NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

How do a range of innovative investment models work, and work together, to tackle core issues that perpetuate poverty? This theme is at the heart of SOCAP 09 and the plenary “Showcasing the Social Capital Spectrum” provided insights from leading organizations exemplifying differing approaches.

If fierce debate was the goal, perhaps the wine should have been served to panelists at the beginning, instead of the end of the discussion… But instead of disagreement, there was overwhelming consensus for collaboration among the panelists representing the range of investment philosophies from venture philanthropy to commercial funds delivering high returns. This was a refreshing indication that the market is beginning to mature and making positive steps forward.

The nonprofit and hybrid models represented both have a decade or more of operating history under their belts. Kim Smith discussed how NewSchools uses the venture philanthropy model with a nonprofit fund structure to make grants and investments in US education reform and challenged the audience to innovate by using existing tools to achieve new ends or figure out where creation of new tools is needed. Willy Foote described how Root Capital, also a nonprofit, is a “hybrid capital beast” that provides credit and financial education to rural entrepreneurs in emerging markets and leverages public goods (subsidies) to address market failures that cannot be solved with commercial capital.

The successes achieved and lessons learned by nonprofit hybrids have helped pave the way for innovation in the commercial market. As a personal anecdote, an article that profiled Kim Smith’s pioneering work with NewSchools in Columbia’s alumni magazine inspired my own motivation to merge my experience in traditional private equity and venture capital into something that could produce social change. With several social enterprise endeavors in between, two years ago I moved to Mexico to join IGNIA at its inception, and at this conference I am moving back to SF to play a new role, continuing along this spectrum.

The for-profit players represented were founded in 2006, 2007, and 2008 respectively. Aavishkaar Goodwell provides access to affordable financial services by investing equity capital into entrepreneurial MFIs in India and Wim van der Beek shared how he initially thought it was ok to provide impact adjusted return, or emotionally adjusted return but deserted that thinking early on and realized the way to tap into the capital markets is to provide market rate returns.

Alvaro Rodriguez Arregui explained that IGNIA was founded on the belief in the power of business to tackle social challenges at scale. Through a fully for-profit venture capital fund, IGNIA invests equity into high growth companies serving the BoP in Latin America with scalable business models in sectors including health, housing, education, nutrition and water. The massive scale of poverty requires solutions at scale – meaning moving from serving hundreds and thousands to serving millions and billions. Since profit is the engine for growth, IGNIA believes that profit is the best driver of scale.

Finally, Jed Emmerson appeared to have happily left his Blended Value Birkenstocks behind to fill the shoes of a fully commercial player, commuting from Greenwich CT to Manhattan as part of the hedge fund group, Uhuru Capital Management. He focuses on maximizing value through a straight commercial product, a global hedge fund of funds. The GP owns 25% of profits and based on performance of the funds, it will use available profits to make grants to support social entrepreneurship. While to date Emmerson has avoided using any “s” words (like “social impact” or “sustainable”) in promoting his product, Uhuru plans to launch a branded sustainable hedge fund next month.

Regarding collaboration, Rodriguez is emphatic about the need to shift the traditional debate which focuses on where an organization sits on the map defined by the axes of social impact and financial return to a landscape that assumes that all organizations are aiming to maximize their social impact, and redefined the axes of the dialogue as simply the risk-return profile of each player. If we look at organizations along this risk-return spectrum, the roadmap for collaboration becomes clearer. Using an example from traditional capital market, a company might move from public grant funding for a biotech project to angel then VC funding, then go public. The social capital markets can operate more effectively for example passing projects seeded by philanthropic funds onto venture philanthropy, then onto the commercial players to bring the companies to scale.

In conclusion, if the players on stage represent the feet on the street, increasing focus on building more effective alliances is ahead. Foote summarized it well by emphasizing the need to be “pathologically collaborative with your would-be competitors.” Van der Beek reminded us that there is surprising little difference between traditional and social capital, including the ability to learn from failures.

With more good evidence, which is generated every day, that purpose-driven companies outperform traditional ones, the mainstream market will start dropping the negative misconceptions of the “s” in social capital as referring to “soft” or “sissy” (as one panelist bluntly put it), and begin associating it with the real values of social impact and sustainability.