Sean is a visionary leading the charge to transform philanthropy. He is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm. He is also the author of the very popular Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and his insights on philanthropy have been referenced in The New York Times, Wall Street Journal, Washington Post, and Financial Times.
Nell: At the first Social Capital Markets Conference (SoCap) in 2008 one of the keynoters said “we’re not here to talk about nonprofits.” We’ve come a long way from there to this year’s devoted track around philanthropic capital and the nonprofit space at SoCap. Where do you think the initial hesitance to connect philanthropic and impact investing came from? And how do we continue to integrate the two worlds?
Sean: I think that one of the segments of people who are attracted to impact investing are people who think philanthropy doesn’t work. While I view philanthropic and for-profit social capital to be part of a single continuum of capital, many people seem to feel that they are fundamentally different. Like most new ideas, early adopters often think it is a silver bullet that will “change everything”. Some early adopters of impact investing or other forms of for-profit social capital wrongly believe that impact investing will replace philanthropy. I think this is a fundamental misunderstanding. Continuing to integrate the two worlds will require helping the various points on the capital spectrum better understand each other. At the end of the day, capital shouldn’t be viewed through an ideological lens, but should simply be deployed based on what sort of capital fits the situation.
Nell: The SoCap session on nonprofit rating systems like Charity Navigator and GiveWell demonstrated that there is still quite a divide between GIIRS (the impact investing rating system) and nonprofit rating systems. What is your sense of this? Do you think there is potential to somehow combine GIIRS (or something else) and nonprofit rating systems so that there is one comparable impact measurement system?
Sean: I would guess that any truly effective impact measurement system should be functional across both for-profit and nonprofit activity. A good impact assessment system wouldn’t care about the tax status of the entity producing results, it would just care about the results and the cost of obtaining them. That being said, I think evaluating a nonprofit organization is really quite different from evaluating a for-profit organization. So even if we have a unified impact assessment framework some day, I would guess that organizational assessment will utilize different systems and approaches for nonprofit and for-profit organizations.
Nell: How would you like to see the conversation about connecting philanthropy and impact investing evolve at SoCap11? What are your hopes for next year’s conference?
Sean: I’d like to work to profile more examples of ways that for-profit and philanthropic capital worked together to produce social impact. Our session on Evergreen Lodge at this year’s conference looked precisely at this question, but I’d like to see more examples. I’d also like to see examples of ways philanthropic entities have used for-profit investments or subsidiaries well or for-profits have effectively used philanthropic activities to drive profit and social results. However, one of the most important goals is simply getting the different players into the same room and getting them to come to understand each other better. While Kevin Jones and I had a good time talking about the Social Capital Markets as a meeting ground for the Barbarians and Byzantine, in reality none of us are barbarians.
Nell: Beyond SoCap where do you think the important conversations about unlocking philanthropic and government capital for social impact are happening?
Sean: This is an interesting question. SoCap is special because it is one of the only (the only?) conference that is specifically about capital for social impact without regard for sector. But versions of this conversation are happening around Grantmakers for Effective Organizations, The Social Innovation Fund, online and in a different sort of way at the PopTech conference.
Nell: At the last general session of SoCap Woody Tasch of the Slow Money movement said he doesn’t think mission-related investing will ever be adopted by the majority of foundations. What are your thoughts on that?
Sean: Social Responsible Investing, the practice of screening out stocks of tobacco companies, defense contractors and the like from investment portfolios, is not practiced by a majority of investors. Yet, SRI is very mainstream and has significantly altered the behavior of publicly traded companies. Today, SRI mutual funds are one of the fastest growing areas in money management. So I don’t think that the majority of funders have to adopt mission related investing for the concept to be deemed a success. It should be noted that SRI took a good 20 years or so to go mainstream. So it could be some time before mission related investing is considering mainstream.
Nell: And more broadly, what do you think it will take to change how philanthropists (both foundations and individual donors) use money to support social impact? How do we make more donors builders instead of just buyers?
Sean: Today, I think that very few people in the social sector really understand what “philanthropic equity” is and how capital differs from revenue. Nonprofit accounting does not acknowledge that capital even exists in the sector. Nonprofits can only book cash coming into their business as revenue or a loan. There’s no official way to account for equity-like capital. So I think that there needs to be a pretty major education effort to get the whole sector very clear on how fundamentally different it is for a funder/donor to “invest” philanthropic equity in a nonprofit vs paying a nonprofit revenue to execute programs. Personally, I don’t think much progress will be made until nonprofit accounting changes. Until that happens, it doesn’t matter much what we call “growth capital”, it is all just revenue to the nonprofit.
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.