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Last week, more than 1,500 people crowded into historic Fort Mason on the San Francisco Bay overlooking the Golden Gate Bridge and Alcatraz. The retrofitted military relic was an appropriate venue for the The Social Capital Markets Conference, which attracted throngs of investors and entrepreneurs who want to remake finance into a tool for social change.
The biggest gathering of the year for impact investors seeking better ways to merge money and meaning, The Social Capital Markets Conference was an opportunity to find the best new social entrepreneurs to fund. GOOD talked with some of these pioneering investors to get tips for social entrepreneurs who want to attract values-driven cash.
The charitable venture of eBay founder Pierre Omidyar and his wife Pam, Omidyar Network brought the nimble verve of Silicon Valley to philanthropy back in 2004. This firm pioneered the idea that a single organization could both invest in companies and offer grants to nonprofits, based on what creates the largest social impact. The organization gives $100 million a year to projects in the U.S. and overseas that have the potential to touch tens of thousands of people or more.
Advice from Matt Bannick, managing partner
Do: Know your customer.
"It's a very basic one. Sometimes in the barrage of Power Point presentations, people lose sight of the customer. People get infatuated with a product and how well it is engineered [...] without being fully grounded in whether that is needed by a customer base."
Bridge International Academy schools in Kenya, for example, offer a private education for $4 a month. They also survey students and parents to find out why they keep coming and why they don't, something highly unusual in Kenyan public schools where even the teachers are known for regularly playing hooky.
Don't: Go right to the financial projections.
"An entrepreneur who leads with the financials is frequently not an entrepreneur who is deeply immersed in serving customer needs."
Photo courtesy of Omidyar Network.
A pioneer in using for-profit investment to solve social problems, Acumen employs what the company calls patient capital; it's ok for the returns to be a little lower, and the money a little slower in coming back, if the anti-poverty results are bigger in the long term. After 10 years, the fund now has $60 million invested in South Asia and East Africa in everything from health and water to housing, energy, and agriculture. These guys are known for being the first big money for small companies ready to boom.
Advice from Brian Trelstad, chief investment officer
Do: Solve a social problem first and foremost.
"Ultimately we want them to run through the brick walls of solving the [social] problem, not just building the business," Trelstad says. Husk Power, an Acumen fundee, is bringing affordable electricity to rural Indians through rice husk generators. "Their aspirations were to do something for the development of Bihar, India. There are a bunch of people who view [rural energy gaps] as an opportunity to raise capital and make money, and that's great [...] but we are really interested in finding people who are passionate about solving the problem."
Don't: Drive a Mercedes.
"We've had bad experiences investing in social entrepreneurs who drive Mercedes Benzes. When you drive through the slums with the entrepreneur in a Mercedes Benz" you start to ask yourself about his willingness to take risks.
This group is working to make it easier for everyday investors to put their retirement money where their values are. Impact Assets is collecting social impact investment fund managers into a pooled fund of funds that could lower the barriers for the average person to get involved in higher impact, higher return opportunities. Right now, they're lending out $60 million from 450 donors who specify the causes they want to tackle.
Advice from Elise Lufkin, managing director
Do: Have a diverse staff.
"Do you have women and people of color on your board and staff? Do you have different age groups represented? How are you compensating your staff? It's important to us what you are doing but also how you are doing it."
Don't: Be a glutton.
"We have had donors turn down investments because they were planning to make too much money. We had an investment that was projecting a 21 percent return, and we had donors who invested in it, but two who wouldn't [...] It was a microfinance fund and the donors said, if you are returning 21 percent to me, you are ripping off poor people."
Photo via Impact Assets.
RSF Social Finance
RSF behaves like a cross between a bank and foundation, with some grants and $230 million in loans since 1984. They focus on companies that commercial banks typically wont touch "because they are a little too small, a little too pioneering, or a little too something." Where RSF stands out is in building community. The fund holds quarterly gatherings where borrowers and investors all come together to help decide interest rates. Just try to imagine Bank of America inviting you down to the office to suggest what your mortgage payment should be next month!
Advice from Don Shaffer, president and CEO
Do: Try something nobody else is doing.
"We're not funding green tech," Shaffer says; enough people are doing that. However, "We made a loan to Revolution Foods in Oakland... because nobody had been crazy enough to think that they could provide healthy, nutritious, organic, locally-derived school lunches at a price point comparable to what [the federal government] would pay for orange drink and pizza." Revolution Foods is doing that and more.
Don't: Look at us for a short-term relationship.
"We've had many companies that have approached us too early to get funding from us [...] and then they came back later and got a loan from us."
This young group has two funds for U.S. companies, one for seed funding and one designed to help proven social enterprises expand. Good Capital is exceeding expectations on their first $7 million investment, so look for a third fund from these folks soon.
Advice from Kevin Jones, founder
Do: Know how to get your first five customers.
The Hoop Fund is a mix of eBay meets Kiva that was funded by Good Capital. "They came in knowing exactly who their first customer was going to be, and two weeks into our program, they had a customer," Jones says.
Don't: Say "if only."
"Don't say something like, if we only get 1 percent of this market we will be a $100 million company. No one will believe you. It's not ever true."
Photo courtesy Fora.tv
City Light Capital
This venture fund has been finding small and growing companies making innovations in safety, education, and the environment since 2004. They give out between $1 and $3 million per investment, and it's a hard numbers game for City Light. They are so measurement-obsessed that each company they invest in must sign a letter promising to hit specific, measurable social impact goals that get reported just like financial metrics. If you can't measure it, you can't get this cash.
Advice from Matt Cohen, principal
Do: Come with a quantifiable measure of your impact.
"Explain exactly how your core business or product is going to deliver impact and how you intend to quantify that," Cohen says, citing Glacier Bay Technologies as a strong example. Diesel trucks idle overnight to keep the cab warm and lit while the driver rests, in the process spewing pollution for eight or more extra hours a day. Glacier Bay offers an electric battery alternative that cuts 3,000 gallons of diesel use per truck per year. "That has a corresponding number of CO2 tons reduced for each truck, and you can aggregate up" to an exact measure of environmental impact for the whole fleet and the whole company.
Don't: Underestimate the competition.
"One of the silliest things people say is we have no real competitors [...] In all likelihood, we know who the competitors are and if you demonstrate a naïveté, it is only going to discredit you."
Photo courtesy of Matt Cohen.
Aspen Network of Development Entrepreneurs
This international network of 140 funders focuses on small businesses in developing countries because building that sector creates jobs and local wealth. Think of it as a motley mix of groups supporting the companies that have outgrown microfinance but still need a boost to attract big-time money from the usual financial suspects. There are a few pioneering banks in ANDE, but also development nonprofits, corporations building up their supply chains and even a few universities.
Advice Randall Kempner, executive director
Do: Be real.
"A lot of investors see a lot of people who come in and try to sell them these grand ideas [...] and trying to overestimate what you can do is not going to help you."
Don't: Be overconfident.
"These markets are so new, and most of the products and the business models haven't actually been tried," especially with new technologies. So it's ok to admit you don't know exactly what will happen.
Photo courtesy of John-Michael Maas/Darby Communications.