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

Friday, January 13, 2012

Case study highlights challenges facing the nascent social investing sector and explores ways to face them.

ANN ARBOR, Mich.-Social investing. Impact Investing. Patient capital.

That the idea itself has more than one name underscores the challenges facing an industry that seeks to invest in and grow companies that measure wealth both by profit and the ability to solve social problems.

This relatively new sector in the venture capital world is trying to redefine the very mission of capitalism. The idea is that for-profit companies should be judged by more than one bottom line.

But who defines those more intangible bottom lines? How do investment firms discover startups worthy of investment? How does social investing raise funds when it’s still in a no-man’s-land between philanthropy and traditional venture capital?

Those questions are probed through the lens of San Francisco-based impactne investing firm Good Capital in the case study Good Capital and the Emergence of the Social Capital MarketSupervised by finance professor Gautam Kaul and written by Lauren Foukes, BBA ’06/MBA ’12, the case won fourth place in the 2011 NextBillion Case Writing Competition.

Social investing is a relatively new idea, especially in the United States, and those involved in the industry have to lay the foundation for their own ecosystem, says Kaul, the John C. and Sally S. Morley Professor of Finance. Leading experts need to set standards-especially on how to measure and value social impact-and need to establish a regulatory framework in the U.S., where the law usually favors the primacy of shareholder value.