executive Director salaries and/or fund transaction costs related to a merger discussion. In my opinion, lack of funder appetite is probably one of the biggest barriers to more M&A in our sector.

Nell: As a rule foundations are less interested in making capital investments in nonprofit organizations (funding things like infrastructure, systems, technology, evaluation). Why do you think that is and what can help move philanthropists to understand the need for capacity capital?

Chris: I think there are two reasons:

  1. The idea of “expressive philanthropy” is fairly well ingrained and many folks start out their philanthropy work wanting to “put their stamp” on a particular cause or portfolio of organizations. The challenge is that many foundations knee jerk into a risk-averse grants process that may or may not fit with their place in the ecosystem. Part of this is based on the endowment model of funding, which more often than not results in a formal, tedious grant application process. This may not be the best way to identify and screen potential grantees!

    Let me acknowledge that I spent the first few years of my career as a grant writer, so I completely understand the time and effort that go into these proposals. This experience informs (or biases) my “anti-process” grantmaking strategy wherein we prefer to put the “search cost” onus on myself as a funder and try to respect the time and effort of the ever lean development dollars being spent by grant seeking organizations. It may sound like an arrogant “don’t call us, we’ll call you” approach to grantmaking, but I’ve found that making the grant process donor-centric vs. grantee centric allows the system to operate more efficiently.

  2. While philanthropic dollars should be fungible, the ability to restrict funds creates a tiered system of revenue for grantees. It always strikes me as a little odd that funders get so hung up about funding direct services vs. infrastructure and overhead and restrict their funding to such a degree. Ask any VC how their portfolio companies use their investments and you’ll find more often than not it pays for the critical growth functions like Sales and Marketing. You can’t grow without infrastructure, and unfortunately our current giving culture is much less amenable to that. I’d even go so far as to say the framework/ process that most funders use to select their grantees are, by their very nature, skewed towards less risk and greater restriction. Therein lies one of the structural problems in our industry. Even something as simple as separating the motivation of our giving (“we really like your yy program initiative…”) from the structure of our giving (“…so here’s an unrestricted grant to spend where you feel it is most needed”) makes a huge difference for the lives of our grantees. It also shows the Executive Director that you value their ability as a manager to make decisions from the inside.

Nell: How do we get funders to get take more risk with their investments and be willing to fund things that have a higher risk, like growth capital, mergers, research & development, but could result in huge social payoff?

Chris: Similar to my earlier comments about impact investing and grant processes, I think funders need to see more celebrated instances of both success AND failure. Another solution is using less restrictive grant processes that are a better fit with the size and scope of your particular foundation. The fact that you can restrict grants does not automatically mean that you should. Until we embrace the idea that its ok to take a risk with our funding (and have a process that embraces this), even if it doesn’t turn out the way we planned, we’ll be much closer to creating an environment ripe for some of the larger social change that motivates our philanthropic giving in the first place.

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Can Slow Money Launch an Austin Social Capital Market?

As I have written before, despite being the 3rd largest venture capital city in the country, Austin is slow to climb on the emerging social capital market bandwagon. Tremendous wealth and entrepreneurial expertise exist here, but there isn’t a lot of energy around creating a continuum of capital for social entrepreneurs. Perhaps that is about to change.

Slow Money is a national movement aimed at increasing the availability of risk capital to sustainable food-related social entrepreneurs. Austin recently established an affiliate of the movement here, Slow Money Austin, and their kick-off event is next month. Scott Collier, who has written on this blog before about mission-related investing and has been active in Austin’s venture capital community for years, is helping to lead this effort. I interviewed him about Slow Money Austin and what they hope to accomplish. Even if you don’t live in Austin, I think it is interesting to watch how one of America’s top 50 cities is responding to the increasing demand for a capital market for social entrepreneurs.

Nell: What is Slow Money Austin?

Scott: Slow Money Austin is a Central Texas affiliate of the national Slow Money Alliance focused on increasing the availability of risk capital to support the growth of sustainable food enterprises.

Nell: Why do you think Slow Money is a fit for Austin at this particular point in time?

Scott: Austin is one of several locations around the country where there is significant and growing interest in local food sources, organic farming that is better for people and planet, and sustainable food businesses that can provide much needed jobs and natural food alternatives. Slow Money is important to these businesses as they cannot grow to serve the increasing demand unless they have access to capital, especially patient risk capital that invests in partnership with food system entrepreneurs.

Nell: As part of a national movement, how will Slow Money Austin differ from other Slow Money organizations around the country?

Scott: Oh, I imagine we will find ways to make our Slow Money activities weirder than others. But seriously, Austin has such a national reputation for a healthy, entrepreneurial and well-educated population that I think it is obvious we should be national leaders in this process. Maybe it is because we are home to Whole Foods, the best entrepreneurial success story in the health food industry, or maybe it is because Austinites value community, health and a connection to nature like few other places in the country, but whatever the reason, this could be the start of a major new investment and entrepreneurship sector for Austin.

Nell: Your kick-off is in April, what do you hope to get out of this event?

Scott: The main objective is to get the Austin investment and entrepreneurial communities talking about the local and sustainable food sector in a serious way. The food industry, at over $600 billion, is a big part of the U.S. economy and it has a huge impact on hot-button issues like healthcare costs, carbon footprint and environmental health. With Slow Money, we want to awaken entrepreneurs and their funding sources to the great opportunity we have to use the power of free enterprise to tackle these major issues of our time.

Nell: What happens after the event? Where does Slow Money Austin go from there?

Scott: Great question. We are hoping to awaken some regional leaders to the opportunity with this event and after the event we would like to see ongoing events and investment activities proliferate that continue to build sustainable food enterprises. I like to draw a parallel to the efforts 20 years ago to bring attention to the opportunities for Austin entrepreneurs and investors to build technology businesses. As Texas struggled to come out of a dismal recession, thought leaders in this region launched the Austin Technology Incubator, The Capital Network, the Austin Technology Council and held events and venture conferences, all of which allowed Austin to claim a solid portion of the growth in the then-emerging tech sector. Cities all over the U.S. are still coming to Austin asking how we managed to pull that off. Well, hopefully this event will trigger some similar thinking as regional leaders see opportunity to create sustainable economic welfare in a large and growing sector: the sustainable foods market where margins and growth rates are high, but market penetration, at only about 3 percent, leaves tremendous room for further growth.

Nell: I’m fascinated by the funding piece of this. Is one of your goals to create a fund for sustainable food-related entrepreneurs in Austin? And if so, how does that fund work, how big is it, how are investments made, what do the investments look like?

Scott: I would again point to the example of 20 years ago and say it is not about creating a single fund to answer the opportunity. Instead, it is about creating a continuum of angel and fund investors and a support network of legal and other services that can support ventures ranging from dozens of small farms that want to bootstrap healthy lifestyle businesses all the way to scalable production, processing or distribution companies that can produce strong returns and substantial social benefits. What the funding for these business should look like varies from simple equity or unsecured debt investments of tens of thousands of dollars to larger amounts coming from investment firms managing tens of millions. Considering the scale of the opportunity across the country, it is not hard to see dozens of funds emerge managing amount of $10 million to hundreds of millions. This is pretty much what has happened in the Cleantech sector, which 10 years ago was hardly a sector at all and now accounts for about a fourth of the $20 billion in venture capital that is invested in a year’s time. Of course I think there is room in Austin for a couple of funds especially focused on Texas, and I would hope that some of the existing venture and private equity firms would allocate some attention to the sector.

Nell: How do you think such a fund or funds will fit into Austin’s current “emerging” social capital market?

Scott: That raises a very important distinction that will be made in Slow Money activities. The book that Woody Tasch wrote, called Inquiries into the Nature of Slow Money, addresses this in a more comprehensive way, but in a nutshell, Slow Money investors will mostly be investors that are seeking a financial return as well as a social impact. This raises the potential for the sustainable food sector to be a major target for philanthropists and private foundations as they launch Program Related or Mission Related Investment practices deploying funds to generate not only a financial return but also a positive impact to human health, environmental and animal well-being, and employment opportunities. A dramatic example of such fresh investment thinking is the Gates Foundation’s recent move to deploy $400 million into such impact investments. While this represents just 1% of Gates Foundation corpus, imagine the impact that could result if the other $500 billion or so of foundation capital in America invested with similar expectations. We would see the deployment of $5 billion of investment capital seeking positive social impact and a financial return of capital, thus creating a sustainable, perpetual virtuous cycle.

Nell: Besides you, who is behind bringing Slow Money to Austin?

Scott: We have great underwriting sponsors in Whole Foods Market, a global leader in the healthy and sustainable food sector, and Barr Mansion, one of the country’s first USDA Certified Organic events facilities, where we will be holding an investor-focused local food dinner April 22nd. And of course we have great partners in the Sustainable Food Center and the City of Austin, who will host the Showcase event on the 21st in our own LEED Gold-certified City Hall. We have great support from Austin Ventures, The RGK Center for Philanthropy and Community Service, Greenling, Dai Due Austin, and too many others to name here. And of course we will have Woody Tasch representing the national Slow Money Alliance in attendance to kick things off. It should be an interesting discussion, and an amazing dinner! Sign up at www.slowmoneyaustin.org.


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