Category: impact-investing

Over the past year there has been a lot of focus in the financial services community on social impact investing. Investors who have not traditionally been in the social impact space are now making changes to their investment charter to include mission driven, for profit companies. Venture Capital and Private Equity firms that have been ignoring social impact have jumped in as well.

The presence of the PE/VC crowd is changing the ecosystem and some traditional social impact investors are now taking a different approach. NGOs, foundations, and banks have always been in the game, but are starting to behave differently as well. Each of these players think that they have the right blueprint for social impact investing: They are all wrong.

Blended Capital

Social impact companies and investors can benefit greatly from something called Blended Capital. Blended Capital is the mix of government or non-profit grants, equity investments, and bank loans put into a startup. The salient point is how the capital is sequenced:

1. Foundations, governments, and NGOs go in first and grant non-equity taking, non debt capital to a social entrepreneur with an idea. This gets the founder out of the garage and gives them the ability to hire a small team, build a product, and attract initial customers. This de-risks the investment for the next stage, but adds a lot of impact, accomplishing the foundation’s goal.
2. Next VCs and Social Impact funds come in and make equity investments, typically getting the company past the initial stages of product-market fit and into a growth mode. This helps the company scale in ways a grant would not allow and de-risks the investment for the next stage.
3. A lot of times the company will need to finance inventory, equipment, or the expansion into a new market. This makes more sense to finance by bank loans rather than dilutive capital. The banks get to lend to the company at commercial rates as the company has been de-risked by the previous two sources of capital.

Blended capital only works if all three parties (non-profit grant agencies, equity investors, and lenders) work together. A blended capital deal does not make sense to any one player if the other two are not involved, creating more opportunities for social entrepreneurs. For example most foundations “spend $1 to buy $1 of impact, but that $1 goes away forever.” Now those foundations, governments, and NGOs can get a better return on that $1 if they work with equity and bank finances on deals, creating sustainable, lasting companies that not only provide a return on investment for their investors, but a longer return on impact for their grant-givers. Now a foundation can spend $1 and get $10 or more of impact.

In the past these players worked independent of each other, creating misalignment and inefficiency, reducing the amount of impact and opportunity. For example, I watched a social entrepreneur try to finance inventory of their portable solar lights to send to Puerto Rico after the hurricane. No bank would finance the operation, despite several customers (in need!) lined up.

If that company had been allowed to take advantage of blended capital, the sequencing of the grants and equity financing first would have made the startup attractive to market/commercial lending rates for any bank. Because blended capital was not available at the time, the founder had to turn to expensive equity financing for that inventory. (VCs typically don’t finance inventory.) Because of dilution and the expense, only a fraction of the original inventory was financed, bringing the company far less revenue (and profit) and impacting far less people in need.

An alliance of philanthropic and for profit investors is needed to solve some of the world’s most pressing problems. Experts estimate that the opportunity is measured in the multi-trillion dollar range. Its time for all the social impact players to stop working in silos and work together.

Blended Capital: The Future of Social Impact Investing was originally published in Fusion by Fresco Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

For the last 200-plus years, capitalism has essentially been guided by one central tenet: delivering the most value to shareholders as possible.

Capitalism, of course, is not perfect.

So while companies scrambled to increase value for their shareholders, they did all sorts of atrocious things — forcing the government (or unions) to intervene on behalf of the citizenry.

In 1938, for example, the Fair Labor Standards Act became the law of the land, ostensibly outlawing child labor. In 1970, along came the Occupational Safety and Health Act (OSHA), which was designed to improve workplace conditions. The Family and Medical Leave Act became law in 1993, enabling workers to take extended breaks from their jobs for medical and family reasons without having to worry about becoming unemployed. There have also been laws passed to regulate the environment and prevent securities fraud.

The list goes on and on.

Focusing on the Wrong Thing

When companies are guided solely by maximizing shareholder value, management tends to focus on the wrong thing.

This is why you get Enron-style scandals, the collapse of Lehman Brothers, the tech overlords spying on you and other booms and busts that end up wiping out everyone’s savings.

This is also why you get United dragging people off of planes.

There must be a better way forward.

Something Needs to Change

Capitalism, as it’s currently conceived, is far from perfect. Something needs to change — and everybody understands this.

This is why Bernie Sanders and Donald Trump — who actually had very similar messages — were so popular last election cycle. Both were a reaction to what is broken with the traditional model.

Capitalism is great — don’t get me wrong. But the misguidedness of focusing exclusively on maximizing shareholder value is what is broken.

Here’s where Bernie and others at war with capitalism get it wrong: Instead of focusing on the entire philosophy, they should be focusing on the shareholder value part of the equation.

Capitalism 2.0

I believe we’re in the middle of a defining moment. Capitalism is evolving into what I call Capitalism 2.0.

Capitalism 2.0 is straight up capitalism — but with a twist. Instead of focusing solely on shareholder value, companies operating under this model will prioritize the customer experience first and their contributions to society second.

By focusing on these two areas, shareholder value will automatically increase.

This is the philosophy of the Laudato Si’ Challenge accelerator, which I’m happy to be a part of.

We accepted nine startups that not only are going to get rich by focusing on the customer, they will add enormous social value doing so.

It’s truly a win-win-win for everyone involved — and even those who aren’t.

Ultimately, I envision a world where all companies operate this way.

Right now, it’s mostly just the startups built by the younger generation that are focusing on more than mere profits.

But give it 10 years.

Don’t be surprised when you look around and see that every company — even the ones that have been around forever — is operating similarly.

The Rise of Capitalism 2.0 was originally published in Fusion by Fresco Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.