Creating a New Asset Class for Social Entrepreneurs
BY Suzi Sosa
Participants at this year's SoCap conference talk about creating a new asset class for do-gooders.
Investing in Anti-Poverty: Jacqueline Novogratz of Acumen Fund, kicked off the Social Capital Markets conference in San Francisco in early October.
The big question at this year's Social Capital Markets conference was this: How can we unlock more investment capital for social entrepreneurs? Kevin Jones and the folks at Good Capital, the founders and conveners of "SoCap" (as it is known among its followers), believe that the pressing need in the field is to make large volumes of capital available to world-changing entrepreneurs.
With the explicit intention of tapping into and mobilizing mainstream capital markets, the buzz among the SoCap crowd this year was all about "creating a new asset class" for social entrepreneurs. This terminology is important because it reflects the intention of the conference participants to move away from niche "socially-minded" investors and instead to tap into the trillion-dollar pot of traditional investment capital.
Jacqueline Novogratz, founder and CEO of Acumen Fund, one of the earliest pioneers to invest in social entrepreneurs worldwide, kicked off SoCap with a provocative declaration that the world has never been more open to supporting social entrepreneurship and social entrepreneurs. With a global acknowledgement that old-school aid models are broken and that funding for public services is and will remain shockingly low, societies are looking to social entrepreneurs to skillfully leverage the capitalist market to solve more of our social woes. In particular, Novogratz underscored the need for more "patient capital," which she believes is a "third way" – a type of capital investment that accepts a longer time horizon for maturation, supports a higher risk tolerance, and has as its goal maximizing social, rather than financial, returns. Unlike pure philanthropy, patient capital is usually a debt or equity placement, expecting repayment or an exit within approximately five to seven years.
Immediately following Novogratz's talk, Matt Flannery, the co-founder and CEO of Kiva, introduced his theory of "connected capital" on which Kiva is founded. In his view, connected capital is defined by four components: it is patient, democratized, catalytic, and accountable. And it is changing the face of philanthropy by building new models of trust and engagement between donors and recipients. Contrary to what early skeptics of Kiva predicted, more than 750,000 "regular" people have made investments through Kiva.org, averaging more than $200 per person, despite they fact that they are very-high-risk and have as their goal not financial return but the opportunity to make a meaningful impact.
One of the questions raised by experimental models such as those of the Acumen Fund and Kiva is whether this is philanthropy or capitalism? This has been a challenging issue for the social capital marketplace where philanthropy is traditionally rewarded with a tax deduction and capitalist investment with a competitive rate of return. Sometimes these hybrid models offer neither.
What became apparent through the various conversations at SoCap is that the leaders of the social capital markets see the need to expand both the types and the amount of capital available to social entrepreneurs. In the diversity of capital, the priority is to increase the type and availability throughout the entrepreneurial life cycle — from seed stage to angel investment and growth capital. Among the notable pioneers in this space is Village Capital, a fund that is experimenting with a new model for seed-stage funding in which a group of entrepreneurs decides collectively who among them should receive the investment. A second pioneer in this arena is Jessica Jackley, also co-founder of Kiva, now launching a new social business called ProFounder that will enable entrepreneurs to build personalized web pages through which they can raise money from friends and family.
Of those who are most concerned about increasing the amount of capital available, the discussion centered on how to effectively court mainstream dollars from investors of all types, including wealthy individuals, family offices, angel networks, and mainstream institutions. A study, titled "Money For Good," released at SoCap, found that 48 percent of investors are "interested" in this type of "impact investing," representing a total potential market of approximately $120 billion. Pioneers working to increase the volume of capital available include Gloria Nelund, co-founder and CEO of TriLinc Global, an impact investment firm constructing large investment funds to market impact investments to main street investors, and Ron Cordes, co-chairman of Genworth Financial, who announced at SoCap the launch of Impact Assets, a new web portal that will make available a broad scope of information to potential impact investors.
Momentum is clearly building around expanding the capital pool for social entrepreneurs and public awareness and interest are building. Still, there are a number of structural reasons why the market has been slow moving. First of all, there have been few well-documented success stories of social enterprises that received investment and ultimately yielded an exit or meaningful return. In addition, the absence of systematized rating and consolidation systems, like those that are found in the mainstream markets, means that it's still difficult for investment advisors to compare and package these investment opportunities. A few trailblazers, like the Global Impact Investing Network, are working furiously to construct this infrastructure, but it hasn't had enough time to garner scale in the market.
In sum, there is a tremendous amount of excitement in the air about the fact that investors across the spectrum — from global financiers to Silicon Valley angels to the general public — are at least intrigued by the idea of dedicating some portion of their investment to social entrepreneurs. At SoCap the sense of urgency is around tapping into more of that capital faster and collectively building the infrastructure to make that happen quickly. Several people noted that it's still the Wild West in the social capital markets, which generally means that few rules apply but for those who view this space through the eyes of opportunity, there is a lot of money to be made.