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A New Model For Ending Inner City Poverty: An Interview with Ted Howard

Ted HowardIn this month’s Social Velocity interview we are talking with Ted Howard. Ted is the driving force behind an exciting experiment in social innovation going on in Cleveland. Evergreen Cooperatives are employee-owned, green, start-up, for-profit companies that are designed to completely revamp inner city Cleveland’s economy by drawing on assets already there. Ted is one of the principal architects of Evergreen Cooperatives through his role as Senior Fellow for Social Justice at the Cleveland Foundation. He is also the executive director of The Democracy Collaborative at the University of Maryland. I found out about Evergreen Cooperatives at this year’s Social Capital Markets Conference and was so blown away, I asked to interview Ted.

Nell: Like any social entrepreneur, Evergreen Cooperatives has huge plans for growth. The goal is to create 5,000 jobs in inner city Cleveland, and you currently have created about 50. How do you plan to scale Evergreen Cooperatives to that level?

Ted: The Evergreen strategy is based on leveraging the economic strength of Cleveland area anchor institutions – hospitals, nursing homes, universities, museums, cultural centers, and the like. We tend to think of these types of institutions in terms of their social missions – providing health care, educating students. But they are also important businesses – albeit usually nonprofits. In Cleveland, three of the city’s biggest anchors – the Cleveland Clinic, University Hospitals, and Case Western Reserve University – annually procure more than $3 billion in goods and services. This is in addition to their very substantial personnel and construction budgets. Yet virtually none of that $3 billion of annual spend makes its way into the low-income neighborhoods that surround the campuses of the institutions.

Our strategy is to work closely and in partnership with these anchors to identify supply chain purchasing opportunities that could be sourced locally. For example: laundry services, food, renewable energy, recycling, and so forth. Evergreen then develops locally-based businesses matched to these procurement needs. The goal is to drive as much of this $3 billion into the community as possible, and in the process, catalyze a network of locally based businesses that hire their workforce directly from the neighborhoods.

In truth, we don’t know how to move from a few companies with 50 or 100 employees to a robust network of dozens of companies that can employ thousands. But clearly the opportunity exists due to the presence of these anchors. The institutions aren’t going anywhere (unlike corporations, universities and hospitals almost never move) and their need for goods and services continues to grow.

Nell: There have been countless attempts over the years to solve inner city poverty. Why do you think this model could be the solution? What makes it different and more promising than past attempts?

Ted: Evergreen represents a new “paradigm” in community economic development. By that, I mean to suggest several important elements in the Evergreen design that are significantly different from traditional anti-poverty approaches.

First: this is not a welfare or subsidy strategy. We are building a network of for-profit businesses committed to hiring their workforce from among local low-income neighborhoods. Each business is closely linked to area anchor institutions that can provide ongoing contracts to support the company.

Second: because our workers live in low-income households (the median annual household income in our target area is below $18,500), we believe that jobs alone are not enough, even when those jobs offer a living wage and no-cost health benefits, as our jobs do. People need to be supported in building their family assets and wealth beyond their weekly paycheck. The way we are addressing this is by incorporating Evergreen companies as worker-owned cooperatives. Once someone has joined the coop, they become eligible for annual profit distributions into their capital accounts. The goal of our business model is to generate enough profit in each company so that a worker who has been with Evergreen for 8 years has amassed $65,000 in his or her account. This is their property, their asset, and when they leave the company, they take this money with them. While most of us can’t imagine retiring on $65,000, in our neighborhoods, this amount of money can be life-altering.

Third: the long-term goal of the Evergreen Cooperative Initiative is not simply to create business or provide jobs, not even to build the work of workers and their families. The ultimate commitment is to stabilize and then revitalize six neighborhoods that are home to 43,000 residents. In the past decades, these communities have been radically disinvested as jobs and business have left the area. We are trying to rebuild community, and a key to that is creating new capital (in the form of Evergreen businesses) that won’t get up and leave the community (as so many individual entrepreneurs and businesses often do). By broadening ownership of our businesses to the workers who live in the community and are employed in the company, it becomes much less likely that these companies will exit the area.

Rather than a trickle down strategy, Evergreen focuses on economic inclusion and building a local economy from the ground up. Rather than offering public subsidy to induce corporations to bring what are often low-wage jobs into the city, the Evergreen strategy is catalyzing new businesses that are owned by their employees. Rather than concentrate on workforce training for employment opportunities that are largely unavailable to low-skill and low-income workers, Evergreen first creates the jobs (in our network of companies), and then recruits and trains local residents to take them.

Nell: The financing to get the Evergreen Cooperative up and running was a pretty innovative mix of public, private and nonprofit capital. How were you able to get those three players to the table and investing?

Ted: Access to low-cost capital is one of the great challenges faced by low-income communities. Typically, they are starved for investment – banks don’t want to make loans and investors don’t tolerate the risk level. We think we are beginning to crack the code on this problem – we still have a lot to learn, but we are making progress. To date, we have raised about $6 million in grant funding which in turn has helped unlock an additional $35 million (approximately) in long-term, low-interest federal loans (such as HUD108), tax credits (including solar and New Markets Tax Credits), state grants and loans, and even growing participation from commercial banks.

What has helped bring all of this to the table has been the leadership of local philanthropy (in particular, the very strong commitment made by the Cleveland Foundation) and by partnership among the city’s large anchor institutions. By putting their reputations, relationships and resources on the line, they have been able to reassure public and private investors that investing in Evergreen is a sound investment. I should also say that the very strong support from the Mayor and the City’s Department of Economic Development have been crucial in building a funding bridge between Evergreen and Federal and State sources.

Some might ask: why are local universities and hospitals and other anchor institutions so intimately involved in the Evergreen strategy? Why are they at the table at all? The answer is simple, actually. They realize that in order for their businesses to succeed, the neighborhoods surrounding them have to be strengthened and rebuilt. It is never good for business to be surrounded by depressed and dangerous neighborhoods. Parents won’t want to bring their children to those schools; doctors and nurses won’t want to work for those hospitals. If people aren’t employed, they can’t pay for the services these institutions offer. So, even beyond the moral or humanitarian reasons, there are sound business reasons for these institutions to be at the table.

Nell: What are your long-term financing plans for the Evergreen Cooperative? Will you ever be able to fully exit and allow these businesses to stand on their own?

Ted: There is essentially no equity investments in the Evergreen cooperatives – almost all of the financing is debt financing that will be repaid over time. The goal is to have each company become profitable, repay its debt, and become a sustainable and successful business. That said, we also are intent on tying the businesses together into a coherent network with a shared mission and shared values. In 2011, we will establish the Evergreen Cooperative Corporation which will be a kind of holding company that will coordinate the entire network. ECC’s board will be comprised of a range of stakeholders – representatives of the individual coops, the anchor institution partners, local philanthropy and so on. In building this structure, we have been inspired by the example of the Mondragon Cooperative Corporation in the Basque region of Spain. There, over a 50 year period, a group of 120 cooperatives employing more than 100,000 people, with annual revenues of $20 billions has been built. While each company has great autonomy, they are all networked together, which provides business resilience and ensures that the cooperative vision and mission are shared by all,

Nell: Aside from the fascinating model and financing, yours is also an interesting study in managing diverse stakeholders. There are many stakeholders in this project (city of Cleveland, businesses, employee-owners, funders, etc). How do you keep them all aligned on both the long-term vision and the day-to-day tasks?

Ted: Certainly, Evergreen embraces a broad and diverse group of stakeholders. At one end of the spectrum, you have world-class, multi-billion dollar institutions that are the economic engine of our region. At the other, you have men and women who have grown up in some of the most disadvantaged neighborhoods to be found anywhere in America. Any many other types of institutional actors in between. Keeping all of this aligned and moving forward together is one of the essentials to our success to date.

We have established many mechanisms to nurture and sustain this alignment. Each quarter, for example, the Cleveland Foundation’s president, Ronn Richard, convenes a meeting of the leaders of the city’s major anchor institutions, foundations, city agencies, etc. – the most recent gathering had about 30 people around the table. They update each other on ongoing plans related to community development, job creation, transportation issues, and so on.

There is also a leadership team of people working on Evergreen at the staff level – the managers of the cooperatives, program staff at the Cleveland Foundation, consultants working on different elements of the project.

Continuing education and constant information flow are essential to keep the network and system of relationships whole and aligned. One element that has been quite important is an annual study trip to Mondragon (sponsored by the Cleveland Foundation). To date, about 35 civic leaders from Cleveland have participated in these trips, which have been important learning experiences about how cooperative development strategies can move to significant scale. I imagine that the City of Cleveland has a greater percentage of its leaders that have visited Mondragon than any comparable city in America.

Finally, it has to be said that the role played by the Cleveland Foundation as an honest broker and convener, in addition to its role as a funder, has been essential. The Foundation has been able to bring people to the table, and to keep them on board over a period now going on six years.

Nell: What is still holding the project back? Where are the hurdles in this project going forward and what are you doing to overcome them?

Ted: While we have had some success to date, we very definitely are facing big hurdles and significant challenges. Three stand out:

First: we have more business opportunities related to our anchor partners than we have solid management talent to bring new Evergreen companies into existence. We are now aggressively looking for seasoned managers who want to play key roles in this initiative – and who buy into the broader cooperative ownership and community stabilization vision. This is not typical for most business people, to say the least. But if any of your readers out there are interested in this, they should contact us!

Second: it will be critical to our long term success to build a strong culture of cooperative ownership within Evergreen companies. Being a worker-owner is a very different proposition from showing up at work for 8 hours a day and then clocking out. In Evergreen, each person is an owner – and with that comes enormous responsibility and accountability. Building that culture, and empowering our worker-owners to become leaders, both within their companies and within the communities, is essential.

Third: while we have had some success at accessing and placing capital, we are going to need to expand our capital pool considerably. In 2011 we will be launching our new Evergreen Cooperative Development Fund and will be seeking a broad range of investments – from foundation grant and program related investments to mission related investments, private equity (that is willing to take a below market rate of return), and government loans and grants. We are thinking of something on the order of raising $50 – $100 million in the coming period to capitalize the next generations of Evergreen companies. This is going to be a challenge in these difficult financial times, to say the least. But we believe we can do it.

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My Favorite Blogs

I just updated the blogroll on the Social Velocity website. You can see the brand new list under “My Favorite Blogs” on the right hand side of the Blog page, and I’m also including it below for those of you on the RSS feed.

These blogs are my favorite in the social/entrepreneurship/financing worlds. By my “favorite” I mean that these blogs:

  • Consistently create pithy posts that make me think, as opposed to just regurgitate a press release or old argument
  • Include new ideas and arguments
  • Cover the social entrepreneurship, nonprofit, philanthropy, start up, social finance, and/or social business worlds
  • Seed or contribute to larger, interesting discussions in the blogosphere

So here is my list of favorite blogs:

But I always love to be introduced to new blogs, so please tell me your favorite blogs in the comments. If your favorite blogs become mine, I’ll add them to my list.

Photo Credit: Don Cheps

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Nonprofits and the Emerging Social Capital Market

Socap ImageLast week’s Social Capital Markets Conference was an amazing experience.  You really felt as though you were at the beginning of something pretty innovative.

The financial market collapse of the last year has given the emerging social capital markets, where social impact and money converge, a voice and credibility.  Indeed some social investments, like those in the microfinance arena, have actually far outperformed the financial returns of the traditional capital markets in the past year.

Will it last?  And will money begin to flow more readily to organizations and projects that promise a social return?  Will, as some at SoCap forecasted (or perhaps hoped), impact investing become a significant part of a normal investor portfolio in the next five years? Will social impact become a necessary and prevalent part of the traditional capital marketplace? Who knows.   This whole space is evolving, and it is much too soon to understand how it will all play out.

One thing, however, that was lacking in last week’s conversations, and is worth a larger discussion, is how nonprofits, those organizations that have been creating “social impact” since before it was cool, fit into this emerging market. As I mentioned in earlier post, attendees to the session I moderated, “Growth Capital for Nonprofit Social Entrepreneurs,” appeared hungry for information, tools, advice, insight about how their organizations could play in this emerging space.

If you think of the overall market as a continuum with traditional charities on one end and traditional businesses on the other, the social capital marketplace, then, is everything in between.  It most certainly includes social businesses–businesses that not only make a profit, but also contribute some sort of social impact (like wind farms or organic groceries).  And there are emerging investment vehicles that can provide investors a financial return (sometimes equivalent to a traditional market rate return) in addition to a social impact return.

But the social capital market must also include new financial vehicles for nonprofit organizations. In order to effectively provide the public goods that for profit businesses (both traditional and social businesses) can’t or won’t provide, nonprofit organizations require seed funding, growth capital, capacity capital, loans, equity, grants, operating revenue and so on.

Although there was some discussion of these financial needs, the nonprofit side of the social capital market discussion was not as prevalent last week. And indeed some at the conference, including conference co-f0under, Kevin Jones, refer to nonprofits as “our cousins” in this space.  Indeed, the keynoter at the first SoCap conference  last year encouraged the audience to “set aside” nonprofit organizations because they were not what that conference was about.  And I have had a few conversations with leaders in the social business space who have told me: “Innovation will never come from the nonprofit side.  It must come from the social business side.”

But nonprofit organizations are very much part of this conversation and this emerging market. Social impact is not a new thing.  As much as those of us assembled at SoCap last week would like to believe that we are pioneers in all things, we are not.   Many of the financial vehicles emerging in this new space are exciting and new.  But creating social impact through entrepreneurial efforts is not new.

Nonprofit organizations have been around for a long time.  And their reason for being has always been to create some sort of public good that was not addressed by the market.  That is not to say that it has been done right.  Many would agree that the nonprofit sector and the philanthropy that funds it are dysfunctional, even broken.  And I think most of us would agree the government sector is fairly broken as well.

But we cannot discount and dismiss either sector.  In the true spirit of the social innovation space, we must recycle and reuse the nonprofit and government sectors, just as we are refashioning the private sector.  We must reconfigure the assets of all three sectors to turn them into more effective, more productive, higher functioning sectors that can work with, not separate from, each other to create solutions.

What does that look like?  It means that venture philanthropy funds are sharing investor prospects with social venture funds and vice versa.  It means that investors interested in a social return have portfolios that include not only social businesses, but also nonprofit deals.  It means that foundations are investing in both for profit and nonprofit social impact organizations.  It means that the SoCap conference list of attendees and speakers come equally  from all three sectors (public, private, nonprofit).  It means that the majority of nonprofit organizations that have an interest in and capacity for growth have access to growth capital and management expertise to scale.  It means that a nonprofit that is solving social problems is just as sexy and gets just as many resources, respect and mind-share as a social business that is doing the same. It means that those working on changing laws to help social entrepreneurs look at both for profit and nonprofit structures, incentives and restrictions.

The creation of the social capital market is a bold, chaotic, possibly insane, but potentially game-changing endeavor that has the power to completely rework how money flows through the market to shape society. Let’s not get bogged down in dichotomies and factions, rather let’s take a bigger picture view of the essence of what we are attempting to do.  And that is to completely reconfigure, and create a productive convergence among, the three sectors. Now that would be innovative.

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A False Dichotomy: Non-profit vs. For-profit Solutions

In a recent blog post, Tony Wang, a brilliant researcher at Lucy Bernholz’s  Blueprint Research & Design, a strategy consulting firm for philanthropy in the Bay Area, makes a thought-provoking, yet ultimately flawed argument about the social impact of nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false dichotomy.

Tony’s underlying argument is that a for-profit business model is better able to deliver social impact per dollar than a nonprofit one.  He gives many reasons for this:

  1. Dollars for charity are limited. True the nonprofit sector is undercapitalized, but that is changing, and will continue to change as the public, private and nonprofit sectors continue to converge and the social capital market, for both for-profit and nonprofit social impact organizations, grows.  The mere fact that nonprofits are undercapitalized is not a reason to dismiss nonprofit solutions out of hand.
  2. Charity is often inefficient because of its lack of accountability to the people who are the primary beneficiaries of aid.”  This has been true in the past, but I think it is changing.  An increasing focus on metrics, brought on by the venture philanthropy movement and others, has encouraged nonprofits to track and demonstrate outcomes.  These aren’t perfect by any means and there is much work still to be done, but why not work to encourage better accountability rather than simply say nonprofits are inefficient?
  3. Charity is often harmful and insulting to its recipients.  I agree that Western solutions to third world problems can sometimes be full of hubris, but this is no less true in social businesses than it is in nonprofits.  Read my post on the “missionary” nature of some social business solutions.
  4. Business has a much easier time scaling: “it will be difficult for domestic nonprofits to scale when the federal government is the only viable answer and that international nonprofits will still struggle mightily with the issue.”  Government isn’t the only viable answer.  Some great organizations have been able to scale without government assistance (Teach for America, KIPP, Citizen Schools). And the beauty of nonprofit organizations is that scale doesn’t have to mean just the expansion of a single organization.  Rather, scale can mean the dissemination of a solution that works.  Because nonprofits worry less about competition, they are more likely to want to share best practices, models that work, and allow local adaptations of a solution from another area.

Because of all of this, Tony believes that “a lot of young social entrepreneurs…are starting to realize that business solutions and not charity solutions can be more ideal when it comes to maximizing impact (and philanthropy’s impact would be multiplied if it leveraged its capital to fund social impact businesses with true potential).”

I’m sorry, Tony, but I really disagree with this.  Why does it have to be either, or?  Why is one model inherently better able to create value than another? Rather, I would say that it depends on the problem and what the best solution is.  Yes, there are problems and inefficiencies within the nonprofit sector, but there are also some pretty major problems, and inefficiencies in the for-profit sector (dot-com bust, financial crisis, anyone?).

Rather, we need to take a holistic approach to social impact.  There need to be multiple tools available to social entrepreneurs, whether they be for-profit or nonprofit  (different business models, various financing, etc).  And let’s remember that there are some inherent problems with for-profit social impact models as well.  When a solution requires the appearance of impartiality, a nonprofit model might be more effective.

I think the whole point of the convergence and “resetting,” to quote Lucy Bernholz, that is going on is that the old dichotomies and definitions don’t work anymore.  We have to break out of the notion that the way we used to categorize things doesn’t apply anymore.  Structures are changing, new models are emerging.  We need to be flexible and analyze the best solution to each problem that faces us.  “One or the other” thinking just won’t cut it anymore.

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Understanding Social Innovation

If you are interested in learning more about the social innovation movement and will be in Austin on May 14th, join me for a seminar, “New Models: Social Innovation.” This 90-minute session will discuss what social innovation is, what the terms social entrepreneurship, growth capital, venture philanthropy, mission-related investing, and social enterprise mean, and what some really innovative organizations are doing in this space.  If you run a nonprofit, serve on a board, run a social business or are thinking of launching one, donate to social impact organizations, or are interested in solutions to social problems, there is great significance for you in the social innovation movement. And because Austin  has a lead role to play in the movement, I’ll examine how Austin compares to the rest of the country.  You can read some of my past posts on Austin’s social innovation ecosystem, where Austin is going and what it needs to be a leader in this space here, here and here.

If you’ve been intrigued by social innovation and want to learn more, join us:

Lunch and Learn: New Models  – The Social Innovation Movement

May 14, 2009
At Greenlights

Click Here to Register

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Austin the Social Startup Capital of the World?

One of the things I talk and write about (possibly ad nauseam) is how well positioned Austin is to lead in the social innovation movement.  Our rank as the 3rd largest venture capital city in the country, our entrepreneurial spirit, our tech focus, our passion for green living and our tremendous wealth all make us uniquely positioned to capitalize (both financially and socially) on the growing movement for innovation and enterprise around social impact.

I’ve written here and here about what elements of a city’s infrastructure are necessary to catalyze social innovation.  And I was particularly excited when Nathaniel Whittemore, Director of the Center for Global Engagement at Northwestern University, described in a recent blog an ideal environment to stimulate successful social enterprise:

So here is what I’d like to see. Someone combines The Hub model of collaborative working space for social entrepreneurs with the Y-Combinator model of funding low-cost tech startups [provide promising startups small amounts of seed capital and intense mentorship and networking in anticipation of further investment ]. In this model, which is geared toward social enterprise, the Y-Combinator style investment would be focused on tech startups that are building services useful for other businesses and social startups (things like Yammer, which is great for keeping a team of volunteers or employees connected to one another). In addition to the cash investment, the tech startups get to work (and maybe even live?) in the Hub space. In return, they give up equity – but also a small chunk of their developer time (25%? 10 hpw?) to pro-bono or reduced cost projects for the nonprofit social entrepreneurs who are part of the same Hub community. This combines the density, talent and energy of the tech startup world with the mission focus of the social enterprise world. All it would take are the right partners. Sounds like a pretty good combination to me…

This sounds just like Austin.  And, in fact, we have these kind of incubators on the pure business side.  For example, Capital Factory is an Austin-based seed stage mentoring program for startups that provides a small amount of seed capital and weekly mentoring sessions by entrepreneurs who have founded successful companies.  What if there were a Capital Factory for social enterprises and social businesses?  I’m not aware of anything like that anywhere else in the country.  Couldn’t Austin pave the way in social enterprise by taking something we already do very well (venture capital, angel investing, start up incubators, entrepreneurial mentoring, etc.) and put a social spin on it? That would be truly innovative and get us out ahead of the curve of what is shaping up to be a huge movement.  And there is financial and social profit to be made.  Don’t we want a piece of that?  It seems such a natural thing to me.  What is stopping it?  And how do we overcome those roadblocks?

If you’re interested in exploring this topic more, join me and Jessica Shortall for our RISE session on March 3rd:  Start Ups with Social Impact where we’ll talk with Austin-based social enterprises and discuss what is required to make Austin a leader in this space.

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Tuesday, February 10th, 2009 Social Enterprise 7 Comments


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