Social Capital Markets

At SoCap09 two weeks ago, I spoke on a moderated panel called “True Tales of Amazement and Horror from the Fundraising Circuit” with Don Shaffer, Shari Berenbach, Penelope Douglas and moderator Stuart Davidson. It was a great group - one I was honored to be a part of - and it was a successful panel in no small part thanks to Stuart’s questions.

One of those questions was directed at me; Stuart asked, “Do metrics sell on the fundraising circuit?” Must have been an ear-perking question, because my answer has been tweeted and re-tweeted a dozen times. Here’s how it came out, at least to the Twitter-verse:

@elizabethu: Brian Trelstad, Acumen Fund: our donors care more that we care about metrics than they care about the metrics themselves #socap09

As other tweeple picked up on this response, I’ve been mulling over the limits of 140-character messages; frankly, some important context got lost in translation. In retrospect, here’s what I was trying to get at, more or less:

I remember my corporate finance professor saying that valuing a public company was a combination of cash and hope. Cash flows from current businesses and hope for the future. Cash plus hope = corporate valuation. Start-ups and social enterprises are a little heavier on the hope than the cash in their early stages, but this is how you measure value in any enterprise. In our fundraising, in the early stages of our business and in the early stages of our field, we have also relied more on hope than cash in that these are early stage businesses with more promise than current performance. And when we go out to fundraise, our metrics are not really the selling point. So at this point, I think that our donors care more that we care about metrics than they care about the metrics themselves. But as competition increases and the field matures, I believe this will change and we need to be ready for some tough questions as a fund and as a field about the impact of our work and the social metrics.

This is also a riff on an article in the Stanford Social Innovation Review from back in 2004. In it, the authors cite research on high net worth individuals in venture philanthropy, concluding that the obsession with performance metrics is actually somewhat overblown, and metrics are not a gating factor for contribution decisions.

Hopefully that clarifies. Thanks for all the tweets, folks - and for caring enough about metrics to send 140-character musings out to the ‘verse. And as much as I can - which is not often - I tweet at @trelstad

Guest blogger Sue Yun Chi is an Associate at SeaChange Capital Partners, which seeks to mobilize a network of wealthy donors so they provide substantial amounts of philanthropic capital, to increase the impact of outstanding nonprofits.

I arrived in San Francisco with a sense of foreboding from the current financial crisis, but it took only a moment at the Social Capital Markets conference in sunny San Francisco to change my outlook on the future. Although the conference may have started with 650 individuals with different agendas, what transpired over the course of the conference was a movement toward a cohesive social capital marketplace. As the second day drew to a close, I came away with a sense of inspiration and optimism.

The conference offered a variety of substantive topics, from design in the developing world to sustainable US social enterprises, with keynote speaker Katherine Fulton of the Monitor Institute presenting a framework in which to place these individual sessions. In seeking balance between the goals of social impact and financial profits, she said, there exists a vast spectrum of possibilities. The optimal mix would ultimately require finding, as Steve Zuckerman translated into economic terms, the “efficient frontier.” However, in order to find this frontier, we would need to move from a series of uncoordinated actions and distinct silos to a more cohesive market. Although Katherine mentioned that we have yet to establish this market, SoCap08 suggested the beginnings of one.

You might not have seen it if you were focusing solely on the panel discussions, but loiter in the hallway, or sneak out for a coffee break, and you were bound to run into a small group of people excitedly discussing topics such as metrics, business synergies, or new ventures. These stairwell chats were encouraged and facilitated by official sessions. For example, IDEO, a global design consultancy, led a session on new and quick ways for attendees to network and find ways to collaborate. Connection Concierge led a capital networking session that grouped people by sector interest and had three-minute paired introductions. Substantive panels also fostered this type of networking, as they offered a taste of what both participants and panelists had to offer and wanted to discuss. Small group discussions are commonplace at conferences, but SoCap08 strived to create a true marketplace environment.

A bird’s eye view into Herbst Pavilion would have shown a bustling marketplace with buyers, sellers, and intermediaries primarily exchanging ideas about financial services, information technology, and a host of other social products. To be fair, this might not be the social capital market that the conference title referred to, but it offered a positive outlook on what’s to come.

As someone interested in the syndication of philanthropy to get non-profits to scale, I found myself in discussions on the role of traditional philanthropy. For example, some were saying that philanthropy could never move social impact to scale because it doesn’t offer the incentive system and capital- raising potential that private markets offer. Surely there are sectors where this statement applies, but what about non-profit organizations that deliver critical services that have not yet been valued by the public as a marketable good? Isn’t there a role for philanthropy to support organizations that aren’t yet ready or suitable for the market?

A few attendees made the point that, in the evolution of social markets, philanthropy has allowed organizations to take risks in their efforts to achieve social impact in ways the commercial market would never allow. For some organizations, success in philanthropy has allowed them to access commercial lines of credit. For others, it has provided the “proof of concept” needed for society to support the commercial viability of socially-minded ventures. This debate helped to clarify the different points on the spectrum of social and financial return, and the different options that lie between pure philanthropic and pure profit plays.

As with any marketplace, you could find those who were willing to collaborate and others who were happy to challenge and disagree. One importance of a convening such as this is to find those who think differently and then to work together, to produce a more nuanced view of what works, when, and why. A market entails creating various products and services to meet the needs of organizations according to their specific structures, goals, and needs. Understanding these differences is what will produce a market, move us towards product and service sophistication, and ultimately find that “efficient frontier” for social capital markets. Attendees recognized the timing of this conference as a boon; after all, what better time to move this agenda forward than during one when the mainstream market is looking to redefine itself?

Guest blogger Graham Macmillan is the Senior Director of VisionSpring (formerly Scojo Foundation). In addition to his work with the VisionSpring team, Graham is pursuing his Global EMBA as part of TRIUM, which is a joint program of London School of Economics, HEC Paris, and NYU Stern. He also holds his MSc in International Management from NYU Wagner and his BA in International Studies and History from Colby College.

Is private equity really making a play in this space? If so, what’s their impact going to be? Those were the questions I asked myself as I sat down at the session “New Private Equity Funds” at SoCap08. The session’s description piqued my interest enough to choose it over the many other concurrent sessions. I wanted to learn more about the “serious money” being invested in non-microfinance related social enterprises. Well, I am happy to report that I found some good examples, though I left with some lingering questions.

The session’s Moderator, Scott Smith of Hanson Bridgett, did an effective job of facilitating the discussion among Álvaro Rodríguez Arregui of Ignia Partners, Wes Selke of Good Capital, Christian Schattenmann of Bamboo Finance, and Josh Becker of New Cycle Capital. For someone that doesn’t spend the majority of his time talking with investors expecting a financial return, I was interested in seeing what the investments in the funds were and what, most importantly, were the expected returns—both financial as well as social.

Here is a quick listing of the funds, some of the investments the funds have made, and the expected returns:

Good Capital

Good Capital recently launched a $30 million Social Enterprise Investment and Expansion Fund focused on poverty alleviation, health care, and education in the U.S. While the fund hasn’t closed yet, they have already made two investments: Better World Books and Adina for Life. Wes Selke noted that the targets of the fund’s investors were social mission-led companies that can demonstrate scalable change. One of the differentiating factors in Good Capital’s investment approach is its hands-on, VC-like approach to working closely with the management team and taking a seat on the Board.

Target: 8-10% IRR over the seven-year lifespan of the fund.

New Cycle Capital

New Cycle Capital was new to me, but I was quite impressed with Josh Becker’s presentation on their investment strategy. New Cycle makes early-stage, VC-like investments in energy efficiency/clean building projects and domestic emerging markets. Some of their investments are: Cool Earth Solar, Goalspring, MK: Michelle Kaufmann, Positive Energy, Terrapass, and Sneaker Villa.

Target: Comparable to top quartile of VC funds over nine-year lifespan of fund.

Bamboo Finance

For those of you who aren’t familiar with Bamboo Finance, they came out of Blue Orchard Finance which is well-regarded for its microfinance investment funds. Christian Schattenmann described Bamboo Finance’s strategy as trying to help social enterprises tap into the capital markets like microfinance has. They have set up Oasis Fund to make five investments in social enterprises that provide critical services or goods to the lowest income sectors. Bamboo provides both debt and equity financing in the range of $250,000 to $3 million.

Target: 10-15% on equity investments. 7-8% debt investments.

Ignia Partners

Ignia Partners hails from Mexico where they are making strategic investments in BoP opportunities in Latin America. Led by Álvaro Rodríguez Arregui and Michael Chu, Ignia has established Ignia Fund I which has raised more than $20 million to invest in businesses that are scalable, generate cash, part of the last mile of the value chain, and led by experienced entrepreneurs. Ignia has made two investments thus far in Primedic which is a Mexican healthcare provider and an affordable housing project in Chiapas.

Target: Ignia focuses on hurdle rates and has a target of 25-30% over the hurdle rate.

Overall, I found the presentations from the funds to be quite interesting. Clearly, “real money” is beginning to move into this space and trying to mimic the investment cycle that occurred with microfinance, though there haven’t been any IPOs just yet. While it is still early days, it was evident that this was a trend all four of the funds were trying to push.

While all four of the presenters were essentially on their first funds, it was interesting to note that one of the presenters said that the purpose of the first fund is really to get to the second fund. I took that to mean that there is a credibility and proof of concept stage here. With success breeds success and this is where I became concerned not only for the fund managers but the space itself. What kind of expectations are we creating? What happens if we don’t realize a financial return on these investments? Does this mean that the money will go away? Or, is there a real pent-up demand for these products? Will history show during these tumultuous days that social capital investments actually provide a stronger, risk-adjusted return than we’re seeing in the traditional capital markets? Lots of questions, few answers.

While the game of expectations is my overall take-away from SoCap 08, my take-away from the “New Private Equity Funds” session was measurement, hence the title of my post—two bucket thinking, two bucket standards. In the session there was a lot of talk about expected financial returns, IRR’s, and hurdle rates. If I were at a VC conference I would have felt right at home. The trick is that this gathering is about Social Capital and the phenomenon of the merging of two bucket thinking. I think it is safe to say that all the attendees believe in the blending of financial returns and social returns. No longer do we want to live in world where you can’t have your cake (20% return) and eat it too (poverty eradication).

While all of the presenters acknowledged that the purpose of their funds was to provide double and triple-bottom line returns, I didn’t see anything other than anecdotal evidence of this being achieved. For one who comes from a philanthropic capital-funded organization where rigorous social impact measurement is required and the norm, I did not get a sense that the same rigor was being applied to the Private Equity Funds. I don’t believe this is the fault of the fund managers or the companies they’ve invested in. I truly believe that they feel they’ve seen the evidence of the social impact in their due diligence. Yet, not one of the fund managers could provide quantitative results of impact beyond carbon credit offsets.

So, I left the session in a quandary. If you’re receiving philanthropic capital, are you held to higher standards of social impact measurement than other types of capital? If so, why? Is this somehow an adjustment to risk? If quantitative social impact measurement is the gold standard of social capital investment, how much are investors expecting a financial return willing to spend?

Editor’s note: This post also appears on the VisionSpring blog, Business in a Bag.