Jed, Timothy and Jim

My 2 cents worth in reply to your questions and within the Empowerment Gateway framework.

Re: Question 1

A redesign of the financial and philantropic funding markets would be a start ... in fact a 180 degree turnaround and the creation of a new economic and funding paradigm?

How can we expect any real change when:

1. We still operate in pre-defined economic markets developed within an ICC environment ... et al..
2. Philantropic economics is still being applied in very much the same way and not much has really changed during the past 50 years
3. There is still lack of konwledge in all camps, regarding feasible projects, funding mechanisms geared at the SE environment, etc ...
4. There is a lack of coordination and access routes between investors and SE entreprises ... not to mention suspicion, and lack of understanding.

Regarding your second question I would say, education is probrably the first stepping stone ... networking, linkage programes, etc.

laurinda

I'm ever the optimist, and after spending ten years as a social entrepreneur without knowing the term or anybody else like me, I feel like there's already real change. Our job is to keep the change going and continue to increase the growth in change.

Many social entrepreneurs are out there raising growth capital, and the capital environment is improving. It's still ten times more difficult than for-profit capital formation, but that beats one hundred times more difficult. Maybe in a couple of years we'll have it down to 2X!

And, education is a big part. Knowing that other funders are getting great results from these opportunities is a real boost. Familiarity breeds comfort...

Jim, Just reading your blog. There's something that may interest you on the application of ICT to human rights. Essentially, a project we've been working on funded by revenue fron software sales and maintenance in the UK. I put it up on netsquared today, with the aim of drawing attention to what seems so difficulty to get across in both the business and nonprofit world.

http://www.netsquared.org/cause/human-rights

It was back in 2004 and with founder Terry Hallman who I'd invited to the UK where the government embraces social enterprise, we put together a proposal for a community broadband project. The model, a community purpose business was one he'd conceived and published on the web as public domain.

Steered toward ICOF, the funding body for the cooperative movement our project was then rejected. There were insufficient funds for all such proposals and hence they were limiting funds to full cooperatives. All other sources proved fruitless, being aimed at registered charities. Refocussing, we move our efforts to Eastern Europe.

Recently, as I've learned in the last week, the UK cooperative movement now promotes a new model based on the Community Interest Company definition that was established later in 2004. According to what I've read, it looks like we need their approval to deploy it, though it doesn't indicate whether funding will now be made available.

Can they do this, I wonder, for something in the public domain they rejected and now want to own?

Of course, I suppose there is a difference between what one may do legally and what one may do strategically. While I've followed the CIC evolution with great interest, I had thought it was a category that allowed for other investors to participate, as opposed to simply qualifying an entity to receive public funds...first off, Jeff, is that not the case and secondly, are you inferring that you are then limited to use that structure to raise funds from other sources? Look forward to more dicussion on this CIC concept from all, since i had thought it was very promising... best to all! Jed

Jed, It gets complex and I'm an observer rather than an expert. First we had two forms of coop, one informal, registering under company laws, the other known bona-fide registered under Industrial and Provident Society acts evolving from the coop movement. As I understand it, the first CIC which I was a little to early for came as a development of company law in later in 2004 and the most recent under I&P law has just emerged. A conversation with a representative of the coops today informs me that there's a Coop CIC limited by share capital in the pipelines. In the end, P-CED as the revenue source in the UK re-incorporated under the conventional share capital form to meet the Dept and Trade and Industry definition of one form of social enterprise, a business rendering more than 50% of profit to community purpose. In fact more that 50% of revenue, the way things stand right now.

I come across as a critic of social enterprise in the UK because like many government backed programs, it's slow and unresponsive. We pay money in taxes to support it and often need to pay subscriptions to gain access to any network. This, I believe is well meaning, but not conducive to dynamic enterprise and a often a little less than social. As one fellow expressed it in a recent conference, "we don't want to be treated like the thick third son of a third son", which to me indicates a tendency toward being patronising.

I can see the need in some quarters, to treat social business as some kind of extension to the Welfare State but more and more I'm gaining the impression from those who simply fail to respond, from the top down, that this is more about jobs for the patrons than for anyone wanting to break the mould.

I really wonder, frequently, whether we're understood by anyone and whether I ought to re-incorporate again as Robin Hood. Though at least here, I know there are three who are on message.

Jeff

It seems that the issues concerning questions 1 and 2 have to do with outdated tax laws and misperceptions surrounding the role of business and the responsibility of individuals in society.

I would recommend trying to find a new type of banking or stock trading system that offers both monetary rewards and reputation capital for key areas concerning social values, cooperation and positive environmental impact. This would help make investing in positive social ventures more available for the common (wo)man.

I think we also need to re-educate the average person – quickly and with the help of inspirational figures. As a community, we need to foster open dialogue to craft new definitions and measures concerning the "social values" of enterprises and the impact of the enterprise on society. The common man is clueless to these issues as they are evolutionary ideas whose time has come.

Overall, more needs to be done to show how one individual’s efforts has an impact on so many. We need to move the average individual to want to create strong change. We need everyone on board in order to change the way we govern the role of business in society.

I think many people are unaware of how much Jeff Skoll (the guy whose name graces the footer of Social Edge) is doing on the topic ShariA brings up. His movie production company, Participant Productions, has been behind films like An Inconvenient Truth, Syriana, North Country, Murderball and so on. He is trying to reach the average media consumer and change their perceptions around their ability to engage in social change.

I agree that we are trapped a bit betwixt between the conventional and traditional system and one that needs to be different. Neither the giving lens or the conventional investment lens are quite right. Some "mash-up" of the two and the creation of a new third pocket?

On the corporate structure question, there's somethign there to be sure. The CIC model in the UK has been interesting to watch. Not sure if people are finding it really as useful as expected. There is a lot of discussion going on here in the States around for benefit structures (e.g. Fourth Sector Network), new legal structures based upon LLCs (e.g. L3C in North Carolina?), and rating systems (e.g. B-Lab's "B-Corp"). And Aspen Institute is hosting another roundtable at the front end of the April National Gathering of Social Entrepreneurs in Longbeach, CA. Putting that together with a new stock exchange model for these companies that is being worked on by a couple camps in the the US, and you start to get something interesting coming together.

The trick with all this is how to incent and engage human capital and financial capital, but in a context of "how much is enough" and an equitable sustainable world...provide for entrepreneurship and steerage, but secure mission. It's a delicate balance.

Hi Tim, Just to make it even more confusing there's a version of this which I find very interesting. The concept is advocated by former City of London regulator Chris Cook, who says that if the road to Hell is paved with good intenrions, then maybe the road to heaven is paved with bad ones.

The UK LLP came about as the result of corporate lawyers worrying about vicarious liability in such accidents as the demise of Barings due to Nick Leeson's trading. They conceived the LLP to provide limited liability to partnerships.

What this did was to open the door for all kinds of collaborative efforts under an LLP wrapper. Open Capital is Chris website illustrating the possibilities of shared risk and reward, engaging Islamic banking principles, asset based funding and community land partnerships. Chris has recently been invited to participate in the UN funder Global Land Tools Network project to map land values using GIS techniques led by advocates of American visionary Henry George's philosopy of land value taxation/rental.

From simple examples of shared asset financing, starting with a project linking a scottish nonprofit with one in Pakistan producing wind energy finanaced from Scotland, the concept of community land partnerships, guarantee societies, private investment in public project and the Hanseatic Micrifinance Initiative, Chris is a very active chap. he and I started a dialogue about many of these things on Omidyar.net and there are many examples on his site at www.opencapital.net

Otherwise, back to the traditional debt based funding model, we have CDFIs in the UK which social enterprise, the public and traditional business may invest in to leverage seed capital for social business with tax incentives.

I really would like to see a for-profit form where social mission is baked into the DNA of the organization. In the U.S., that would mean that these social for-profits would be eligible for the small business incentives that would really help job and enterprise creation. In general, it would mean a new way for investors to move into the hybrid zone knowing that social mission was the primary objective.

We'd probably rush out and create an affiliate if there was such a structure that met our needs.

We've been really struggling in crafting funding to SEs because of this. The inability to take in equity capital, and even with some of the innovative structures being worked around for nonprofit equity-like capital, hobbles us. There's issues of private enurement, trouble in linking directly to cashflows, and mostly just alot of conservative lawyers in slugging it out in the muck. The creation of sub-forprofit LLCs that pass through non-UBIT [hopefully] earnings to the nonrprofit parent and controlling entity, but give risk investors access to direct claims on earnings, is the only elegant way around this right now. I'd be interested in anybodies experience in these areas to feed into the R+D we're working on (specifically for the http://www.GoodCap.net fund in development). I do agree in general that crafting a new corporate class from the ground up, one that could take both grants and supply some sort of noncontrolling claim on cashflows to outside mission-based investors would be great. The latter could agree to a cap on returns, be unable to force non-mission positive liquidity events, and perhaps, gulp, get some sort of favorable tax treatment to there earnings, ala tax free muni-bonds. This last item could also extend to standard nonprofits ideally within certain bounds (e.g. a commercial bank charging market rates wouldn't get tax consideration, but a below market rate investor would...though this starts sounding way too nuanced for our system to wrangle of course).

This is a discussion that needs to be taking place in thousands of locations around the world, and be connected into a network of discussions that contribute to a new level of education and commitment.

Shari suggested that we need a "system that offers both monetary rewards and reputation capital" to encourage leadership and risk taking investment in social benefit organizations.

I think Jim's right that the environment is changing, but I feel we're still in the wilderness looking for a few Messiahs.

What Bill Drayton has done with Ashoka is an inspiration. He's created this huge network that is constantly searching for people to invest in. Imagine if Gates or Omidyar or the Rockafellers were investing similar time/talent into finding and supporting people and organizations around the world who were doing good work, but were in need of investment partners?

Without some sort of recognition and reputation system, we cannot recognize and encourage those who innovate on the donor / investor side of this equasion, and without that recogition, we cannot inspire enough others to innovate even better investment habits.

Jim suggested a "180 degree turnaround". To me this paradygm shift is critically important. Because of the Internet, anyone can post material on a blog, wiki or web site, outlining their vision, the problem they want to solve, their theory of change, and the actions they are taking to achieve that vision. If Drayton type investers were spending time each day searching the web using logic concepts like the Boston Innovation Hub http://www.tbf.org/indicatorsproject/hubofinnovation/innovation.asp or the Creativity Map shown here: http://www.ngf.org.uk/map/map.html , they could be searching by cause, country, city and zip code, to locate organizations doing work in this category in specific locations. Based on what they read on the web site of th at organization, the investor could decide how much time, talent or dollars he wants to invest to help that organization achieve its mission in that geogrpahic area.

What's required in this thinking is a change in the traditional geographic boundaries of where donors choose to invest, as well as a commitment to doing the learning, or shopping, that is needed to look for organizations doing the work they want to support.

I operate a reputation reinforcement system and a geographic search system at the http://www.tutormentorconnection.org site. I post links to businesses doing good work in the area of tutoring/mentoring, and provide search features that would enable volunteers and donors to search for existing programs serving specific areas.

I feel that such models could be used by many to help investors find programs, and to recognize innovative investors for the way they are moving the field into new ways of supporting social benefit organizations.

Absolutely Daniel, Thinking of the parallel conversation on Omidyar.net and the apparent need to qualify under 501c3 acccreditation. The obstacle I think, is applying that reputation system on a global basis without detailed information on what's being achieved at what cost. Then do we really have that for conventional nonprofits?

I note there's a bit uf a bun fight going on right now with RED/Anti-RED philosophies, myself leaning towards the latter, but it's still sometimes dropping money into short-term relief. The shopping approach I value, if opening markets for disadvantaged producers rather than consumer goods.

Now Jim, I can tell you that such a social structure has existed in the US and becuase it's offered as an "Open" paradigm, you don't need to become an affiliate, you can just do it. All it required is that the directors agree, by memorandum on the direction of profits. Like the UK CIC which later replicated this paradigm, it defined a community directed business yeilding a substantial proportion of profit to social causes and an irrevocable trust fund to seed the creation of similar businesses.

I don't know if this would qualify for the assistance you mention, but in a business such as software development which has few raw material costs, I find it perfectly workable without such assistance, even though business is a little lean right now.

This is laid out on our website at http://www.p-ced.com

Now here's an example which came to my attention only today. It's Harvard Business School advocating a business driven approach to the reduction of poverty and an association with countering terrorism. An entry from my blog, promoting a large scale investment project:

http://www.netsquared.org/blog/jeff-mowatt/harvard-endorses-a-business-driven-approach

It's unlikely that Harvard or many others know that the concept is backed by a five year, full cost recovery pilot in Russia, nor is it likely that such news spreads much further than this small conversation.

The point of seeding this idea in the public domain was to spread the word and even modern technology can't always deliver these expectations.

Of course we must do what we can to make right our current human story; most of which might be mere bandaids on 2,500 year old change in the way we humans hold our lives and self interests. I too will do what I can for the present; but my main passion is to create a sead for a time beyound our own: margafoundation.org While turmoil increases there is acumulated language of heat that has been building and robbing us of our ancestral memory of what feeds us and gives us life. The MARGA Project integrates modern financial returns, with a stream of consciousness of thoese who have observed us for 3000 years, and a symbolic sculpture park for the paratetic journey of self reflection. Good luck to us all and sweet dreams , with

Hi Tim, the non-profit LLC structure seems to be popular with Community Development Venture Capital, I believe that is how Pacific Community Ventures is organized in SF. Unitus in Redmond, WA is also organized that way - the nonprofit does microfinance assistance and they're raising a venture fund that will also support microfinance with equity and the non-profit gets a general partner particiption.

I believe the challenge facing us is coming up with measures of non-financial values. As non-owner investors, financial return is our only tool to measure management competence, or as fiduciaries to demonstrate our diligence to our clients. With measures of environmental and social impact, two investments can be compared on more than just return, and fiduciary and management intermediaries can more readily defend their performance. Our financial structure has grown too large and distant from owner to investments to rely on trust.

I thought others here might be interested in the following very recent conversation which seems to be drawing together some exciting collaboration toward deploying an investment mechanism for seeding business investment in Africa.

http://www.omidyar.net/group/foodchain/news/207/

The title of this thread was taken from the paper Jed, Jim and I recently did for Oxford B-school...I've posted it up at xigi.net site for easy access to those interested: http://www.xigi.net/?action=download&file_id=47

Hi Tim

You appear to be missing in that comprehensive report a simple funding mechanism, which isn't a grant, a loan or a "share" as we know it.

It has been possible for about six years now to make use of the "new" UK LLP (and in fact the US LLC) form to create "Capital Partnerships", following the example of a (quite unnoticed) radical £1bn deal in the UK a few years ago using the structure.

Essentially the asset is placed in trust with a "Trustee" Member and then the "Capital User" pays an agreed "Capital Rental" - which may be a proportional "Equity Share" of production, or of the revenues from the sale of production - to the "Investor" Member, with the possibility that an "Equity Share" also goes to a "Managing Member".

These proportional "Equity Shares" are not dissimilar to Units in the Income Trusts taking Capital markets in Canada by storm. ie a share of the GROSS revenues before the management of the enterprise gets their hands on it.

Would you rather drink the water before it goes into the bath or after it comes out of the plug-hole? Ask a Canadian pension investor.

Such "pre-disribution" essentially constitutes an entirely new asset class, enabling ANY entity - public or private: commercial, social or charitable in aims: whatever legal form to have "Equity" investors rather than, as now, having to borrow in many cases.

It changes the game. And I say this as a financial engineer myself, having - while a Director of the International Petroleum Exchange (for what that's worth) - implemented new products and mechanisms such as "Exchange of Futures for Swaps", "Volatility Trades".

Unfortunately, since most professional advisers are paid by the hour, they have a vested interest in complexity and conflicts, and a simple, consensual model such as - say - the Community Land Partnership simply does not register.

Best Regards

Chris Cook

I think the discussion of LLCs and LLPs is interesting. I've been aware of LLCs being formed around property ownership (for example, low income housing) with nonprofit partners. My impression is that LLCs didn't solve the problems of most nonprofits looking for social investment, but need to understand why I have that impression.

Paying a share of gross revenues off the top without regard to underlying strength of the enterprise (for example, is it losing money?) would probably be a concern, at least in the U.S. Structures that look like a private entity (a for-profit, an individual) is making money off of charitable activity runs into the prohibition on "private inurement." So, loans are easier, especially ones at sub-market rates. Equity relationships are fraught with complexity.

Anyway, I want to dig more in LLCs and better understand the tradeoffs.

Chris - that's good to know...and to pull in Jim's last comment...I do think that the LLC structure is flexible either as a rev share or equity share within the US. In that it becomes a partnership and if cashflow are attached to it it is likely to pass muster on private enurement...but I'm not (yet) an expert in this area. We've just started to set our legal folks on this particular issue to get visability well in advance of the structuring we're starting this summer on some deals. Jim your point on gross vs net is of course huge. If gross this has to be thought of as a COGS and priced into the revenue generation (meaning, the product or service). Otherwise it just doesn't work. I will say I've been thinking about this for the Calvert Giving Fund enterprise that I'm involved in, what a participation would look like for outside expansion capital providers. In that case we have a simple revenue model. The donor advised funds are charged an average of 0.8% of assets per year. If that was break even, and I needed a 5% share for risk capital, it would be a 0.04% COGS in a certain way of thinking. Thus if I have pricing power to 0.84% then it could be as simple as that. Now, the problem gets back to private enurement and making sure the structure works. I can't simply put these rev streams into an LLC. But a management contract could theoretically juggle this to make sense wherein the partnership supplied the marketing and sales and admin services, leaving the nonprofit to handle the core charitable mission, and perhaps that starts to give some navigatibility.

Bottom line. We have to crack the code of supplying risk taking expansion capital to high performing social enterprises ready to scale, and where profit maximization is second to social mission. That we're forced in gymnastics is simply to say that our market system is dysfunctionally organized for these ends. If it means structuring simple high risk loans with some linkage to up and downside that are above reproach, so be it. It kills your balance sheet though, which can be a problem for some nonprofits. If it means crafting partnership solutions, so be it. I agree that this is a low complexity solution, and often is a good path. And concurrently, getting some private letter rulings form the IRS won't hurt either, even as the Aspen Inst, B-Corp, For-Benefit, Fourth Sector initiatives think about policy level changes to champion.

Jim, Tim

I distinguish between:

(a) "asset-based" finance, based upon "ownership" of assets and revenues in a "legal wrapper" such as a company, trust or "open corporate" (as I call the UK LLP - the US LLC is not technically a corporate); and

(b) "deficit-based" finance, which is credit, either originating from credit institutions, such as Banks, or from suppliers ("Trade" credit).

Most money in circulation today comes about from secured loans, and I characterise this as "deficit-based" but "asset-backed".

I am pointing out the potential of the new forms of "asset-based finance" - such as Canadian Income Trusts - which now, after phenomenal recent growth, constitute a very large part of Canadian capital markets.

Why are these so popular with pension funds? Simply because they get their hands on a Company's revenues BEFORE the management does. Would you rather drink the water before it goes into the bath or after it comes out of the plug-hole?

The same "pre-distribution" revenue-sharing financing can work for any form of enterprise, whether it is commercial, a charity, local government or social enterprise and whatever legal form it takes, be it company, not for profit, sole trade, whatever.

However, the trust model has tax issues, management issues, and is costly and complex to implement (which is why lawyers love them).

Both the UK LLP and the US LLC allow a revolutionary - and possibly optimal - enterprise model I call the "Capital Partnership".

The assets themselves are held in trust by a "Custodian" LLP/ LLC Member (not dissimilar to the role of the likes of Northern Trust and State Street in conventional institutional securities transactions).

The other Capital Partnership stakeholder Members are then: (a) a loose consortium or "Club"/ "Co-operative" of Investors; (b) a similar "club" of "Capital Users"; and (c) a consortium of Developers/ Managers/ Service Providers.

(b) and (c) simply share agreed proportional "Equity Shares" in the production of the "co-owned" property, or the revenues from the sale of production.

Thereby aligning the interests of the managers with everyone else - for the first time.

This opens up entire new asset classes of "Equity Shares" with very interesting properties: for those interested, I have spreadsheets and "chapter and Verse".

The interesting thing about this form of LLP/LLC is that it need not "own" anything; "do" anything, or "employ" anyone, but may serve as a framework for its Members to do so.

ie the "chaordic" entity envisaged by Dee Hock (but never found).

And for those who say this is great in theory, I have already observed a deal in excess of £1 billion in the UK using an embryonic "Capital Partnership" while the number of LLP's has doubled to over 14,000 in 2 years - albeit no-one has the faintest idea what people aredoing with them, because there is no reporting requirement.

I call it the "Corporate that Dare not Speak its Name", since the Press seems to have a moratorium on writing about it, the government is in denial about it, and professionals paid by the hour, rather than the outcome, have no interest in promoting the simple consensual solutions implicit in using it.

Why should I be taken seriously, when I say this is a new asset class capable of entirely "changing the game"?

Well, for what it's worth I WAS the Director of Compliance and Market Supervision of a global energy exchange (the IPE) for six years, and responsible for introducing most of the trading innovations during that time such as "Exchange of Futures for Swaps", "Volatility" trades, a new Natural Gas contract structure and more.

Finally, an LLP agreement is in fact usable as a global (tax transparent) legal protocol capable of comprising a cross-border legal framework which transcends current jurisdiction-bound regulation.

But that, as they say, is another story...

We (the Commission on Unclaimed Assets) finalised a paper on a Social Investment Bank to act as a driver for the development of a social investment marketplace in the UK. Much of the discussion is very relevant to the conversation here and we would be very interested in thoughts or comments. In particular, it provides one possible solution to your second question above (though focuses on the use of money in dormant bank accounts as this is a present policy initiative by the UK government). It is available at: http://www.unclaimedassets.org.uk/press.php

• In order for it to be of use to entrepreneurs, what does this type of expansion capital need to look like?

As a social entrepreneur I see three types of existing capital, affinity driven capital, policy driven capital and market capital. Affinity driven capital is philanthropic. Policy driven capital are government funds. The challenge for social entrepreneurs is to build a capitalization argument for each of these types of funds.

That argument has three perspectives reflecting the culture surrounding each of these sources of capital. Affinity driven capital is about values and beliefs. Policy driven capital is about social networks and communities of interest. Economic returns define market capital.

To capitalize a venture a social entrepreneur has to build a business model that can in fact be meet the needs of each culture. That model may include a charitable entity, partnerships and corporations. The charitable periods allows testing the business model, the partnership leverages charitable, policy and private capital for a larger launch. For example; Boston Community Loan Fund.

I don’t have extensive experience in the US, but my first impression is that both the capital and legal structures to leverage capital this way exist. The difficulty is demonstrating a viable business model in each context. Perhaps social entrepreneurs need to investigate the terms of all the sources of capital and then plan their business model.

Learning the underwriting criteria and return on investment criteria for each source of capital is necessary to having access to capital. Good market research and active pr