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Social Impact Investing Will Be the New Venture Capital

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Social Impact Investing Will Be the New Venture Capital
by Sir Ronald Cohen and William A. Sahlman  |   8:00 AM January 17, 2013

During the past century, governments and charitable organizations have mounted massive efforts to address social problems such as poverty, lack of education, and disease. Governments around the world are straining to fund their commitments to solve these problems and are limited by old ways of doing things. Social entrepreneurs are stultified by traditional forms of financing. Donations and grants don’t allow them to innovate and grow. They have virtually no access to capital markets and little flexibility to experiment at various stages of growth. The biggest obstacle to scale for the social sector is this lack of effective funding models.

But the problem is not money, per se. Take a look at the social sector in the U.S. There are $700 billion of foundation assets, and 10 million people working for non-profits. These are huge numbers. Yet there are massive inefficiencies in capital allocation. Too often donors starve organizations and entrepreneurs by refusing to cover overhead. This makes it impossible for social organizations to scale. Interviews conducted in 2000 by the Social Investment Task Force in the United Kingdom, revealed what most nonprofit leaders already know: Almost all social sector organizations are small and perennially underfunded, with barely three months’ worth of working capital at their disposal. And that hasn’t changed in the last 12 years.

Compare that to the world of venture capital. If a business entrepreneur came to us with a plan for growing a new business without spending a penny on overhead, we would show him or her the door. Why should it be any different for a social entrepreneur?

We believe we are on the threshold of a major change not unlike the early days of the modern venture capital industry. In the mid-1960s and early 1970s, a new type of investment vehicle was created: the professionally managed venture capital partnership. This organizational innovation drew investment capital from institutional players like pension funds and endowments and allowed for appropriate time horizons. Soon venture capital became a core part of many economies and those bold moves changed everything. Entrepreneurship has never been the same.

Just as the formation of the venture capital industry ushered a new approach and mindset toward funding innovation within the private sector, impact investment has started to bring opportunities to harness entrepreneurship and capital markets to drive social improvement. This in time will bring much needed change to the social sector.

We’re already beginning to see innovation. People are developing new securities that link social performance to financial returns. There are new experiments — models that use the tools of finance to try things in different ways — sometimes creating income streams from novel concepts, likefunding cancer research. There are also hybrid organizations like the Acumen FundBridges Ventures and Root Capital that channel patient capital to high social return investments around the world. There are even organizations like Endeavor and Social Finance that help entrepreneurs gain access to global capital markets to fuel growth in employment and social impact.

Within the last two years, government agencies in the U.K., U.S., Australia, Canada and Israel at the national, state, or even county levels have begun exploring the potential of social impact bonds. These are financial instruments that pay an investor if the cost or incidence of something (foster care or prisoner recidivism) is reduced, with comparable or better results, than a government program. If so, the investor makes money; if not, they lose money.

As more and more examples emerge from all regions of the world — addressing issues as diverse as recidivism, drug discovery, sleeping sickness, literacy, food deprivation, and poverty — one begins to get the sense that there’s no stopping this idea whose time has come.

Things will change rapidly over the next five to ten years. If investors can find the same courage the early institutional backers of the venture capital industry found, we will see talented social entrepreneurs build large, effective organizations that move the needle on a social issue and deliver acceptable financial returns at the same time.

To get there we need success stories — like the early investments venture capitalists made in companies like DEC, Intel, Scientific Data Systems, Teledyne, Genentech, Apple and Tandem — that build confidence and unlock private capital. When investors believe they can earn acceptable returns, money will flow. And smart people will feel they can succeed because they can attract capital.

We live in a world awash with capital — some $200 trillion in financial assets according to McKinsey & Company. We also live in a world of remarkably low interest rates. If we can create instruments — like social impact bonds — that can deliver a financial return of about 7%, a high social return and limited downside risk, then we can meet two needs. We can provide reasonable returns that are uncorrelated with equity markets and attract capital to entrepreneurs who can develop innovative and effective ways of improving the fabric of our society.

Follow the Scaling Social Impact insight center on Twitter @ScalingSocial and register to stay informed and give us feedback.

Impact Investing Market Predicted to Grow to $500 Billion by 2014

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August 3, 2011

SAN FRANCISCO, Aug. 2, 2011 /PRNewswire/ — The fourth annual Social Capital Markets Conference (SOCAP11) will be held September 6-9 at San Francisco’s Fort Mason Center. Hundreds of global innovators including investors, foundations, institutions and social entrepreneurs representing 75 countries are expected to gather in San Francisco to address the impact investing market – an emerging asset class that provides financial gains for investors with a social and environmental benefit.

The Global Impact Investing Network’s data last year estimated current impact investments at $50 billion but expect it to increase to $500 billion, or 1% of all managed assets, by 2014. Keeping pace with the market growth, SOCAP conferences have scaled more than 200% in three years. In the Bay Area, SOCAP has grown from 600 to 1,400 people, with 20,000 following online, and 8,000 community members active in social media channels. More than 50 social entrepreneurs will attend on scholarships. In addition, the best entrepreneurs from the best accelerator programs, including the Unreasonable Institute, Echoing Green and Slow Money will be pitching their companies to impact investors.

“SOCAP is bringing together a global community of change makers who are forming partnerships and funding innovative solutions that are built to achieve positive social change and yield profits,” stated Kevin Jones, SOCAP Founder. “We are passionate in supporting social entrepreneurs creating beneficial change in the world by providing access to institutions, investors and foundations that want to be their partners in this endeavor. We are dedicated to advocating this movement to the broad investing community by showcasing how they can choose to integrate money and meaning and make both a significant and valuable change for their portfolio and the people and planet around them.”

Helping investors identify solid investable opportunities has been made easier with the June launch of the ImpactAssets 50, the first publicly published list of private debt and equity impact investment fund managers including leaders from microfinance, community development, fair trade, and other strategies. The IA50 represents $8.9 billion of capital invested across multiple asset classes, geographies, and impact areas.

Ron Cordes, Co-Chairman of $21 billion asset management firm Genworth Financial Wealth Management and ImpactAssets board member remarked, “We’ve seen a dramatic increase in impact investment products and created the IA50 to address and simplify this rapidly evolving marketplace that is bridging the gap between philanthropy and traditional investment. SOCAP is instrumental in accelerating the sector’s growth and will help drive further dollars into the space by hosting and nurturing a worldwide community that aspires to educate, collaborate and partner in businesses that can solve the world’s social and environmental problems.”