Social Fusion: Hybrid Capital and Sustainability

stacey_lawson - Aug 2, 2005 3:31 pm (#1 Total: 25)
UC Berkeley

Greetings,

Thank you for participating in the Social Fusion dialogue on Hybrid Capital & Sustainability.  At our luncheon on friday, Stephen, Paul, Priya and Darian did a great job outlining the motivations, as well as the opportunities and challenges, for hybrid social ventures.  I'd like to continue the dialogue and pose a follow-on question to the Social Edge community:

What is the right relationship between philanthropists and investors as we look at bridging the traditional realms of doing good (philanthropy) with doing well (business/financial markets)?  What is the right mix of capital for hybrid ventures?  And is there a need for “smart subsidies” where philanthropists subsidize some for-profit social enterprise development to address some of our most pressing social, economic and environmental challenges?

Stephen DeBerry - Aug 2, 2005 6:17 pm (#2 Total: 25)
Omidyar Network


You pose an interesting question about the relationship between philanthropists and investors, Stacey. I have a couple of thoughts:

1) I think the ideal scenario is one in which social good determines profitability for business. Those opportunities do exist today, but they're hard to find since there are so few of them and because the models for this are still emerging. We have a long way to go to get there but I think the idea of having social good drive returns is worth considering.

2) I think it's easy to fall into the trap of allowing descriptive categories to determine our behavior. "Investor" and "Philanthropist" are not mutually exclusive, and if we're serious about the ideas we've been discussing then we ought to hold the two to increasingly similar standards.

This is an exciting time and there's lots of room for innovation in and around the idea of hybrid capital. I look forward to seeing some of the thoughts and questions that others have to share.

SparkPeopleChris - Aug 3, 2005 4:46 pm (#3 Total: 25)


Hi Everyone

I'm with you Stephen, it seems like everyone involved in this movement can sense we're at an exciting time for making a difference in the world!

Something might be happening that is leading to a critical mass on this issue which could then lead to the virtuous cycle of more great minds getting involved. If enough great, passionate minds get involved, the capital seems sure to follow?? (especially if we get good early results)

My favorite part is finding that intersection of a "great business opportunity" with a "great social opportunity". It seems like all the great people involved in this movement will figure out new ways of looking at new places for this intersection to happen.

Right now I'm more excited than ever on this subject because of something my company is working on. We launched the world's first online healthy pregnancy planner in August 2003 - it focuses on pregnancy fitness and nutrition and other health topics (http://babyfit.com)

Several months ago, we decided to make this a free ad-supported site for the reasons talked about here: 1) We realized BabyFit could be the best distribution system ever for consistent pregnancy health information and motivation since our members use our site WAY more than they see their OB - and we have a global audience.

2) There are so many good products surrounding babies that it's a good business opportunity.

Since that decision, BabyFit has grown into one of the largest baby sites in the world with huge growth rates and an incredible reaction from members. Our goal is to make a measurable impact on world health by focusing first on the health of moms-to-be.

Good luck to everyone, together we can do it!

Chris/SparkGuy

Rupert Ayton - Aug 3, 2005 4:59 pm (#4 Total: 25)


Is hybrid capital another name for an investment with a plausible return? Investing has generally become a very opaque process, which has lead to a significant misunderstanding of true returns on investment, and therefore implausible expectations. Certain sophisticated institutional investors are very transparent and not return driven, but operate on such a huge scale that they cannot access social enterprises offering a plausible return on investment. The impediment is the lack of capital market infrastructure serving both institutional investors and social enterprises. I'm oversimplifying to make the point that society needs to examine the financial intermediation process as well as the instruments of finance.

tintin - Aug 3, 2005 5:24 pm (#5 Total: 25)
Increasing the flow of capital to good


I agree, Stephen, that in this early market, categories are not as helpful as they are in other areas; in the dot.com era, since money was flowing so fast, taxonomies and common definitions had huge value. but in this space, where new money is flowing in, but much more slowly, it's kind of like trying to build a flood control plan when you need to do a rain daince. Though I am a single malt drinker, I am finding people are finding a middle ground between giving and traditional investing... a third bucket.. for which they have fewer frames that make sense to their various constituencies, so their actions are ahead of their conceptions. That's what I'm sensing anyway.

tintin - Aug 3, 2005 5:31 pm (#6 Total: 25)
Increasing the flow of capital to good


what does that phrase mean Rupert? that it's plausible that I will get a return? is it different than market rate?

Darian Heyman - Aug 3, 2005 6:01 pm (#7 Total: 25)
Craigslist Foundation

It was truly an honor to sit on such an esteemed panel and I look forward to continuing our dialog on Social Edge.  In particular, I'm curious to hear people's thoughts about my notion of American Democracy.  As mentioned, it's my belief that today people feel that democracy and capitalism are inextricably bound, when in reality they are two separate philosophies.  Democracy, which I believe to be nothing but a good thing, has been overshadowed by capitalism.  Not without its virtues (i.e. the meritocracy & the American Dream), Capitalism also carries with it heavy baggage:  the Poverty Dilemma.  This is the “rich get richer, poor get poorer” quandary we find ourselves when a system is based on the premise that those with the capital get to invest it and potentially exploit those without.

 

It is my greatest hope that in my lifetime we will see these democracy extricated from capitalism, which will pave the way for capitalism to be salvaged.  Those in charge are too smart and too powerful to allow for a full blown revolution, but evolution is inevitable in this age of freer flowing information.  Corporations, nonprofits, government agencies & officials and even citizens are being held more accountable; part of this transition is the People demanding responsible behavior from organizations that are intended to serve them.

 

So what does this all mean, in particular as it relates to philanthropy and social enterprise?  The walls between business and service are blurring and what was once a polarized world with corporations on one end and nonprofits on the other is seeing a gravitational pull towards a middle ground, social enterprise.  Corporate social responsibility is all the rage and nonprofits are now expected to run with more business savvy.

So where do we go from here?

Mario Oliveros - Aug 3, 2005 8:23 pm (#8 Total: 25)

Unfortunately, I missed the roundtable at the World Affairs Council, but this online discussion allows those of us who were unable to attend to comment on this excellent and timely topic.

I want to comment on three things: 1) the state of what is being called hybrid capital in this discussion and 2) Stephen's previous posting and 3) Darian's previous posting.

1) Hybrid capital, aka social investing, aka other terms is more than a fad... in my humble opinion.  However, I feel that it is still emerging, still evolving and very far from the tipping point.  In my work in diaspora philanthropy with a Philippines-based NGO called Unlad Kabayan, we are encountering an increasing number of people who bridge philanthropy and investing.  Previously, we looked to tap into people who wanted to 'give' and let the private sector handle those who wanted to 'invest.'  This is changing, and we are noticing a merging between the two 'areas.'  Unlad's challenge / problem is developing the programs and enterprises that can sustain the intersest of social investors and commit them to working in a social investment capacity.  We are not there yet, and for this reason, I say that we are far from the tipping point.

2) This leads me to my comment on Stephen's posting, and which is related to my first point.  I agree that doing good should determine doing well.  However, in addition to doing good, I believe that we need to be able to measure and show return - both in social and economic terms (double bottom line).  Herein lies the difference between philanthropy and hybrid models.  Our problem in attracting / closing deals with interested social investors is that we are unable to deliver the appropriate measurement or returns.

3) Finally, I apologize that this post is so long, but it is actually the philosophical debates that really get me going.  I think Darian hit the nail on the head with his 'extrication' of democracy and capitalism.  In my travels and studies, I have had an epiphany in that capitalism is culture-based.  What capitalism looks like here is different than how it looks elsewhere, say Asia.  Given US global dominance, it might seem that capitalism = American capitalism, but this is not the case. 

What does the future hold for capitalism?  I am sure there are plenty of opinions, and will leave it to those with greater knowledge than I.  But I will say that I doubt capitalism will look the same in the future.  My personal hope is that it will continue in a way that leaves fewer behind.

priya haji - Aug 3, 2005 9:48 pm (#9 Total: 25)
Co-founder and CEO, World of Good

There are fruits and there are vegetables - and then there are tomatoes . . .

This is a great analogy for the hybrid space.  There are two clearly defined sectors and their behavior is transparent and historically clear.  Social-benefit-focused organizations operate to maximize the public good for every dollar they recieve (non-profits), and then the financial-return- focused companies maximize the economic return for every dollar they recieve (for-profits).  Now - there are the tomatoes - they are concerned with both the social return and the public good. 

The problem that I see is that because this blended space is emerging sometimes the fruits wish they could be vegetables and the vegetables want to be fruits.  But there are really only a few tomatoes. 

As we grow the sector - we have to all learn to recognize when our ideas best fit in one mode of maximization and should attract a particular type of capital, and when it it truly a blended value proposition.  There is still alot of fog, on the capital level, and the entreprenuer's level - and this is critical to continue to clarify.

Claude Rallins - Aug 3, 2005 11:29 pm (#10 Total: 25)

In this line of work, where the magnitude of the world's social problems dwarfs our collective efforts (profit, nonprofit, and hybrid) to do social good, perhaps we all have to be a least a little nuts.

A question that came to mind has I listened to the audio was... are there any "bootstrap" social entrepreneurs that have become rich, financially, exclusively as a result of their social-ent. business? And, if so what business model did s/he apply?

If there are some, or even one, then perhaps we are not nuts. But more to the point... such a role model/example would be an inspiration to others considering this line of work, as well as, of course, for those of us that are already on the path. Such an example would also best answer the "sustainability", and "hybrid capitol" questions.

KUDOS to Social Edge for making the audio content available! It is also very well structured, and presented (Vaz) --serving both poor and rich bandwidth computers, in a virtually universal format. I ate the whole thing, and loved every byte!

 

Rachel Elliott - Aug 4, 2005 1:15 am (#11 Total: 25)
Ibstock Community Enterprises Ltd

Hi

You might like to look at http://www.adventurecapitalfund.org.uk.  I accept its not true venture capital as it comes from the Government, but they are trying to do things differently.  It is also the closest we are getting to taking Social Return on Investment seriously and trying to measure it.

We had some patient capital for our managed workspace project www.project57.org.uk but it was early days and I think we have a long way to go with these explorations.

I am currently working on a new project that I think would be a good candidate for some hybrid capital as it has both environmental and social potential.  My main issues at the moment are devising an appropriate legal form that would allow us to make return on the investments and I know that things are different over there but any thoughts around this would be welcome.  As a result of Enron (and other scandals) the legislation for our type of organisation is concentrating on 'locking in assets' rather than exploring alternatives about returns on investment.  Consequently, at the moment over here, we seem to be stuck with loan finance as the only real alternative, unless I've missed something.

Regards

Rachel

m.i.zuberi - Aug 4, 2005 1:52 am (#12 Total: 25)
university of rajshahi


Dear Stacey,

This is a very appropriate approach for the less developed countries, specially for poverty alleviation and sustainable development. Also it will be a 'test' for the 'hybrid' system in a different socio-economic background.

There are willing people to try but we need collaborators and capital for doing it.

Is there any one in the Socialedge to show us the path ?

M.I.Zuberi, University of Rajshahi, Bangladesh

mfidelman - Aug 4, 2005 3:01 am (#13 Total: 25)
Center for Civic Networking


One source of capital that isn't often talked about is "program related investment" - where a foundation invests some of its endowment in an organization that is in line with the foundation's mission. As I understand the rules in the US, a foundation is allowed to invest a portion of its endowment, at below-market rates, if there is a mission-oriented reason for doing so.

I've seen it more often in the form of below-market-rate loans to non-profits - rather than equity investments.

I'd be interested to know if any foundation people on this list have experience with program-related investments that they'd be willing to share.

mfidelman - Aug 4, 2005 3:04 am (#14 Total: 25)
Center for Civic Networking


EDCs, CDCs (community development corps) and various loan/grant programs by local governments seem to be pretty common sources of capital for projects with locally-focused economic development goals.

In these cases, the capital isn't seeking socially motivated businesses to invest in - the creation/support of a local economic base is the mission in its own right.

mfidelman - Aug 4, 2005 3:05 am (#15 Total: 25)
Center for Civic Networking


Until its recent problems, the Catholic Church seems to have done very well for itself by investing in real-estate - and particularly in affordable housing projects that had tax breaks associated with them.

ChrisCook - Aug 4, 2005 3:18 am (#16 Total: 25)

Hi

Just some reassurance to Rachel Elliott- in fact loan capital is not the only option for a Social Enterprise.

You can share revenues through "Co-owning" an asset as a member of a "new" UK LLP in a "Capital Partnership" - the other member being an Investor/Capital Partner. The Hilton group did just this a couple of years ago in a £350m deal.

With a bit of imagination you could proobably do the same in the US with LLC's and an unlimited US partnership.

See

http://www.opencapital.net/papers/LLPRegenarticle.pdf

and

http://www.opencapital.net/papers/Cook-BJGP-0412.pdf

and recently

http://www.opencapital.net/papers/co-ownership.pdf

in connection with which I made a presentation to UK MP's the week before last.

Essentially our Government has (accidentally and for entirely the wrong reasons) come up with a new - and probably optimal -corporate form which is neither "For Profit" nor "Not for Profit" but rather "For the mutual profit of member stakeholders" - which to me would be a good definition of "Social Enterprise".

Scots "get" this - it's in the same space as their "Not Proven" verdict - as opposed to "Guilty"/ "Not Guilty".  No disrespect to our hosts, but I have yet to meet a US citizen who has transcended the "absolute" property rights inherent in their legal structures and got their head around the hybrid I am describing: I guess I just don't explain it well enough.

We are looking at a new form of "hybrid" Financial Capital here.

I call it "Open" Capital - hence my site www.opencapital.net but the Iranians (and Bangladeshi's, Mr Zuberi) consider it "Islamic" in the way that debt and interest are not involved and one or two Chinese I have discussed it with see it as "People's" Capital because it is neither "State" ownership nor "Private" ownership but ownership "in Common".

If you want some help structuring what you want to do, just contact me off-line on cojock@hotmail.com

Best Regards

Chris Cook

JessicaMargolin - Aug 4, 2005 3:49 pm (#17 Total: 25)


Darian, you are speaking the truth.

Capitalism can only work if everything is valued accurately, and we're very far from it right now. I think there's momentum for re-evaluation of financial valuation, e.g. of knowledge assets, where a lot of work has been done, but obviously a lot is left to do.

But if I'm a publicly traded company, there's not really a way to incorporate the fact (if it's even explicitly known at all) that people who work for me are relatively healthier, happier, their children do better in school, and their interpersonal relationships are more positive; my financials might show that I have an unusually high headcount for my industry.

That makes me look like I'm being irresponsible as a fiduciary. That's bad.

Similarly on the economic side, natural resources of course aren't accurately valued either.

Personally I think social entrepreneurism is fantastic, I feel all this movement is great. However I think that ultimately capitalism will have to evolve, and with it there will be changes in reporting requirements which will pull different kinds of corporate decisions.

Interestingly, a lot of the research in this area is out of Scandinavia, which of course is an area that is capitalistic but with a strong reputation of social responsibility.

JessicaMargolin - Aug 4, 2005 3:59 pm (#18 Total: 25)


Someone last Friday raised the question "What do you do if you're regionally relevant but you aren't scalable?"

Every now and them someone runs around and compiles a "Best Practices," (though in my opinion they're often so poorly segmented as to be useless) and that's the extent of how those successful entities propagate: it's word of mouth, sometimes facilitated word of mouth, but not awfully efficient, and there's a "telephone" effect in the replicability even when the environment is sufficiently similar.

So, is there a way to take the regionally successful program, delineate its differentiating criteria, package it, hire a team, create "McMission-Driven" University, and roll it out this way in such a way that it would work for the social investment community?

Paul Frankel - Aug 4, 2005 4:38 pm (#19 Total: 25)
Ecosa Capital

Hi All -

 

A few scattered thoughts and quotes I'd like to share with you...

 

There is also little availability of mid-term, medium risk structured investment opportunities to round out either an investor’s diversified portfolio or a sustainable company’s sources of capital.  This problem has at least three causes:

 

First, traditional lenders want to focus on significantly larger deals in order to achieve economies of scale.  A portfolio of numerous small loans to smaller companies typically entails greater management oversight and has associated with it greater monitoring costs than a portfolio consisting of a few large loans to larger companies.  As a result, small loans are less attractive for large institutions burdened by sizable administrative overhead.  In the banking industry, in particular, consolidation over the last decade has increased the size, and reduced the number, of surviving banks.  The surviving institutions have sought to limit their credit exposure to, and the monitoring costs associated with loans to, smaller businesses.  In addition, traditional lending institutions operate in a regulatory environment that favors lending to large, established businesses.  Over time, many traditional lending institutions have developed loan approval processes in response to such regulation that conflict with the entrepreneurial culture of smaller, green companies.  Because the financial needs of many sustainable firms fall below the deal-size threshold for traditional lenders, green companies’ needs are not met in the existing financial services market.

 

Secondly, there is a deeply held belief on the part of the traditional financial community that green businesses are inherently more risky and less profitable than their non-green counterparts.  While this belief is not based on any analysis of facts, businesses in sustainable segments of known markets and industries are viewed as outside the target markets for most capital providers.  Any investment or lending activities to sustainable businesses is typically believed to be non-core and is associated with high opportunity costs, thus representing a significant barrier to the flow of capital to green businesses.

 

Thirdly, traditional debt sources are currently not able to readily liquidate green firms’ collateral.  This makes these companies difficult to evaluate using traditional lending criteria and, to the extent that creditors seek collateral, makes the process of perfecting liens on, and foreclosing on, collateral more difficult than would be the case with loans to industrial companies.  As a means of compensating for this perceived risk, lending institutions often under fund or overprice a firms’ financing requirements.  As a result, sustainable businesses are often left in need of supplemental financing.

For these reasons, I believe that many viable sustainable companies have difficulty obtaining the complete financing amount or reasonable terms from traditional lending institutions.  What are your thoughts?  I have several other notions I'd like to share on this and related topics mentioned by the above contributors, and will post again shortly.  For now, I'll leave you with a quote from The Soul of Capitalism, written by William Greider,

http://www.thenation.com/doc.mhtml?i=20030929&c=1&s=greider

"The challenge of financing innovative startup firms that are willing to accept more ambitious social commitments in exchange for patient capital [is difficult]. Given the extraordinary variety of hybridized financial instruments that Wall Street devises, the potential for elaborating specialized interventions is vast but largely unknown. Conceivably, for instance, environmentalists could organize targeted capital investments in major corporations to provide financing for the technological changes in production systems needed to protect nature -- the ecological reforms business and finance have been reluctant to make. The returns on targeted eco-capital would be based upon the improved efficiencies these technologies bring to the company. Society's return would be a less destructive industrial system.

"So long as the risks are pursued with tough-minded self-discipline, there is nothing in the operating rules of capitalism to prevent any of these departures from the status quo, whether they involve community-loyal investment funds or the pressuring of pension-fund trustees to alter their investment priorities, or punishing the disloyal Wall Street firms or taking control of corporations by making direct-equity investments. Indeed, these are routine practices within the system, employed every day on behalf of narrower objectives and self-interested values. The financial power of society awaits the rise of tough-minded social inventors, investing risk-takers with the courage to take control of their own money."

DR.PRABIR DUTTA - Aug 5, 2005 10:17 am (#20 Total: 25)
CALCUTTA MANAGEMENT ASSOCIATION


Today most of the foods(both plant and animal origin)in the world are hybrid variety-very difficult to identify the original.

geoffrey - Aug 5, 2005 4:28 pm (#21 Total: 25)


In my view, what is important is that the distinction between investor and philanthropist is changing. Certainly, there will exist for a long time to come the traditional capital loans, for small and large businesses. Loans that are financed directly through banks or with the backing of the SBA. I don’t believe that in these situations, whether the company represents itself as a purely for-profit enterprise or a hybrid enterprise with a profitable social mission will matter per say, but rather, whether the business can document sustainability through either a commercial product or service. In making these traditional commercial loans, banks do not share risk, rather they assume minimal risk. This differs from the roles of the investor or philanthropist, who assume a significant portion of the risk when investing. How investors and philanthropists differ may relate more to expectations of return. What I hope we’re seeing is that the concept of value with respect to what is returned is evolving.

It seems that defining value in terms that are relevant to both investor and philanthropist would enable each to better evaluate these new hybrid ventures. This idea is central to the concept of a Social Return on Investment which has been put forth by a number of groups. The task at hand is how to best provide this kind of analysis to investors. I know that Sara Olsen of SVT Consulting is working very hard in this area. Their goal is to provide investors with a process for evaluating and selecting social ventures that align with their needs. Once we’ve built a bridge that traditional investors are comfortable crossing, then we’ll have reached the tipping point.

The distinction between investor and philanthropist is blurring and here I would agree with Stephen, they should be held to increasingly similar standards. Indeed, this is an exciting time and I believe the hybrid ventures may eventually prove to be the preferred model.

Claude Rallins - Aug 9, 2005 12:41 am (#22 Total: 25)

"The financial power of society awaits the rise of tough-minded social inventors, investing risk-takers with the courage to take control of their own money."

Paul, that line you quoted, from The Soul of Capitalism, written by William Greider, stood out. The question then is ... How long can society afford to wait?

The new investment structures seem very similar to the old --in its regimentations. One set of perceived needed qualifications has been layered onto, or exchanged, for another. At least here in the U.S..

Who will fund the chaos needed to organize a sustainable, mass-market, local-global, society? And can/will we do it in time? We all know it must be done, but seem content to nibble on the social edges of issues. Afraid to let go of industrial educational, and finance, "standards".

Claude Rallins - Aug 9, 2005 1:36 am (#23 Total: 25)

Your three main points, Paul, go to the heart of the sustainable paradox. Finance capital, including hybrids, apply standard, or a standard sub-set, of industrial math. Which can be summed-up as: order=order. Eco-math, on the other hand, naturally applies a chaos=new order model to evolve (sustainable) eco-systems.

"Courage" is the key alright. But when it comes to "your money"... well, let's just say having the courage to invest in chaos is a critically endangered instinct.

admin. note: the system timed-out when I went to edit/add to my post. Hence -two parts. I changed the title, in post 1, but it did'nt take.

Rupert Ayton - Aug 9, 2005 5:13 pm (#24 Total: 25)


Hi tintin. I use plausible here to mean likely and credible. Setting aside what is "market" for a moment, we can start with a most plausible return being that provided by an investment in a US treasury bill. It has an exactly specified return (redemption value minus price paid)and has neither credit risk nor market risk nor liquidity risk. It meets investor expectations every time. Moving away from a treasury bill to other forms of investing that carry a fixed return, an investor begins to accept risk, but can still quantify and reasonably expect a return. Moving farther still away from fixed income, into the realm of publicly traded common stocks that pay no dividend, an investor has lost any way to quantify risk or reasonably expect a return, which introduces a psychological aspect to investing. Move farthest still to venture equity investing and you have arrived at the psychological extreme. So, at the most plausible end of the investing spectrum, risk free treasuries, the compound 10-year return is less than 5%. At the least plausible and most psychological extreme, the return is expected to be 80% to 100% for successes. It's illogical to think that any business can return that much more than the risk free rate without externalizing somthing to someone. In terms of "market," 5% is roughly the expected rate of inflation, and 80% to 100% is the rate expected by an investor so uncertain of returns that they demand as much as they can get, as opposed to what is fair. Adam Smith wrote that high rates of return had no place in market systems, and was the purview of the profligate. Unfortunately, that chapter get left out of abridged versions of Wealth of Nations.

Laurinda - Aug 11, 2005 2:40 pm (#25 Total: 25)

I read all your posts with interest and now I would like to share with you what we have opted to do.

We started twp projects in South Africa:

1. gateway 2 growth with Funds projects

2. gateway 2 development for BOP /social development

If you e-mail me I will send you copies of docs ... still very new as we have gone out with it only this week after many months spent on research ...

my e-mail is laurinda.seabra@empowerment-gateway.com

Take care and keep up this interesting debate ... in reality "our way of life"

Laurinda

Attachments:

Infopack - Investors-rev 04.doc (138 KB)