In today’s Social Velocity interview, I’m talking with Ted Levinson. Ted is the Director of Lending at RSF Social Finance, a San Francisco-based financial services non-profit dedicated to transforming the way the world works with money. Levinson manages RSF’s flagship $75 million Social Investment Fund which provides debt capital to US and Canadian social enterprises.
You can read past interviews in the Social Innovation Interview Series here.
Nell: RSF Social Finance is really the leader in the social finance market, you’ve been doing this long before anyone started talking about a “social capital marketplace.” Given that long history, how do you view the current state of the social capital market? Are we where we need to be to funnel enough and the right kinds of capital to social change efforts? And if not, how do we get there?
Ted: RSF has a twenty-nine year operating history, but it’s still early days for the field of social finance. The industry is at the same stage of development as natural food stores were thirty years ago – we’re established, we’re growing, we’re doing good work, and yet we’re still considered a fringe movement. I believe we are on the cusp of mainstream acceptance which will mean a much broader audience of impact investors (especially young people and unaccredited investors) and far greater demand for social capital from the growing number of social enterprises that are just now becoming investment-ready.
There’s been a shift in society’s view of natural food stores – we’ve overcome our fear of the bulk bins and now all grocery stores look more like natural food stores. I expect the same thing to happen with our conventional financial institutions which are just now beginning to pay attention to social finance.
What the field really needs is to expand the financial products available to social enterprises and address some of the existing gaps. Frustrated social entrepreneurs may disagree, but I think the angel capital and large-scale venture capital spaces are meeting the needs of for-profits. Incubators, business plan competitions and seed funds are providing modest amounts of funding to emerging non-profits and for-profits. RSF and some of our friends including Nonprofit Finance Fund, Calvert and New Resource Bank are addressing the middle market market.
The big voids in social finance include:
- True “risk capital” for non-profit social enterprises. We need more foundations willing to place bets on high-potential organizations.
- Bigger finance players or (better yet) a more robust consortium of social finance organizations that can band together to meet the $5 million + needs of high growth social enterprises such as Evergreen Lodge, Playworks and other organizations that are reaching scale.
I believe the field will get there but we’re playing “catch-up” now and social entrepreneurs are an impatient bunch.
Nell: RSF does something pretty revolutionary in that you combine philanthropic giving with impact investing, whereas these two sides of the social capital marketplace have not yet really found a way to work together in any large scale or significant way. Why do you think that is? And what needs to change in order to encourage foundations and impact investors to work more closely together?
Ted: We call our approach of combining debt and philanthropic dollars “integrated capital,” and we think it’s going to have a profound effect on impact investors, philanthropists and the social enterprises it serves.
Most non-profit social enterprises rely on a combination of earned revenue and gift money. There’s no reason why a single transaction can’t bridge these two forms of capital. With integrated capital we can leverage philanthropic grants or loan guarantees to push high-impact loan prospects from the “just barely declined” category into the “approved” category. In fact, even some for-profit social enterprises are eligible for this. Our loan to EcoScraps – a fast-growing, national, composting business was made possible by a foundation that shared in some of RSF’s risk.
Integrated capital is possible because RSF works with individuals and foundations that have overcome the prevailing view that how you invest your money and how you give are distinct activities. We’re also fortunate to work with an enlightened bunch of people who recognize that philanthropic support for social enterprises isn’t a crutch or a sign of a failed enterprise.
Our work at RSF is driven by a belief that money ought to serve the highest intentions of the human spirit. Conscientiously investing money, giving money and spending money can all further this goal.
Nell: What do you make of the emerging social impact bond movement? Is this a social finance vehicle that you think will work?
Ted: I’m deeply hopeful and deeply skeptical of the future of social impact bonds. I’m hopeful because our government is notoriously risk-adverse and slow to adopt new ways of improving education, reducing recidivism, or curbing our runaway health care costs. I think spending money on early interventions could go a long ways towards improving these fields societal challenges, but paying now to save in the future is at loggerheads with the short-term view which prevails in politics. Social impact bonds are a clever way to push the risk on to investors who are willing to take a longer view for the potential of a big upside.
I’m also a fan because social impact bonds are an alternative to the financial engineering which brought us collateralized debt obligations. They demonstrate that Wall Street doesn’t have a monopoly on financial innovation.
That being said, I’m skeptical that this market can ever reach a stage where transactions costs can drop enough to make it economically viable. Bringing together the multiple parties that are required for such a transaction (the government, the investor, the non-profit, a monitoring entity, a social finance organization, an attorney and possibly a foundation) just seems unaffordable to me.
Nell: What sets the nonprofits and social enterprises you invest in apart? What characteristics do you look for in the investments you make?
Ted: All of our borrowers fall into one or more of three focus areas – sustainable food systems, the environment and education & the arts. These borrowers all have capable, committed management who recognize that financial sustainability is a prerequisite for lasting change. Our best borrowers have strong communities supporting them whether it is donors, customers or suppliers.
Evaluating these stakeholders is a key component of our underwriting process at RSF.
Our experience demonstrates that performance improves when social enterprises engage all of their stakeholders. RSF’s long-standing support of fair trade is an example of this commitment. We also regularly expect borrowers to solicit their community members to join RSF’s investor community as a precondition to approval. We take community seriously at RSF!
Our borrowers are all addressing major social or environmental problems such as a lack of adequate housing for developmentally disabled adults (Foundation for the Challenged), inefficiencies in the wind industry (FrontierPro) and poverty and environmental degradation from rice farming (Lotus Foods.) As social enterprises, they’re primary activities are DIRECTLY making the world a better place. We believe our borrowers have the potential to scale their organizations and make a real dent in these problems, or become a model for others to do the same.
For example, we were one of the first lenders to Revolution Foods when they were operating out of a defunct fast food restaurant in Alameda, CA. Today they deliver over 200,000 healthy meals a day to public school children.
Similarly, we think DC Central Kitchen’s model of combining culinary training for adults with barriers to employment with a robust meals business (they deliver 5,000 meals a day to schools and homeless shelters) is a winning approach that can be replicated throughout the country.
Nell: Some have argued that nonprofit leaders lack a level of sophistication when it comes to financial strategy and use of financial tools. Obviously you find nonprofits and social enterprises that are able to effectively employ sophisticated financial vehicles, so how do you respond to that argument?
Ted: Rather than argue I prefer to let the results of our borrowers speak for themselves. DePaul Industries, for example, is a $30 million non-profit that employs over a thousand disabled Oregonians. The Portland Business Journal ranked them one of the most admired companies in the state and they did this all with 98% earned revenue. Network for Good processes over $150 million of online donations every year while Digital Divide Data has a decade of year over year revenue growth in the field of impact outsourcing.
I see no lack of financial sophistication in the non-profit sector. I do, however, see a lack of risk-taking, which can sometimes be misinterpreted as unsophistication when compared with the for-profit world. It’s a shame this mentality is so pervasive because of the importance and urgency of the work that so many non-profits do. Many icons of industry have biographies filled with risky expansion, leverage, false starts and failures. We need to de-stigmatize failure in the non-profit sector and adopt that same boldness which has led to so many of the biggest successes in the commercial world.
In this month’s Social Velocity blog interview, we’re talking with Jeff Raderstrong, founder and editor of UnSectored, an online platform for people interested in developing collaborative efforts to create social change. In addition to the online platform, the UnSectored community uses offline events and activities to identify intersections, facilitate discussions, encourage cross-sector collaboration, and promote cross-sector change efforts. Jeff is also a community engagement consultant and has worked for Venture Philanthropy Partners, among other organizations on the front lines of social innovation.
You can read past interviews in our Social Innovation Interview Series here.
Nell: You and some friends started the UnSectored blog a year ago to encourage the nonprofit, public and private sectors to break down their walls and work together on social change. How has it worked so far? What are you seeing?
Jeff: The blog was a first step in changing the conversation around social change to focus not on individual components—social enterprise, nonprofit, corporation social responsibility, government innovation, etc—but to consider the entire ecosystem. Social change is a complex task and, to us, it seemed silly to have all these conversations separately, with people not really paying attention to what those with similar (or identical) goals were doing.
In that way, the blog has been successful in providing that space. The response we received was way more positive than we were expecting, because our core message is a pretty simple one—that social change is the responsibility of all individuals, organizations, and sectors, and that everyone should work together. But there had not been a place for discussion around that idea, so it resonated with people.
There’s still a lot more work to do, obviously, and UnSectored can’t do all of it. We are providing the platform for the community that believes in this idea—what’s next is up to the people who join that community.
Nell: Your fellow bloggers at UnSectored are all part of the Millennial generation. Do you think the notion of “unsectoredness” (is that a word?) is a particularly Millennial one?
Jeff: Answer to first question: Yes! You just put it on the internet, so it’s now a word!
Second question: I do not think there is anything inherent about the ideas behind UnSectored that make it explicitly a millennial endeavor. The work on UnSectored has been done primarily by millennials, but I think that’s just a function of the people I reached out to (my peers) rather than who the idea resonates with most. We have gotten response on this from people of all ages and backgrounds—I think it’s a universal idea.
That being said, I do think it’s a relatively new idea, born out of the more collaborative and connected nature of the brave new world we live in. The new tools available to people make it much more easier now than ever before to work together. For millennials, this isn’t “new,” this is the way we were raised. Because of that, we get it a little quicker than others, but I don’t think that makes it “ours” at all.
Nell: In addition to the blog you are also doing UnSectored Talks and Working Group Actions. What are these and what are you hoping they will accomplish?
Jeff: We have four components to UnSectored: Blog, Talks, Actions, Campaigns. The blog is relatively straightforward, as are the Talks: Both are ways to engage with open and intentional conversations around social change. The Talks are offline, the blog is online.
The other two components are trying to leverage the power of the UnSectored community to move from discussion to action. The Actions are the offline, coordinated version of this, and the Campaigns leverage the online platform of UnSectored. By giving people the option to engage in discussion and action, both online and offline, we hope to meet people where they are and get them to engage the best they can.
Nell: How geographic is your movement? Is it growing beyond the D.C. Metro area?
Jeff: It’s centered on DC, but we’ve been talking to people around the country. Because we aren’t funded and rely on volunteer time, it’s hard for us to have events in other places. But, we are looking for creative ways to partner with other organizations around the country. If you have some ideas, let us know!
Nell: Many of your fellow bloggers work for high-profile organizations within the social sector space (Venture Philanthropy Partners, Calvert Foundation, Council on Foundations, etc.). Do you find that your employers buy into the UnSectored idea and if so what are they doing to make it a reality?
Jeff: They definitely do. I think we all get inspiration for UnSectored from our other work. More and more, people at all types of organizations—high profile or not—are beginning to see how working together can produce better outcomes and create more transformative change. Personally, I’ve worked on the Social Innovation Fund initiative from the Obama administration, a great example of “unsectoredness” at work: The federal government partnering with funders and service providers to better leverage resources and encourage innovation. This initiative, which many of your readers are probably familiar with, is a great example of UnSectored’s core principle: That by working together, we can do much more than working alone.
Now that I got that off my chest, I want to tell you about all of the great things happening at the Social Capital Markets Conference (SoCap). Day 1 provided a great update on all the work that has happened since we met at Fort Mason a year ago. Unlike so many other conferences that just regurgitate old information and bring the same people together to discuss how great they are, SoCap is very much a working conference. The sense of urgency is palpable. The attendees are the very people who are creating this new social capital market, and they don’t have time to sit around and theorize. So SoCap holds many exciting announcements about new initiatives, new infrastructure, new tools to strengthen and grow this burgeoning marketplace for money to create social impact.
Day 1 began with a passionate, inspiring speech by Jacqueline Novogratz of Acumen Fund. She discussed their and others’ work to create new measurement tools for impact, like Pulse and REDF’s new tool (officially announced later in the day). So much of SoCap is about measurement, which is very exciting. How do we know social change is happening? What does it mean to say we created a job?
She also talked about the need for exit strategies and patient capital. Two critical elements to making impact and scale happen and be sustainable. But most importantly, Jacqueline provided the balance of passion, commitment, and inspiration that is so important to remember as we work to create what often is a dry, data-driven space. She encouraged us to remember that we are “building our own organizations while we are building a sector,” and “each of us can work to change a small sequence of events that together changes the world.”
Next up, Matt Flannery, co-founder of Kiva–the online micro-lending platform, described how Kiva has democratized and distributed risk-tolerant, patient capital, which again is such an enormous need to those working to create complicated, long-term social change. And he argued that online philanthropy is quickly becoming a huge economic force. This idea of democratizing capital through lots of people giving small amounts through new technologies is very exciting.
And finally, to drive home that point, Kushal Chakrabarti from Vittana, a Kiva-like platform for education loans to students in third-world countries, demonstrated that this idea of person-to-person small lending holds tremendous promise for transforming how capital flows to social change efforts.
In the “High Engagement Impact Investing” session I attended later in the day, there were great examples of new ways of engaging impact investors, but the highlight for me was Don Shaffer of RSF Social Finance (a true pioneer in the social capital market space) discussing “RSF Prime,” their community-based pricing for loans. Periodically they bring investors and borrowers together with staff to set the interest rate for borrowers. It’s a radical idea that is really working for them. Deval Sanghavi from Dasra described a similar community-based approach that they and others like Village Capital take where the entrepreneurs within their portfolio decide who gets funding. These community-based approaches to funding are fascinating and as Don said, they are truly “transforming the way the world works with money.”
The last general session of the day was packed with exciting new infrastructure announcements. B Lab’s Jay Coen Gilbert announced several exciting things:
- Their work to create a legal “benefit corporation” status in Maryland and Vermont. The benefit corporation is a legal corporate structure that marries the financial motive of the for-profit corporation with the social benefit of the non-profit corporation. Within one day of being a legal business structure, Maryland already had 11 benefit corporations.
- The work to develop the necessary infrastructure of a new impact investing asset class with things like IRIS, (the FASB of the social capital market space) and the GIIRS rating system that compares social impact results (the S&P or Moody’s of the impact investing world).
The standards and systems that B Lab and others are creating provide the necessary infrastructure to encourage investors to become impact investors.
Finally the Calvert Foundation and Ron Cordes announced the Global Impact 50 Index who’s goal is to drive $2 billion of capital into impact investing over the next 5 years by working with the gatekeepers to impact investing, the financial advisor community. The theory is that if financial advisors understand impact investing and have the products and infrastructure necessary, they will encourage their high-net worth clients to make impact investments, thereby unlocking this capital market.
It is so great to see so much progress, albeit in the impact investing part of the market only, in just one year. You really get the sense, at the edge of the San Francisco Bay, that something is happening, systems are changing, the social capital market is slowly becoming a reality. And it is due to this sharp, passionate, committed group of people who aren’t content to philosophize. They are out there building, brick by brick, this new capital market that will make social change a reality.
I’ll give a full rundown of my Day 1 experience at SoCap in a later post, but first I have to admit my excited anticipation of this year’s Social Capital Markets conference encountered some disappointment yesterday as the third annual conference kicked off. The day began with a co-keynote address by Sean Stannard-Stockton, from Tactical Philanthropy and organizer of this year’s first philanthropy/nonprofit focused track at the conference, and Kevin Jones, co-founder of SoCap. Kevin and Sean’s figurative two-step was a nod to the on-going confusion about where/whether philanthropy and the nonprofit sector fit, or how they fit, into a conference who’s heart and founding are heavily in the double bottom-line, impact investing camp.
Sean gave an eloquent speech arguing for the inclusion of the nonprofit/philanthropy sector in this movement to create a social capital market, arguing that “We don’t speak the same language, but we have the same goals,” and “We need to come together to be better able to find what we are both looking for.” But Kevin still referred to Sean and his track as the “nonprofit clan” and Sean as its “emissary.” I’m not sure why there has to be this awkward line between impact investing and philanthropy, but apparently there is still quite a bit of discomfort with the connection between the two worlds. As Stacy Caldwell, Executive Director of Dallas Social Venture Partners, so eloquently Tweeted yesterday:
I’m not sure that we are past the “awkward” stage yet.
To me, it seems so obvious that the nonprofit and government sectors, who hold the majority of money up for grabs in the social impact space, must be full and equal partners in the creation of the social capital marketplace.
But we are still speaking two different languages. And I’m not sure we’re pushing the conversation forward.
The first breakout session I attended yesterday was the Tactical Philanthropy Track’s “Decriminalizing Fundraising” session with two of the rockstars of nonprofit fundraising: George Overholser, from Nonprofit Finance Fund, and Dan Pallotta, author of Uncharitable. But I have to be honest with you, and it pains me to say this about two people I admire quite a bit, I was underwhelmed. The session was just a recap of the spiels George and Dan have given many times before, rather than a cutting-edge discussion and demonstration of how we change the broken funding of the nonprofit sector. If you missed the session, or haven’t read any of Dan or George’s writings, Adin Miller did a great job of summarizing the session on the Tactical Philanthropy blog. But the conversation didn’t go nearly far enough. As Adin said:
In general, the audience seemed to agree with the speakers’ position. There were little to no objections to their key points. The questions from the audience reflected more practical inquiries related to changing perceptions and attitudes toward nonprofits and freeing them up to truly grow the sector. And yet, I feel the conversation has just started and that we need a lot more insights into new strategies and tools to truly decriminalize fundraising.”
There ARE new tools and examples of organizations doing exciting things to finance their social impact in the nonprofit space. I would have loved to hear about those, instead of these old arguments about the need for new tools. And I would have loved to see a discussion about what infrastructure and structural changes need to happen in the sector to push funding forward and how we make those happen.
In the sessions on impact investing and the general sessions later in the day there is a constant movement to push the conversation forward, to unveil new tools, to detail new approaches, to describe new infrastructure in order to push the impact investing sector forward. There is a very palpable sense that this new market is ours to create, “We are the ones we’ve been waiting for,” as Lisa Hall from the Calvert Foundation said in a later session on impact investing. But yesterday at SoCap I didn’t see that same confidence, that same rigor, that same diligence, that same drive in the nonprofit/philanthropy side of the market to create new funding vehicles, new solutions to the broken funding structures we encounter every day.
Let’s see how today goes…