SoCap Coverage: When to Invest and When to Give

This is a guest post by Adin Miller, owner of Adin Miller Consulting, who is providing coverage of the Tactical Philanthropy track at the Social Capital Markets conference.  Follow him on Twitter: @adincmiller

By Adin Miller

Adin Miller On the heels of the Behavioral Finance session, the Tactical Philanthropy track at the 2010 Social Capital Markets Conference (SOCAP10) shifted to a case study of Evergreen Lodge, a for-profit, social purpose destination resort located on the edge of Yosemite National Park. The case study focused on how Evergreen Lodge has blended philanthropic support and social impact investments to scale up its operations, provide ongoing financial returns to its investors, and build an effective social enterprise.

The case study was presented in two parts by Evergreen Lodge owner Lee Zimmerman and venture capitalist/philanthropist Stuart Davidson who originated the philanthropic support and impact investments provided to the resort. The session was moderated by Melinda Tuan of Melinda Tuan Consulting, who currently serves on the Board of Managers of Evergreen Lodge and was instrumental in the early development of resort while managing REDF, a social venture capital fund.

In introducing the session, Sean explained his intention to shed light on how a social investor went through the process of maximizing blended returns through a combination of charitable donations and social impact investment.

The Evergreen Lodge has existed since 1921. The current ownership team of Brian Anderluh, Dan Braun, and Lee Zimmerman, purchased the resort in 2001. Since then, the resort has undergone two expansions, which both renovated the lodge and expanded the resort to include 75 new cabins and communal buildings.

As a for-profit resort operation, Evergreen Lodge aims to provide top-rate hospitality service to its guests. However, the lodge also serves a youth employment center by providing paid seasonal internship opportunities to young people. Its Youth Program supports at-risk Bay Area youth in developing stable careers and lives by providing career oriented training and work experience, strong social service support, multi-faceted outdoor recreational program, and a healthy community.

With its a double bottom-line approach, the Evergreen Lodge has provided 15-20% total equity returns. The investments made in the lodge are structured to be long-term holds with the return of capital through refinancing. Through a combination of both equity ($3.5 million) and debt ($11.8 million), the Evergreen Lodge owners were able to purchase the lodge in 2001, and finance expansions in 2004 and 2009. It has generated profitability and revenue, with double digit returns over the last four years.

The Youth Program, which has supported 125 youth to date (at a current rate of about 20 per year), was woven into the fabric of the resort operation when the property was purchased in 2001. Its expenses are fully funded through the lodge’s profits. In developing and running its program, the Evergreen Lodge partnered with Juma Ventures, an innovative and award-winning youth development program that combines employment and programmatic support to help young people.

In many ways, the development of the Evergreen Lodge would not have occurred without the original support from Stuart Davidson, a venture capitalist and philanthropist. Stuart underwrote the two $75,000 Farber Fellowships through REDF, which supported Brian Anderluh and Lee Zimmerman and allowed them to work with Juma Ventures over a year to create a new youth service enterprise based on Juma’s social enterprise model. In his comments, Lee stressed the importance of having received this early philanthropic support that let them generate the ideas that eventually birthed the Evergreen Lodge social enterprise.

Stuart began to formalize his philanthropic and social impact investment approaches in 1995; he founded the partnership that eventually developed into REDF and then developed the Farber Fellowship program. Initially, he was skeptical about providing the fellowship to support the Evergreen Lodge ownership team. But, he was also eager to experiment with Juma Ventures as a social change agent.

In looking to support the development of Evergreen Lodge, Stuart provided grant resources to Juma to invest, which in turn provided a portion of the original debt needed by Evergreen Lodge in 2001. Stuart was interested in structuring a grant to go as far as it might be able to go and was specifically interested in making sure that Juma had a greater role in the development of social enterprise. He made an emotional decision in determining how to allocate his own resources, a real-life example of the behavioral finance issues discussed in the earlier Tactical Philanthropy session. Stuart found it very appealing to make a grant to Juma and then have it reinvested as debt with Evergreen Lodge.

In discussing his approach, Stuart noted that many philanthropists and social impact investors do not engage in a deep thought process on how to allocate their funds. Stuart, on the other hand, goes through a process to determine if a loan, investment, or grant is the best option. This Best Available Charitable Option (the BACO ratio, a term coined by the Acumen Fund), allows him to determine the best way to leverage dollars. In some cases, a grant has a lot more difficulty going to the place that needs the funds the most; in such moments, an investment might be better situated to provide the needed support. In other cases, philanthropy is better situated to provide the best support.

The case study perspectives from Lee and Stuart provided a fascinating and intimate glimpse into the mindset of an individual looking to maximize financial resources through a combination of charitable giving and impact investments. Hopefully, it also portends an approach by individual investors that will continue to grow and be embraced by philanthropic institutions such as smaller foundations.