SoCap Day 1: Building the Market

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.

Tags: Acumen Fund, B Lab, benefit corporation, Calvert Foundation, Dasra, Deval Sanghavi, Don Shaffer, GIIRS, Global Impact 50 Index, impact investing, IRIS, Jacqueline Novogratz, Jay Coen Gilbert, Kiva, Kushal Chakrabarti, Matt Flannery, Pulse, REDF, RSF Social Finance, SoCap, Social Capital Markets conference, Village Capital, Vittana

PRIs: Another Part of the Emerging Social Capital Market

Continuing the various discussions about the beginning signs and formations of a social capital market, I’d like to add PRIs (Program Related Investments) to the conversation.  In all of the concern about decreasing philanthropic giving because of the economy there has been little talk about these financial vehicles as a real opportunity for foundations, and a potential social capital tool.  A PRI is basically a loan made by a foundation to a nonprofit at a low/no interest rate. The loan is made out of a foundation’s normal 5% minimum payout requirement.  However, because it is a loan, the foundation eventually gets this money back to be regranted elsewhere.

I wrote a few months ago about how foundations could use PRIs in a new way to invest in increasing a nonprofit’s fundraising function (new development staff, new technology, training, collateral, infrastructure, etc).  The PRI investment would be paid off in a few years and the nonprofit would be left with an elevated revenue generating engine. So the foundation’s investment has a pretty impressive return: the principal plus interest is returned to the foundation and, in addition, the nonprofit that they were supporting is now able to generate annual operating revenue at a much elevated rate, bringing them that much closer to sustainability.

It seems to me that now is the perfect time to institute this new use of PRIs for several reasons:

• Foundations have decreased funds with which to invest, so the further they can stretch their money, the better
• Nonprofits need to be smarter and more strategic about raising money in an increasingly difficult economic climate, so investments to help them do that would be very helpful
• The nonprofit sector lacks access to capital for capacity or infrastructure projects like this, so these investments would expand that capital pool

I was encouraged to see that RSF Social Finance recently noted an increased interest among grantmakers in PRIs, especially given the financial market conditions.  In their eyes, PRIs are a real opportunity:

Now more than ever, PRI offers foundations a unique opportunity to respond to the challenge of using fewer resources to provide support to communities with greater needs. Organizations  that were already  promoting PRI as a means for foundations to support their missions are now upping the ante. “As we know, the turn of 2008 to 2009 caught many foundations by surprise,” says Dana Lanza, Executive Director of the Environmental Grantmakers Association. “Within the environmental grantmaking community, assets are down by an average of 30%-40% in many cases. We are noting that in this climate, PRI is garnering significant interest from our members as a means to continue to support innovative efforts while essentially ‘recycling’ funds. I expect this to become a critical form of grantmaking as we pull ourselves through this rough period over the next few years.” The PRI Makers Network, which provides a wealth of resources and data related to PRI, organized a call last month for funders to discuss the results of a recent member survey: PRI in Tough Economic Times.  The survey revealed what callers confirmed: while there are reasons to be cautious, there are even more reasons to seize the opportunities inherent in PRI. According to the survey summary, “last year, in many cases, PRIs constituted [foundations'] highest performing asset class – providing downside protection in the bear market.”

So RSF Social Finance is launching the RSF PRI Funds which allows family foundations to invest at least $250,000 into a pooled PRI fund.  RSF handles the terms and deal sourcing and invests the PRIs into organizations in three areas: food & agriculture, education & the arts, and ecological stewardship. As RSF Social Finance puts it: “Our pooled PRI model means that each foundation’s investment will work alongside other funds, re-invested into a portfolio of borrowers doing critical work on the ground. This approach maximizes the power of leveraged PRI impact while also mitigating risk.”

It’s an interesting idea.  I’d like to see more foundations using PRIs in innovative ways.  I think PRIs are an underused financial tool available to the social sector.  They could be used to help nonprofit organizations increase their capacity, their revenue generation function, their infrastructure and perhaps even help them scale.  It is just another piece of the social capital market that is yet to be developed.

Tags: Foundations, Nonprofits, PRIs, RSF Social Finance, social capital market

The Convergence of Social and Finance

If you are interested in the dramatic shifts the economy is currently undergoing and what it means for the long term, take a look at the article “Notes from the Leading Edge of Social Finance,” in the Fall issue of Green Money Journal written by Don Shaffer.  Don Shaffer is the CEO of RSF Social Finance, a 20+ year-old, leading-edge, San Francisco foundation that makes loans and grants to nonprofits. He is also the former interim head of Investors Circle, a 200+ member giving circle of venture capitalists who invest in businesses working towards a sustainable economy (social and environmental issues). Don gives a very interesting overview of where the economy is heading, and I think he is right on.

He argues that we are no longer content with an economy focused solely on individual gain, rather there is a new convergence of financial, social and environmental gain, where what is good for the investor is also good for society as a whole. Ultimately he sees the new economy “harnessing the striving energy and entrepreneurial drive of the American people to move more towards collaboration and partnership, instead of maximum individual gain, while honoring the power of free markets.” Here’s an excerpt:

International microfinance is drawing a lot of interest this year from U.S. investors. For good reason, it’s great to see direct investment going to small, growing entrepreneurial ventures in the developing world. But what about our neighbors? As the wealth divide continues to widen in this country, both in urban and rural areas, we are asking ourselves at RSF, “How can our clients best support small and medium-sized, privately held companies in the U.S. that have strong community development and ecological sustainability goals?”…We are creating a learning community that asks hard questions about money and how we use it, acknowledging that money is simply a form of energy that creates a relationship between human beings. What is true wealth…What is the right balance between investment and philanthropy…What does it look like to re-imagine money to serve our highest aspirations? What, specifically, will it take to develop a network of risk and liquidity appropriate financial vehicles that are completely different from the products of Wall Street?

These thoughts and questions are very similar to the conversations that were going on at the Social Capital Markets Conference earlier this month and that are going on around the country.  We are witnessing a pretty dramatic shift, and it is fascinating.

Tags: Economy, Green Money Journal, Investors Circle, RSF Social Finance, Social Enterprise, Social Finance, Social Investing, venture capital