Financing Social Entrepreneurs: Transforming Models for the Future. Global Conference 2008

Transcription

1 Financing Social Entrepreneurs: Transforming Models for the Future Global Conference 2008

2 Social entrepreneurs Definition Individuals who: Take a professional, innovative and sustainable approach to systemic change that resolves social market failures and grasps opportunities Engage with a wide range of business and organizational models, both non- and for-profit Measure the success of their activities first and foremost by their social impact Skoll Centre for Social Entrepreneurship

3 Social entrepreneurs Definition Society s change agent: pioneers of innovations that change humanity. Skoll Centre for Social Entrepreneurship

4 Social entrepreneurs Definition Social entrepreneurs are individuals with innovative solutions to society s most pressing social problems. Ashoka

5 Social entrepreneurs Definition 1. Identify a stable but inherently unjust equilibrium that causes the exclusion, marginalization or suffering of a segment of humanity that lacks the financial means or political clout to achieve any transformative benefit on its own 2. Identify an opportunity in this unjust equilibrium, develop a social value proposition, and bring to bear inspiration, creativity, direct action, courage and fortitude, thereby challenging the stable state s hegemony 3. Forge a new, stable equilibrium that releases trapped potential or alleviates the suffering of the targeted group, and through imitation and the creation of a stable ecosystem around the new equilibrium ensuring a better future for the targeted group and even society at large Roger L. Martin & Sally Osberg, 2007

6 Social entrepreneurs Definition Social entrepreneurship combines the passion of a social mission with an image of business-like discipline, innovation and determination commonly associated with, for instance, the high-tech pioneers of Silicon Valley. J. Gregory Dees, 1998

7 Examples of successful social enterprises Fast Company, with Monitor Group, identifies successful social enterprises on an annual basis. Some of 2008 s winners are: Nonprofits Acumen Fund Calvert Social Investment Foundation Ceres Citizen Schools City Year Housing Partnership Network KIPP Foundation New Leaders for New Schools Reach Out and Read Teach for America For-profits Better World Books Developing World Markets Domini Social Investments Equal Exchange Herman Miller New Leaf Paper Organic Valley Family of Farms Seventh Generation ShoreBank SustainAbility

8 Social enterprises fall between philanthropic and commercial entities Purely philanthropic Social enterprises Purely commercial Motives Appeal to goodwill Mixed motives Appeal to selfinterest Methods Mission-driven Balance of mission and market Market-driven Goals Social value creation Social and economic value creation Economic value creation Destination of income / profit Directed toward mission activities of the nonprofit organization (required by law or organizational policy) Reinvested in mission activities or operational expenses, and/or retained for business growth and development (for- profits may redistribute a portion) Distributed to shareholders and owners Source: Virtue Ventures LLC.

9 Blurring of traditional roles Private sector / businesses Public sector / government Social entrepreneurship Voluntary sector / nonprofits Source: U.S. Small Business Administration.

10 Dual objectives Social enterprises are driven by the desire to fulfill: 1. Social objectives Aimed at accomplishing mission Vary widely depending on the organization s mission and sector 2. Financial objectives Focused on financial sustainability Vary according to funding needs and business model Requires diversification of funding streams and/or the creation of earned income Source: Virtue Ventures LLC.

11 Social enterprises vary in degree of financial self-sufficiency Cash flow self-sufficiency: Earned income covers operating expenses of enterprise at lower than market rates Financial self-sufficiency: Earned income covers all operating and investment expenses at market rate Partial self-sufficiency: Earned income covers a portion of operating expenses or recovers some program costs Operating self-sufficiency: Earned income covers all operating expenses without full market-based costs (capital and investments) Source: Virtue Ventures LLC.

12 Funding spectrum of social enterprises Traditional nonprofit Social enterprises For-profit Capital Grants and donations Grants and belowmarket capital, no/low-interest loans Market-rate capital Expected social return High High None Expected financial return None Below market or none Market rate Sources of capital Foundations, government grant programs, bilateral and multilateral lenders, individuals Foundations, local government, CDFIs, PRIs, bilateral and multilateral lenders, nonprofit social investors, individuals Traditional venture capitalists, investment banks, other investment assets, individual investors, stock Source: Virtue Ventures LLC.

13 Spectrum of investors Traditional philanthropy Venture philanthropy Community debt financing Community development equity / venture capital Angel investors / social venture Capital Socially responsible investment funds Traditional institutional capital (e.g., banks, mutual funds) Social equity investors Private equity investors Source: Jed Emerson, based on the work of Shari Berenbach and Timothy Freundlich, 2000.

14 Financing landscape for social enterprises Source: Jed Emerson, Tim Freundlich and Jim Fruchterman, 2007.

15 Types of financing for which social entrepreneurs apply As reported by social entrepreneurs in the U.K., 2005: Bank overdraft Credit cards Government Friends and family Mortgage or secured loan Other individuals Unsecured bank loans Venture capital Non-bank unsecured loan New social enterprises 32% 24% 23% 17% 17% 12% 11% 5% 3% Established social enterprises 26% 5% 14% 20% 12% 14% 14% 7% 3% Source: Global Entrepreneurship Monitor, 2006.

16 Reasons for failure to obtain financing As reported by social entrepreneurs in the U.K., 2005: Nature of business Business too small Costs of finance too high Fear of debt Not investor ready Nature of business Unwilling to share ownership Weak management team New social enterprises 42.4% 32.4% 30.3% 29.4% 24.2% 23.5% 14.7% 11.8% Established social enterprises 39.1% 27.3% 45.5% 4.3% 18.3% 8.7% 54.5% 9.1% Source: Global Entrepreneurship Monitor, 2006.

17 Mission-related investment (MRI) Definition Financial investment made with the intention of: (1) Furthering a foundation s strategic goals (2) Obtaining a financial return

18 Program-related investment (PRI) Definition (1) A concessionary investment for a charitable purpose (2) PRI has a legal definition for private foundations, which can use PRIs toward their payout requirement. In this case, PRIs must meet three criteria: (a) (b) (c) Source: Internal Revenue Service. The primary purpose is to accomplish one or more of the foundation's exempt purposes Production of income or appreciation of property is not a significant purpose Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose

19 Toolbox for investment PROGRAM-RELATED INVESTMENTS Grants Recoverable grants Guarantees / credit enhancement Below-market loans Revolving loan funds Gap financing First-loss loans Community development venture capital MISSION-RELATED INVESTMENTS Cash (deposits) Loans Senior Subordinated Loan funds Line of credit Fixed income Bonds Bond funds Asset-backed securities Public equity Screened funds Direct public equity Alternative assets Direct private equity Private equity funds VC funds Fund of funds Buyout funds Hedge funds Real estate

20 Social stock exchange Public listing of nonprofits and social enterprises Offered to the public as investment opportunities with a social return Examples: South African Social Investment Exchange (SASIX), launched in 2006 Social Stock Exchange on the Stock Exchange of Brazil (BOVESPA), launched in 2004 Source: xigi.net.

21 Panelists slides

22 Shari Berenbach Executive Director Calvert Foundation

23 The Calvert Continuum How does Calvert Foundation fit into the larger Calvert Continuum of enterprises and brand? CF Photo: Jamie Rose for Calvert Foundation.

24 Calvert Foundation track record Calvert Foundation has a strong track-record of growth, stability and community impact. CCI Notes, loans and assets (US$ millions) $175 $150 Cumulative total assets $125 $100 Cumulative CCI notes $75 $50 $25 $0 Cumulative net portfolio Photo: Jamie Rose for Calvert Foundation.

25 CCI Note details Minimum investment: Investment term: Interest rates: Targeting: Ways to invest: Compensation to Advisors: $1,000 Photo: Jamie Rose for Calvert Foundation years; investor s choice 0-3%; investor s choice 8 geographic regions in the U.S. International microfinance Special initiatives: Gulf Coast Recovery, Social Enterprise Custom targeting for $50,000+ investments Either in a Paper Note directly through Foundation with an application, in DTC Note through brokerage accounts using CUSIPs, or on-line through MicroPlace Paper Notes: 25 bps annual trail DTC Notes: bps at point of sale, depending on term

26 CCI Note model Investors CCI Note Partners Investor capital Individuals Foundations Faith-based Nonprofits High net worth Corporations $125 million loan pool Diversified and professionallymanaged Affordable housing Microfinance Community development Institutional investors Donor capital Sr. sub debt Jr. sub debt GiftShares Capital support Social innovations Photo: Jamie Rose for Calvert Foundation.

27 Risk / return paradigm Most of Calvert Foundation and its clients assets MODERATE CONSERVATIVE CDs Deposit accts Community investor pools and CD bonds Direct lending domestic CDFI s Equity: CD banks Direct lending intl MFI Direct lending: Domestic NPs Direct lending: Intl NPs CDVC, equity US AGGRESSIVE Low risk / return / expense Photo: Jamie Rose for Calvert Foundation. High risk / return / expense

28 Community Investment Partners Capital markets Asset management PRI offering Private capital campaign Preparation of offering memorandum Sourcing and marketing to potential investors Facilitate investor due diligence Assist in negotiation and closing Independent offering Capital campaign via Client Note Prospectus preparation State security registration and maintenance Note administration Sales reporting MicroPlace offering Capital campaign via Client Note on MicroPlace MicroPlace due diligence management Prospectus preparation State security registration and maintenance Daily sales confirmation Sales analysis Underwriting Sourcing of potential investments Due diligence Risk scoring Loan agreement preparation and negotiation Portfolio management Payment administration Portfolio reporting Advisory Program design Due diligence reports Sourcing of potential investments Some current and previous CIP clients: Photo: Jamie Rose for Calvert Foundation.

29 Sir Ronald Cohen Chairman, Portland Capital LLP, The Portland Trust, Bridges Ventures; Former Chairman and Founding Partner, Apax Partners

30 Bridges Ventures: Venture capital with a social mission Backed by Apax Partners, 3i and Doughty Hanson Invests in businesses in the most deprived 25% of the U.K. and in the sectors of healthcare, education and the environment First fund 40m: half from private sector, half from U.K. Government, realisation of almost 14m Second fund 75m: entirely from private sector 80% of investment to companies located in the most deprived 10% of areas 830 jobs created or sustained *Source: The Economic Impact of Private Equity in the U.K. 2007, British Venture Capital Association.

31 Charity Bank Lends to U.K. charitable sector only Would like to raise equity to increase lending capacity Value of providing equity to such a bank hard to grasp for traditional foundations Raising of capital as participating preference shares to attract high net worth individuals foundation money Participating dividend rises to max 10% over time and provides appreciation potential 10 million of equity allows 90 million of additional loans to be made

32 Social Investment Bank Recommendation of the Commission on Unclaimed Assets, initial capital of 250 million Engine for accessing capital markets and boosting mission-driven investment Would use its significant capital base for: Providing guarantees, underwriting and supporting intermediaries in their efforts to raise capital Developing new products and programmes to target mission-driven sectors Supporting the development of advisory services

33 Kevin Jones Co-Founder Good Capital

34 Growing mindshare Attention Curve Graphic conceptualizations Mark Beam, Collective Intelligence

35 Adding the dimension of impact to your investing Traditional Investing, 2 Dimensional: Efficient Frontier, just risk and return. Aquillian Investments LLC, Aquillian.com The third dimension: The real world of impact is reunited with the traditional investment equation of risk and return. 35

36 Social and financial measures of success SOCIAL IMPACT Measurement Current Timeframe Projected Timeframe Owner 1 Funding NPLPs $ per annum $1.5M FY2007 $ FY2008 bwb % of net revenues 7.50% FY % FY2008 bwb 2 Funding Library NPs $ per annum $670K FY2007 $ FY2008 bwb 3 NPLP endowment completion n/a completed 3Q 2008 wes 4 Reduce landfill/recycling # (or pounds?) of books # FY2007 # FY2008 bwb 5 Carbon neutral shipping tons of CO2 offset t. FY2007 t. FY2008 bwb OTHER METRICS Measurement Current Timeframe Projected Timeframe Owner 1 Overall profitability EBITDA $133k FY2007 $ FY2008 bwb EBITDA margin 1% FY2007 % FY2008 bwb 2 Rev growth - new biz $ n/a FY2007 $ FY2008 bwb 3 Staffing finance and mktg n/a FY2007 new hires FY2008 kevin 4 Financing costs re-fi mezzanine n/a FY2007 completed 4Q 2008 tim 5 Branding/Mktg activities various activities???? kevin To be completed prior to closing

37 Social impact model We advised BWB on creating a new strategy for funding NPLPs Based on benchmarking industry book acquisition cost Our cursory analysis determined that the industry average used book acquisition cost is approximately 35% of revenue We set 35% as the book acquisition cost target and estimated BWB s actual costs as a % of net revenue (rev less commissions) The difference is the amount to be provided to NPLPs annually Advantages of new model Replaces old model of giving away 50% of free cash flow Enables BWB to reserve cash for growth in lean years (i.e., today) Builds a cost of doing good into cost of goods sold with rationale of paying NPLPs for benefit of using their brands to acquire books New model gives a 5% ownership stake to NPLPs Management has committed to implementing new strategy by July 2008

38 Debra Schwartz Director of Program-Related Investments John D. and Catherine T. MacArthur Foundation

39 Where do PRIs fit in? Investments Missionrelated Investments Programrelated Investments Grants Primary purpose Financial gain Financial and social gain Charitable benefit Charitable benefit Financial profile Maximum risk-adjusted return At or near market return Below-market return Zero return Charitable distribution? Constraints None Fiduciary duty; penalty for jeopardizing investment Counts toward 5% payout Definition of charitable purpose; special reporting

40 Why use PRIs? Institutionbuilding Leverage Innovation Flexibility

41 PRIs at the MacArthur Foundation First PRI Today Recipients Typical structure 1983 purchase of ShoreBank common stock $300 million self-financing pool $40 million awarded in 2007 Community development financial institutions Large nonprofit affordable housing owners Specialized financing vehicles and funds 10-year unsecured loans; 2-3% annual interest Also: equity investments, guaranty