One of the main themes of Tactical Philanthropy is that the money in your “investor’s pocket” and the money in your “philanthropist’s pocket” is really one and the same. People artificially segment these assets because doing so helps them make decisions. People create lots of artificial concepts to help them live their life. Many of them are helpful, but they often stunt our ability to think creatively. I talked about this concept in a post last year titled “Wealth Management of Philanthropic Capital”.
The discussion around The Gates Foundation investment policy can be seen as a discussion about whether viewing the grant making as separate from the investment management of the asset base of a foundation is appropriate. I think you need to view the two groups of money simultaneously. However, I think that “socially responsible investing” is only a small step in that direction. The “philanthropic capital markets” are still developing. But one step in the right direction is Good Capital. Spend a morning with founder Tim Freundlich, as I did, and you’ll be treated to a mind spinning trek through the landscape of Social Investing. Rather than give my own take on the field, I’m going to quote directly from Good Capital:
The Opportunity
Social enterprises – businesses that combine an ability to be profitable, with the power to deliver on a social mission – are creating new and exciting solutions to society’s problems; from poverty to health, education to the environment. Sometimes they hire and train at-risk groups; other times they target financially challenged markets like literacy or low-income housing. They represent something new and important. They are able to create effective and sustainable societal change through the efficiency of a market-based approach.
Good Capital has researched more than 70 prospects from around the country. We have culled that list down to around 20, and we like what we see; the ones still on our radar are successfully making a difference and could offer investors a financial return in exchange for expansion capital. We are confident we will be able to choose a dozen to build the Fund around. Here are a few examples:
- Commonwealth Care Alliance, a nonprofit that provides a virtual HMO to marginalized individuals like those with disabilities, at risk elders, people with AIDs or mental health issues. Huge potential growth opportunity, but traditional investors would want them to target a more profitable customer base.
- Evergreen Lodge, a for profit Yosemite resort, has a five-year record of training and transforming the lives of at risk young people in the hospitality industry. It’s on target to deliver 15% dividends to its investors, and is ready to duplicate its model elsewhere.
- First Book Marketplace is a nonprofit that aggregates demand from literacy programs to lower the cost of printing books for a nationwide network of agencies; market power resulting in more books at lower cost to low income kids. The list goes on and on.
The Problem
Despite growing maturation and success, these social-purpose businesses, both nonprofit and for profit, are starving for the risk-taking expansion capital they need to grow. When it comes to critical capital needs, social enterprises fall through a massive gap. Their entrepreneurial approaches often don’t meet the grant guidelines of foundations. They usually lack the mature assets to tap the debt markets. And, though the best social enterprises have top-flight management teams and proven approaches to their market opportunities, they are locked out of traditional equity investment channels simply because they incorporate the cost of doing good directly into their business models or are nonprofits.
The vast majority of the most compelling social enterprises don’t qualify when investors think only about financial return (the money they keep in their investment pocket). And revenue generating mission-focused social enterprises confound those same investors when they think about giving (money from their philanthropy pocket). The result is that these enterprises are forced to rely on slow organic growth or time consuming one-by-one sales to investors and philanthropists. The capital gap limits their ability to realize the full opportunity of their business model and create positive impact in the world.
Good Capital may be a solution to this problem. I think we’ll be seeing a lot more solutions “coming to market” in the future.