How SoCap Aims to Bring a Broader Focus to Modern Capitalism
Once again, the timing of SoCap-- the annual Social Capital Markets conference -- was extraordinary. With the financial markets awash in uncertainty and cycles of tumbling and rebounding, over 1200 entrepreneurs, investors, philanthropists and others, convened in San Francisco last week to explore how the capital markets can be recalibrated for the greater social good. It was a fitting continuation for the event -- the first SoCap was held in the fall of 2008, just after the collapse of Lehman Brothers.
Kevin Jones, SoCap convener and co-founder, refers to social capital markets as "the intersection of money and meaning." Whether it is a movement or an asset class is unclear. But there is consensus around impact investing: investments that have both financial and social returns. These returns fall on a continuum of "blended value" which includes both market returns and nonprofits, plus everything in between. This is not standard Wall Street jargon.
"Something is wrong with Modern Portfolio Theory (MPT), Leslie Christian said, "and (the theory) is accepted as the truth." Christian, a seasoned veteran of Wall Street and CEO of Portfolio 21 Investments, and Don Shaffer, CEO of RSF Social Finance, presented a paper citing how portfolio management practices need to reflect ecological impacts.
MPT has been firmly entrenched in the American investing psyche starting in the boom years after World War ll. Christian posits that its foundational principles around economic growth, risk and utility need revision to reflect the 21st century's "ecological limits" which undermine the traditional belief that the economy will grow unabated from ever increasing levels of consumption.
Since the raw materials literally fueling the business sector, e.g. clean water, timber, minerals, etc. are indeed finite, this will curtail economic growth. She believes that portfolio management is at a tipping point.
In support of this premise, RSF Social Finance announced that in the past year it converted its portfolio from about 30% to fully 100% impact investing to reflect its commitment to the sector.
Recurrent themes emerged over three days:
- sharpen the metrics around impact;
- create innovative financial instruments, models and legal structures;
- question all assumptions;
- combine money with meaning;
- and find new partners in other sectors.
Seven tracks of concurrent sessions included: Money, Meaning and Impact, Green 2.0, People-Powered Capital and Design for Social Innovation.
Finding the financing to scale remains a challenge -- but one panel, which included presenters from Root Capital and Beartooth Capital, leaders in environmental and social impact, saw possibility. David Chen, CEO of Equilibrium Capital explained, "The challenge of sustainability is finding the simplest and most easily identifiable unit of measure -- then attach metrics to it. This allows financial instruments to be created to unlock the value chain and solve problems."
Chen said that after a several year struggle to find the best way to measure the health and track sustainability impact of the river water in Oregon's Wiliamette Valley, the simple unit of kilo-calorie was finally agreed upon, enabling an estimated $20 million of commercial grade credits to eventually fund ongoing clean water projects.
Six institutional investors gave voice to the balancing of fiduciary responsibility with social returns. The consensus was that the sector is on the cusp of growth, and it is becoming increasingly possible to generate both market financial AND social returns--it's no longer an "either/or" alternative.
"Sometimes we are covert about doing both financial and social returns," explained Will Rosenzweig, co-founder of Physic Ventures. But they are diligent. "We look at about 1400 opportunities to find the 4-5 (that produce both)." Social entrepreneurs are also experimenting. "We're seeing more and more come to us for financing after they transition from a nonprofit to a for-profit," said Dipender Saluja, Managing Director of the Capricorn Investment Group. "There's no stigma attached if there are grants in the beginning. It's called non-dilutive financing"
One panelist said that integrated thinking around the financial and social focus is key, recalling how in the early days of Odwalla, long before it was sold to Coca Cola, its culture was so skewed to the social mission that a mantra was developed to keep the company on track: "no profit, no purpose."
Creating New Paths to Impact Investing
Another panel was aptly entitled: The Democratization of Impact Investing: Breaking Down Barriers to People-Powered Capital. "The vast majority of impact investments are open just to individuals with high levels of net worth or net income, "accredited investors" as defined by the Securities Act of 1933, excluding about 98% of the U.S. population," explained Jenny Kassan, CEO of Cutting Edge Capital. "We are finding ways to allow the non-accredited investor to invest in small, mostly local businesses through private offerings, co-ops, direct public offerings and other innovative vehicles."
Panelist Dana Mauriello, co-founder and president of ProFounder, discussed the online site that enables a community (those with an existing relationship with the business owner) to invest in start-up businesses. She was inspired while at Stanford Business School, where she witnessed her fellow students trying to raise funds for their start-ups, initially unaware of the complexity of the SEC regulations. Our leaders in Washington DC have taken note of her efforts -- she has been called to testify to a Congressional committee later this month to discuss ProFounder's model of equity-based crowdfunding.
A related but separate panel also focused on crowdfunding, but this model allows businesses and nonprofits, to raise funding in the form of a "donation" of sorts, not an equity investment. Colin Mutchler, co-founder of media start-up LoudSauce, described how he raised money on IndieGoGo, an online crowdfunding site. Incredibly, President Obama referenced the crowdfunding model in his recent speech on job creation, the same day as this panel, as a funding tool that will receive more attention from his administration.
While some look for new ways to engage non-accredited investors, others are looking to tap into the existing financial management channels. Tim Freundlich, President of Impact Assets, explains, "What is missing in impact investing now is distribution -- and increasingly wealth is managed, so distribution means empowering advisors." Impact Assets anticipates a roll-out with a handful of wealth management firms in 2012, fully integrating selected private debt and equity vehicles into the firms' investment platforms.
The SoCap conveners identified seed-funding of social enterprises as an emphasis this year. To this end, SoCap and other sponsors provided scholarships to more than eighty social entrepreneurs from over twenty countries; about a quarter were selected to participate in the pitch sessions to investors during the conference.
The last plenary was a panel of seasoned impact investing professionals. Tracy Palandjian, CEO of Social Finance, described perhaps the most intriguing innovation-- social impact bonds (SIB). Implemented in the U.K. in 2010, discussions continue for a pilot program in Massachusetts. Technically not a bond, it is a private-public partnership: "SIB's align the interests of government agencies, private investors, and nonprofits around specific social outcomes by leveraging private capital to pay for early intervention programs." In the UK, they are used to reduce prisoner recidivism through intensive intervention efforts; investors get paid if the desired social outcomes are reached.
This year SoCap had a palpable tension -- perhaps a frustrated urgency that happens when a system is in flux and new and existing players are trying to jockey around the established order while trying to create a new order. This was acknowledged, mostly in optimistic tones, by those who see signs of transformation yet seem to await a few dominos up front to set off a larger chain reaction. But the emerging social capital markets are already set in motion, propelled by energy coming from all directions.
Photo CC-licensed by PerpetualTourist2000.