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

Editor’s note: We can’t possibly cover all the great panels and conversations at the four-day Social Capital Markets Conference (SOCAP14) in San Francisco. So we’re trying something a little different this year: Seen and Heard at SOCAP14. Each day we’ll assemble some of the key points and quotes from the conference. Here are a few tidbits from Day 2. Our Day 1 coverage can be found here.

The Right Track

Kevin Jones, co-founder of SOCAP14, launched the day by comparing today’s impact investing market to America’s early railroads, which opened new markets across the young country. But just like the regional railroads of the day, there’s very little coordination and even less interoperability in the impact investment market. That’s changing, he said, with the help of USAID and others.

“We’re building the bridges between the railroads and making the gauges standard,” he said.

– Scott Anderson

The Future of Impact Investing: Innovations in Mechanisms and Models

The Rockefeller Foundation has invested more than $50 million to build the architecture and infrastructure of impact investing – creating networks such as GIIN, an evaluation framework such as IRIS, mainstreaming measurement through GIIRS, creating enabling policies and frameworks as well as investment opportunities.

Despite these advancements Judith Rodin, president of The Rockefeller Foundation, challenged attendees to look to the future of impact investing. The Rockefeller Foundation sees two future investment opportunities to solve the complex challenges humanity is facing today: innovations in mechanisms and innovations in models.

Rockefeller is working on electricity. Areas with low rates of electrification are more likely to experience higher rate of poverty and vice versa. Rodin (pictured below) shared the benefits of electricity – it results in 17 percent increase in employment hours of women, 39 percent of household per capita income is attributed to electricity and entrepreneurs save between 15-20 percent on monthly energy expenditures, resulting in increased income and business expansion. The Rockefeller Foundation is working to de-risk the model of working with telecommunications companies to bring electricity to developing parts of the world and make it attractive for investment.

Rockefeller is also working to address challenges through the 100 Resilient Cities Model, which invests in cities, communities and their associated systems so they can receive a “resilience dividend,” Rodin said. The resilience dividend results in residents with greater mobility and access, more job opportunities, increased social cohesion; businesses and institutions with lower operating risk, more reliable supply chains, new markets for innovation and technology; and government with increased corporate investment, improved coordination across silos and greater production for the vulnerable. This requires investment in urban planning and design, safety and law, community cohesion as well as infrastructure, economic diversification and preparedness.

Share your thoughts on the next leapfrog innovation for impact investing with Rockefeller via #bigideas #socap2014.

– Heather Esper

Plenary Pledges and Passion

SOCAP veterans Cathy Clark of the Center for the Advancement of Social Enterprise (CASE) at Duke University, Jed Emerson of ImpactAssets and Ben Thornley of ICAP Partners are releasing a new book in October: “The Impact Investor: A Practitioner’s Guide on How to Succeed in Impact Investing.” In the opening plenary, they gave a little taste of the book, with a key ingredient being the concept of “multi-lingual leadership.” Their research shows that the highest-performing impact investment funds are led by teams cross-cut along multiple disciplines, Emerson said. Most of these leaders have bounced from the worlds of Wall Street, to multinational NGOs, to social startups and microfinance organizations. That’s led to a wealth of experience, but not exactly a perfect model for leadership.

“As a community, we’re basically winging it, we’re basically making it up as we go along,” Emerson said. “It’s time to have a more structural approach to impact investing.”

On just how to use an apparent weakness – leaders who are jacks of all trades and masters of none – Clark took it from there. She encouraged the crowd to look within their teams and themselves, and to take the IGNITE pledge – innovate, guide, network, talk and educate.

CASE has also created a survey designed to find out if you have the skills to be a multi-lingual leader, which you can find (and take) here.

Also during the morning plenary, Matt Bannick, co-chair of the U.S. National Advisory Board and managing partner at Omidyar Network, said the task force will unveil a 50-page report of recommendations for reducing regulatory barriers, increasing effectiveness of government programs and catalyzing investments. He noted the example of the U.S. government’s Overseas Private Investment Fund, which at present cannot take an equity stake in investee companies. Bannick said the venture capital industry boomed when government reforms enabled pension funds to invest in VC, and a similar dynamic exists today with impact investing. That report, by the way, will be coming out Sept. 15 and will be a follow-up to “Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing — and Why It’s Urgent.”

Sir Richard Cohen, chairman of a separate task force, the Social Impact Investment Taskforce established by the G8, who took the stage with Bannick, said, “Evolutions in thinking bring us to a tipping point, and government has to push us over the tipping point.”

The evolution of which he spoke is the move toward risk, return AND (social, poverty, environmental) impact, which is becoming mainstream. The sooner the federal government, and governments around the world, recognize it, the better. And there’s a good chance they are.

“The good news is the president deeply believes in impact investment,” said Jonathan Greenblatt, director of the Office of Social Innovation and Civic Participation in the Domestic Policy Council.

In its fiscal year 2014 proposed budget, the White House laid out a $300 million “pay for success” incentive fund, which appears to have bipartisan support in both the U.S. Senate and the House of Representatives. Greenblatt encouraged attendees to pour on the pressure to their elected officials. For a deep dive on the subject, check out this excellent Nonprofit Quarterly piece.

– Scott Anderson

Scaling in More Ways than One

How do you define scale? Well, that’s key for scaling up, now isn’t it? I particularly liked Rob Weiss and Patricia Compas-Markman’s responses to that question during a SOCAP14 breakout session.

Weiss is a business development analyst with D-Rev, which aims to combat the effects of infant jaundice with its low-cost product, Brilliance. So far it’s sold 900 units in 13 countries. But, Weiss said, “The ultimate scale is getting sufficient market penetration so untreated jaundice is no longer a reality … where any hospital that needs affordable phototherapy can get it, that doesn’t necessarily mean that has to come from us.”

It could come from big players like GE, for example. In the end, achieving scale means “seeing that overall market change” and the recognition by hospitals that affordable technology is available.

Compas-Markman, founder & CEO of DayOne Response, said long-term scale is providing 2 billion liters of clean water per year in disaster areas. That translates to sales of 3 million units of DayOne’s waterbags, she said. But Compas-Markman added that for her for-profit organization, which partners with emergency aid agencies and NGOs in post-natural disaster areas to distribute the waterbags, scale means knowing when to add staff and how to harness their talents.

For instance, as the business has grown, new opportunities and applications for the product beyond disaster responses have emerged, such as at health clinics or to assist families dealing with seasonal water shortages.

“It’s helping us frame what is the problem we’re trying to solve and how we’re listening to the customer base, seeing the need and being prepared for that,” she said.

– Scott Anderson

What’s Needed in Scaling Impact? Behavior Change from Funders

The three most important questions an enterprise that wants to scale can ask itself, according to Greg Coussa of the International Centre for Social Franchising, are: Why they want to scale, what do they want to scale and how will they scale? To determine whether they are ready to replicate, they can ask themselves 10 questions.

Kevin Starr of Mulago Foundation hasn’t seen much scale yet. In responding to what can be done to help prepare enterprises for scale, he said that many enterprises are trying to get a model up and running to scale but they don’t know how they plan to scale and therefore aren’t designing for successful scale. The most important thing for an enterprise that wants to scale, said Starr, is to envision who is going to do this at scale – whether it is government or the private sector – and then design the enterprise to make it happen.

In response to why more social enterprises haven’t gone to scale, Starr said it is “mostly because we funders suck” and there is no market for impact. He went on to say that everyone is looking for the bright new shiny thing and when it’s ready to scale they all move on to the next new thing. Funders are really good at getting pilots started but, as a one of Starr’s good friends said, “The social sector is a desolated space of abandoned successful pilots.” Starr added that funders have to drive measurement of impact and then get really serious about chasing it by committing to invest in it, recognizing when it happens and demanding that it is measured.

Coussa agreed that the field needs a fundamental shift away from focusing on the bright star or silver bullet. He added that it is time to scale what is already proven and attract long-term commitments from funders. Julie McBride from Population Services International added that funders, donors and investors exhibit insane behavior – with the definition of insanity being doing the same thing over and over and expecting different results.

In response to a question from the audience regarding whether the field has a fetish with measurement, Coussa responded that in many cases there’s not enough measuring. Starr added that enterprises need to measure as early as possible and understand their mission to pick the right indicators and show attribution.

– Heather Esper

Earning the ‘Title’ of Impact Investment

At the Philanthropy to Payment for Success session, Heron Foundation’s Dana Pancrazi noted that the employment effect is the ultimate social impact indicator. Whether it’s a market rate investment in petroleum or extractive industries or a program-related investment in a Bcorp, it has an employment effect and thus an impact.

Pancrazi distinguished why some gain this title: “Every dollar that leaves our shop is an impact investment … our sector only calls it impact investing when they like it.”

– Tara Sabre Collier

Observations from the Field: Embed, Have Clear Expectations and the Role of Government

Willy Foote, CEO and founder of Root Capital, and Antony Bugg-Levine, CEO of the Nonprofit Finance Fund, shared observations from the field regarding what it takes to make impact investing work and what they’ve learned. Both organizations focus not necessarily on maximizing return, but rather making markets more inclusive. Root Capital’s mission is to grow prosperity in rural areas by investing in agricultural business, combining capital and expertise to unlock potential for farmers to get the most out of their work. The Nonprofit Finance Fund’s U.S. clients are nonprofits that are hampered by their inability to reach the right type of capital.

Success factors noted by Foote include embedding deeply in local markets and being as close as possible to clients. For Root Capital, the most important element is identifying the early-stage agriculture businesses that have huge potential for social and environmental impact, but face many challenges. Foote said it is critical not to over-promise or oversell; that large impacts won’t happen without lots of risk and subsidy.

Foote shared how much trouble you can get into if you don’t have clear expectations up front with your stakeholders, such as your investors. It is difficult to decode everything up front in the face of market failure such as diseases affecting coffee bean production and rising competition from other social investors; therefore, it is important to have the license and room to iterate and adapt to changing circumstances. Last year, Root Capital didn’t hit their target for the group’s five-year Scaling Impact Plan as a result of some of the aforementioned issues. Some investors got spooked and pulled out. However, Foote said what Root Capital did right was quickly and aggressively communicate with their board and investors to implement lean cost controls while not undermining their capability in the field. The coffee market has since rebounded but with more volatility.

Foote said it is important to recognize that impact investing is much more specialized now – and with that comes many different theories of change which require organizations to be careful about aligning their theory of change with others, and that can affect how an organization will engage with the landscape and ecosystem.

Bugg-Levine of the Nonprofit Finance Fund shared a lesson learned since last SOCAP regarding the role of government in impact investing. He said you cannot be an impact investor and make a real difference until you understand the flows of the government into your work. He said government not only creates the conditions for impact investing but also helps pay for services. Thus, the Nonprofit Finance Fund gets repaid by government when the government pays a charter school – that the fund helped to receive capital to rehab the building – to offer services, or in the case of a homeless shelter, the city commits to funding services provided by the shelter.

– Heather Esper

’Freemium’