Small but ambitious social enterprise, seeking capital, offering low returns and high risk. First-timer in the business world, no experience with debt or equity, great social impact.
The above isn't your typical "get rich quick" opportunity for an investor, but the demand and supply sides for social investment capital are growing. They just aren't always growing in the same direction.
I'm currently working on a brief guide for social enterprises in developing countries, to help them understand how the world of what I call "investment-minded funders" (everyone from venture philanthropist grantmakers to sub-market debt, equity, and quasi-equity folks) works. The experience of writing and re-writing and re-writing the paper to work for the audience is reminding me that, like it or not, those of us who like to talk about social investing (or PRI or MRI or whatever American foundations are calling what they like to talk about but hardly ever actually do) tend to act like this is a fully formed field, and that the demand side of this capital equation is up to speed on how this all works.
What we are really dealing with is a demand side that doesn't know a whole lot about how the supply side thinks and makes decisions. Some of this is experience - many social enterprise founders and management, globally, come from development, not business, backgrounds. Imagine a commercial start-up venture going seeking angel or VC funding, never having heard the terms "valuation" or "exit", and not really being sure what "equity" is all about. This is not a conversation that's going to go very well.
In the social enterprise context, there are some very sophisticated players out there, but the vast majority of social enterprises I see have a long way to go in understanding how investment-minded funders think, how they have to present themselves to these funders, how the relationship is vastly different from working with a traditional grantmaker, and why they would want money that expects more of them (repayment, for instance) than grants. I think part of the responsibility lies on the part of funders and intermediaries to help social enterprises understand what's going on. Of course, this benefits funders too - by improving deal flow and the quality of materials being submitted by social enterprises. And then it's up to the social enterprises to learn what is expected of them and provide it.
So I'm developing some thoughts on what has to happen on both sides of the supply/demand equation, in order for these guys to find somewhere to meet in the middle. My not-fully-formed list starts here:
What can social enterprises do?
1. Start getting educated. Set a goal for yourself to understand how equity investing works, how debt and lending works. Read definitions on investopedia.com. Ask stupid questions. If you don't have a board member that is/was a banker, venture capitalist, or "commercial" entrepreneur, get one, and make it clear to him/her that his/her job is to get you up to speed.
2. Research funders/investors you're interested in. Find out where they fund, what financial instruments they use, what social impacts they look for, and most importantly, what level of financial returns they expect. Then ask yourself whether that fits with your operation. I've been talking to a lot of social venture capital and venture philanthropy funders lately, and the #1 error they see, across the board, is social enterprises assuming that their fantastic social impact will somehow allow an investor to make an exception to the level of returns that investor is seeking. These social enterprises are not making the connection between the fund's responsibility to its investors or limited partners, and the return the fund therefore has to seek from the social enterprises it invests in. I have seen so much time wasted by social entrepreneurs convinced that "once they see the impact we're having, they'll be fine with making a little less money."
3. Read business plans (grant applications don't count). Lots of them, in any industry, social and not-social. The more you read, the better you will understand how they are structured and how much the language differs from grant proposals. Then keep yours under 20 pages. Keep the social impact stuff to one clear section, rather than peppering it throughout the plan. Figure out where you want to be in a few years and work backwards to explain how you will get there - operationally, strategically, and financially. Include both full and "snapshot" versions of your financials - a few years of history and 3-5 years looking forward. Profit & Loss, Balance Sheet, and Cash Flow. List your major risks and provide optimistic, "base", and pessimistic scenarios of your financials to show that you are prepared for the bumps in the road. And remember that most of the people who read your business plan will skip everything but the Executive Summary, Management Team Bios, Financials, and maybe Social Impact sections.
What do social investors and venture philanthropists need to do?
1. Transparency. Some social investors choose not to clearly and publicly explain what kinds of financial and social returns they're looking for. And they could all benefit from providing education to social enterprises to help them improve their approach.
2. Simplicity. This especially goes for venture philanthropists and social investors who come from the investing world. You might have worked at Goldman Sachs / McKinsey / Apax. The social enterprises who need your capital didn't, and they don't understand half of what you're saying. Help them out a little.
And the rest of us?
I have been asked a crazy number of times to "map the social investing landscape", for other funders, academics, and social enterprises. I am not a firm believer in the "social stock exchange" concept (mostly because I don't the approach of like putting "social" in front of every investment term we can think of, and calling it a day), but I do think it would be awfully useful to both investors and social enterprises if we had an industry-accepted (and supported?) space to map out all social investors and venture philanthropists in the field. There are a few who take a stab at this - xigi.net is one of them - but the key information is not easy to find, and the listings are not comprehensive. I would love to see a system whereby social enterprises seeking growth or capacity-building capital could answer some basic questions about cash flow, company structure, capital sought, financing instruments they're interested in, geography, and social impact areas, and be given a list of investors whose own criteria might make for a good match.
Gotta get back to the kind of work that pays the bills now
JS.
Friday, February 20, 2009
Wednesday, February 04, 2009
Back on the horse - in Austin
I'm trying to pick up blogging again after a long hiatus. Whenever I'm in transition I have a hard time thinking beyond my current reality, and we had a big transition in 2008 - my husband and I picked up our life in London and, in a several-weeks-long journey, made our way to our new hometown - Austin, TX. For a change, we followed our desire for good quality of life and sunshine, instead of careers, and it's turned out to be a great decision. This is a wonderful little city and we are enjoying getting to know it, along with our recently adopted dog, Blue.
I find myself in Austin at an interesting time for socially minded start-ups. Austin has the luck to have all the basic raw materials to be a leader in this field - it's a town of entrepreneurs, of socially conscious people, of great educational institutions, and of wealth. However the picture is still fragmented here, which I see as both a challenge and a great opportunity. I am of the belief that a community does not become a leader in this or any field without changes and innovations occurring in a number of areas, from public sphere to private sector (I blogged about this on Nell Edgington's blog, here). But there are also some promising signs that entrepreneurs are not sitting on their hands, waiting for Austin's infrastructure and capital markets to open their arms to social innovation.
Commercial companies like Blue Avocado and Greenling are following in the footsteps of older brother and local hero Whole Foods, building what they hope will be profitable businesses with clear social benefit embedded within.
Social enterprises are appearing, too, although they are still a bit thin on the ground here. English at Work is working toward financial sustainability, providing highly valuable services to employers by working with their employees to improve English skills. Emancipet, an organization with the mission to end unnecessary euthanasia of animals in Austin, earns a great deal of its budget through its spay, neuter, and wellness services. Southwest Key, a large Austin-based nonprofit, is making forays into income-generating social enterprise with a cafe and a maintenance company. If you're reading this and have other examples - anywhere on the social enterprise/social business spectrum, let me know!
Interestingly, as far as I know, most of the organizations above are entirely bootstrapped (with some grant funding for some of them). I applaud and support bootstrapping where it makes sense, but have to wonder what will happen when these start-ups (and others) reach that critical growth phase. For the highly commercial businesses, this might not pose a problem - if angels and VCs can see the business value and not get thrown off by the social impact, and if our economy doesn't completely implode, they should be able to get their hands on some capital. But for those who might provide investors with below-market financial returns, through equity, soft debt, or other mechanisms, where is this capital going to come from?
We seem to have a supply and demand problem that is highly chicken-and-egg. With so few social enterprises in Austin, can we go to funders and high net worth individuals with examples of success that might convince those potential investors to experiment with social finance? Or, if we can find some social investing pioneers to take a punt, will we be able to produce the deal flow to make it worthwhile?
My glib answer to these questions is Thank God for entrepreneurs. With some help and support, social enterprises will continue to appear in Austin, because entrepreneurs tend not to be hindered by the (lack of) resources at hand. But this is a big issue, and one that deserves intelligent attention. I'm excited to be here.
I find myself in Austin at an interesting time for socially minded start-ups. Austin has the luck to have all the basic raw materials to be a leader in this field - it's a town of entrepreneurs, of socially conscious people, of great educational institutions, and of wealth. However the picture is still fragmented here, which I see as both a challenge and a great opportunity. I am of the belief that a community does not become a leader in this or any field without changes and innovations occurring in a number of areas, from public sphere to private sector (I blogged about this on Nell Edgington's blog, here). But there are also some promising signs that entrepreneurs are not sitting on their hands, waiting for Austin's infrastructure and capital markets to open their arms to social innovation.
Commercial companies like Blue Avocado and Greenling are following in the footsteps of older brother and local hero Whole Foods, building what they hope will be profitable businesses with clear social benefit embedded within.
Social enterprises are appearing, too, although they are still a bit thin on the ground here. English at Work is working toward financial sustainability, providing highly valuable services to employers by working with their employees to improve English skills. Emancipet, an organization with the mission to end unnecessary euthanasia of animals in Austin, earns a great deal of its budget through its spay, neuter, and wellness services. Southwest Key, a large Austin-based nonprofit, is making forays into income-generating social enterprise with a cafe and a maintenance company. If you're reading this and have other examples - anywhere on the social enterprise/social business spectrum, let me know!
Interestingly, as far as I know, most of the organizations above are entirely bootstrapped (with some grant funding for some of them). I applaud and support bootstrapping where it makes sense, but have to wonder what will happen when these start-ups (and others) reach that critical growth phase. For the highly commercial businesses, this might not pose a problem - if angels and VCs can see the business value and not get thrown off by the social impact, and if our economy doesn't completely implode, they should be able to get their hands on some capital. But for those who might provide investors with below-market financial returns, through equity, soft debt, or other mechanisms, where is this capital going to come from?
We seem to have a supply and demand problem that is highly chicken-and-egg. With so few social enterprises in Austin, can we go to funders and high net worth individuals with examples of success that might convince those potential investors to experiment with social finance? Or, if we can find some social investing pioneers to take a punt, will we be able to produce the deal flow to make it worthwhile?
My glib answer to these questions is Thank God for entrepreneurs. With some help and support, social enterprises will continue to appear in Austin, because entrepreneurs tend not to be hindered by the (lack of) resources at hand. But this is a big issue, and one that deserves intelligent attention. I'm excited to be here.
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