Expansion Finance For Social Impact «

Expansion Finance For Social Impact

Philanthropy has too often remained trapped in the ‘small is beautiful’ world of social innovation – while for-profit investors have striven to avoid any taint of compromising returns for social impact. A growing set of trailblazers is mobilising significant pools of capital to deploy for social impact. In the process they are reinventing the way that philanthropic and for-profit capital is used for social and environmental benefit.

So just to ground us in the conversation, I think the description in the brochure captures it well, and I'll be uncreative and just read it off to folks. It says philanthropy to often remain trapped in the small as beautiful world of social innovation. For profit investors have tried to avoid a view that they are trying to compromise returns for social impact and a growing the trailblazers is mobilizing significant pools of capital to deploy for social impact, and this is to talk a little bit about that.

The challenges, the opportunities, the pitfalls and what it really it takes to do that. And I think we're very lucky to have not just a set of panelist but people in the audience that have very real experience in making this happen. But, before we get started a tiny bit of audience Participation. So kind of take things out of your hands, because there will be some standing and sitting.

First of all, for those of you in the room, please stand if you are part of an organization. that you think works for social impact. Okay, okay remain everybody remain standing. So, remain standing if your organization to complete its mission has raised more than a hundred thousand dollars at a time.

It has raised more than a million dollars at a time. Has raised more than ten million dollars at a time. Has raised more than twenty-five million dollars at a time. Has raised more than a hundred million dollars at a time. I gotta say, everyone who is still standing, please take me to dinner. The second question is OK, please stand if you invest in social impact organizations.

Please remain standing if the largest check you have written is larger than hundred thousand dollars. Larger than five hundred thousand dollars. Larger than a million dollars. Larger than ten million dollars. Larger than 50? Okay. The people that theoretically would have been standing could also take me to dinner.

To give a little bit of context, as we think about those numbers in the public equity markets, small cap, small companies are defined as companies with a market capitalization between 300 million and two billion dollars. Micro cap companies are defined as market capital between 50 and 300 million dollars, and they have come up with a new term to describe things so small that they don't fit in to that, which is nano cap, which is less than fifty million dollars, and I was just Googling and profit, sizes and social change organizations.

As they refer to the size cut-off for small as a hundred thousand dollars in annual revenue. So, just when we were talking about this this morning, George had a nice little analogy from an important cultural reference of yours, Crocodile Dundee.

I don't know how many people. Is this working?

Yes.

I don't know how many people have seen Crocodile Dundee, but there's a scene where they're getting mugged and his girlfriend says, "Eek, a knife!" And Crocodile Dundee says, "That's not a knife." He pulls out a knife and says, " Now that's a knife!"

I think one of the questions as we think about, what scale means can be highly relative in different contexts. So, I just basically want to turn things over to the folks here to talk about the topic. I know they say we're very lucky to have some real doers here. Folks that haven't just thought about this but have actually done the work in this space to share a little bit about what they have done.

I think starting on the more commercial side in terms of capital and enterprises Jean Phillipe and everyone, you can read their bios in the materials, but you know Jean Phillipe, you know Blue Orchard, 900 million dollars, you know in micro finance did one One CDO with one hundred and ten million dollars, before CDO was a four-letter word, which it is today.

I would like to start the conversation to talk about experiences. They have had raising expansion capital for social impact. What it was, why they think it worked and things they learned along the way that might be some tales for all of us out here think about this, so maybe John Phillipe if you could get us kicked off, Sure.

I'm not sure I'd be able to speak to all your questions now, but in the course of the. feel free to ask more questions. You know we started, actually tomorrow it will be 8 years that we started finance in Geneva. And our vision at the beginning was, you know, we like micro finance. We believe micro finance when it's well done can have significant social impact in the field for low income families But we believe that micro-finance organizations should be run as businesses, should become sustainable, because it's a guarantee for long term impact and fast growth.

On the other end, we were sitting in Geneva, which is a place with many private banks and private investors and we said, "Well, wouldn't it be nice if we could, through our work, channel some of that money to micro-finance organizations?" So we started, you know, with $10 million in a little fund - and that was 8 years ago - slowly built track record, and today, as John was mentioning, Blue Orchard Finance is managing I believe outstanding loan portfolios through different products that we created over time of about $800 million.

And we're helping hopefully about 150 micro-finance organizations in more than 40 countries. If you sum up all the clients that are being served by those institutions, we about 9 million micro entrepreneurs. We think that it's been a long road. We've learned along the way. But it's certainly not the end of the road, and there barely scratching the surface of needs in terms of microfinance markets, so hopefully we can continue.

About 2 years ago we realized that in the market of micro finance and looking at micro finance institution the bottle neck for growth was probably private equity and and so we decided to building on our knowledge of the market of the past six years to launch a private equity fund. We've raises so far $130 million dollars that we are deploying with a specialized team to micro finance institutions of different categories.

Helping them to recapitalize, maybe industry and grow faster. And then at the same time we realized that helping low income families and working poor get access to financial services was very nice, but that was not the whole story and low income working poor also do need access to a lot of other services.

Access to education, access to health services, access to affordable housing, access to clean water, access to energy. etc. And we said well if we were successful investment and lucky in doing micro finance investment and helping micro finance companies grow sustainably and and reach out to millions of customers, maybe we can help some companies targeting base of the pyramid, targeting low-income families in emerging markets delivering sustainably and profitably.

Although services that poor families need and to improve the living standards and you know, we We, instead of you know, that's maybe the general way of doing things that I'm doing in the Blue Orchard, but instead of theorizing and coming with a perfect plan, we say let's just do it. So we went and saw a couple of investors and sold them on the track record of Blue Orchard, and said, "Well, we believe that after talking to specialized organizations, such as Ashoka, the Schwab Foundation for Social Entrepreneurship, and many others, that there were a subset of social entrepreneurs I think created companies in need of private capital to expand and grow faster." So with, specifically with the Bamboo Finanace Company, what we're trying to do is to.

Well, first of all, we build the fund from which we invest on a very flexible basis. We can go basically anywhere in the world, in any sector we like, with any sort of instruments from debt, convertible debt, equity, so that we can stick and be the closest to the needs of the social entrepreneurs, because, you know, it's different on a case-by-case basis.

We want to focus on expansion stage Because we feel that that's where our money can have the largest impact and we do that on a commercial basis. Not, again cause we love money, but because we feel that it's the only way to get access to basic major pools of capital in the world that are still sleeping out there, and that we would like to channel social entrepreneurship and sustainable investments.

That's it in a nutshell.

Quick question to the point of tapping into those pools of capital. What you did in getting the 900 million dollars for Blue Orchard, so what, other than as you said luck and good fortune, I'm sure there was a little more that went in to successfully doing that.

That's part of it as well. No, I think there are stages in the fundraising Essentially, at the beginning, you start with venture financial based on people who can put the trace ceremony and believe in your objective and relate to it. And they are the angel investors, they are the key people to start the type of business we have started.

Because that's Eventually they can write off their investments from day one, and if we don't lose that many then their investment will by tremendously leveraged by tons of money that in the future, so in terms of social impact or economic impact this is a wonderful way for philanthropists to, in my opinion, to spend their money.

Then as you progress you traffic court, and hopefully we won't get to many accidents on the road, not to many defaults and by the way for instance with Blue Orchard we, I think to date we have extended More than 890 loans with no defaults whatsoever. So you basically start building trust and track record, and then you start talking to private banks, private investors.

And slowly you get pools of private capital that would not have come on day one and then you keep growing. You know, you then reach a certain scale which is very important in my opinion, and yes, at management business. Not only for your company as a management company, but also because the next stage is then institutional investors' money, and those guys are not deploying their money in tiny funds.

They are deploying money when they can write tickets in thirty, forty, fifty million dollars and upwards. And at the same time, they don't want to represent 50% of your fund. They want to represent 5 or 10% of your fund. So, there is, you know, that's the next stage of getting to those pools of capital.

So, you have to be patient, and you start doing three or four years building your track record with venture philanthropic big money, then you progressively include private investors, and then the next stage is definitely institutional money, and that's where you hit the biggest pools of capital.

Great. So next up on the other end of the spectrum, from tapping into the deep pools of investment capital, to tapping into deep pools of philanthropic capital. You know, George Overholser worked with Non-profit Finance Fund Capital and they have raised over 250 million dollars in philanthropic capital.

for expansion phase investments, and generally non-profits focus on social impact. It's the same question in terms of where you raised it and what you think has made it successful, and then questions or notes or observations, cautionary tales along the way.

I should hasten to add that we actually didn't raise the money. We act as a catalyst to help our clients raise the money. We like to joke, we like to say we're in the irresistible ask business. The basic story is like a growing number of people. I had a financial services background and a venture capital background.

About 7 or 8 years ago got very interested in the venture philanthropy model and loved this metaphor of trying to, for non-profits, approximate the role that's played by run wake capital, and that is money that you burn through whilst on route to establishing a sustainable non-profit enterprise. I worked very closely with that outfit called New Profit, which many of you may know about, which has had terrific results.

Now, one of the problems though that New Profit found and that the portfolio organizations found was as they got through those early stages of sustainable growth they then got interested in larger scale expansion, and the laws of physics seem to change there. The model really started to break down.

For one thing to bring in organization up to prominent scale. We're talking about 10, 20, 30 - sometimes considerably more money than that. And we move away from single grants from single funders into the need to have several funders syndicate under a single investment. And there was really not a lot of experience doing that in the field.

The other thing that I saw, where kind of unintended consequences, strange behaviors seemed that where the metaphor broke down. So, for example I would have a meeting in the morning with a venture capital client and the CEO would be very excited, hey We got our $10 million dollars, high five, and all of this.

And then they would sober up very quickly and they'd say, "Our revenues are still zero. We've got to get working now." and then in the afternoon we'd have our venture philanthropy meeting. Similar thing with the nonprofit. Everyone's high fiving, we got our big check and then the executive director would say not only Only that, we're done for the year.

Look at our revenues, they're through the roof. We've got a big surplus. If I go out and try to raise money now, everyone's going to say why don't you come back when you need the money any way And so there's this dynamic that we have sometimes in the non-profit sector, where large checks lead to dependency relationships; you get a big check.

The cost structure goes up. There's a reluctance to spend a lot more time doing the painful fund raising. And so the fundraising Muscles, if you will, atrophy. And then when the grant runs out, there's this very uncomfortable situation of a larger cost structure with actually a reduced. ability to sustain that cost structure.

So, in their wisdom, and I do mean wisdom, funders would say, well, therefore I'm not going to write large checks. I don't really think it's helpful to the mission to create dependency relationships because many funders view themselves as catalytic types of funders as opposed to sustaining funders.

The other thing I saw that kind of blew my mind a little bit was in the venture capital world, let's say Kliner Perkins is investing in a company. Well, someone about that, they say, Hey, I want in, this sounds great, can we co-invest? Whereas in the nonprofit sector, if a funder comes with a sizable check, it seems like all the other funders Go running the other direction, and they say well come back when you need the money.

Which is a natural response, but it's very frustrating For the entrepreneurs, because the entrepreneurs feel like they have a strategy that they put together, that they'd like to enact, and the strategy takes them from one level of sustainable impact, to a new ratchet step level, which once achieved is sustained by some sort of a business model.

Often a non-profit business model that has Long term, terrible flows associated with it. But the transition cost, or what we like to say is the deficit incurred on route to sustainability. is a big number. It's like crossing a desert. It's 10 million, 20 million, 30 million. And so, the entrepreneur I was speaking with during this entrepreneur, this expansion stage which says, I'm trying to cross the desert, I want to water up my camel but my camel gets two sips I get 100 yards into the desert, I have to turn around and come back and re-water the camel, over and over again.

And every time I re-water the camel it's with a different funder, talking about a different pitch. I feel like I never get anyplace. So that was kind of our mission was to try to create a new type of funding that was very equity like. And the insight that we brought to it was that this asset class is missing in the nonprofit sector, that everything is revenue.

You don't have a separate way to keep track of who are those funders that paid for the interim deficits incurred en route to an institution which, once built, has a sustainable business model, which may or may not have charity as part of it. And here's the rub, and this is the irresistible ask. If you can do that, if you can set those types of funders aside, you can build a capital campaign around it.

You can say, you know, capital campaigns are something's that tried and true. We know in this sector how to raise $20 million for a building or for an endowment, both of which are permanent things you can point to and say, "Who did that?" forever. It's like a naming opportunity. And our work was to create an accounting treatment that made it possible to look at a third permanent thing, that being an enterprise with staying power And so we work with clients who have a strategic plan to go from one place to another place that has staying power.

We help them Tally up what the deficit incurred en route to that new place is. We call that philanthropic equity, and then we help them craft and ask... that says, instead of $20 million to pay for next year's program execution, let's use $20 million to build an enterprise. That we'll figure out another way to pay for every year's program execution.

So it's a much more powerful philanthropic ask. The return on it. investment is a perpetuity as opposed to a one-time thing. And maybe I'll stop there, because I could go on forever.

And, one quick question: Has it worked? Well, how do we define work? We set this up, NFF Capital Partners, we set it up three years ago. Our first goal was to, we use the word, witness 300 million dollars of investment through this methodology. We call it the SEG-way methodology: sustainable enhancement grant.

To date, we have about 250 million dollars that we have been involved with one way or another. Some very heavily involved and then others on a lighter touch consulting basis.

Several of these organization are too early to tell. Some of the earlier experiments that I did before formalizing this thing have been organizations that you may know of. I was just speaking with Dennis Whittle. Is Dennis, are you in the room? No. You may not know Dennis.

Dennis is the founder of Global Giving which is a platform that gets people to invest in grass roots types of opportunities around the world, and he has burned through, sometimes we call it burn capital, he has burned through 10 million of this equity like capital. And he's this close to turning the corner on a sustainable business model.

That directs 20 million dollars every year towards these very exciting grass roots investment opportunities.

So, the thing that works as you'd say, ten million watts creating in perpetuity of twenty million. This is Bernie Madoff type of returns, right? Maybe another reference point.

Let's hope they're more believable than that, but I don't know how many people can put ten million dollars in the bank, and have it throw off twenty million a year, forever.

But that's kind of the proposition. If Dennis didn't have the growth capital to burn through, he could not have built the platform that people are now using to direct their philanthropy. And then one of the things I think that has come up in both what you've heard Jean-Philippe and George say is the phrase business model, which is I think folks are here using generically for the enterprise revenue economic model for whatever type of enterprise we're talking about, and I think one of the things that is really exciting, the work that Ashish and the Monitor folks have done is really look at that question.

Digging, and there is a great report, I think they are just releasing, you should make sure you get your hands on it, studying those business models for three hundred enterprises focused in the social sector, primarily in India, to really dig in to what works, what doesn't work, what can scale and what can't and really have that back base in slightly agnostic way, not starting necessarily on the commercial side or the non-profit side, but really digging into that thing at the core, which is the business model.

So, maybe Ashish could share a little bit about what you guys have found.

I'm based out of India now and I've been in the consulting world for about 15 years with Monitor. I started in the year 1998, helping grow the practice, but it was very clear that the biggest problems we were facing was not helping big companies in India grow faster, for the social space. Great GDP growth, fantastic benefits, mostly going to the top 20 percent and not percolating down.

Now, the other thing in parallel is, today in India, lower-income households, as Jean-Philippe alluded to, are actually spending money on healthcare, education. Eighty-six percent of healthcare is paid out-of-pocket, not government. Sixty percent of the kids in urban India go to private schools, including low income kids, but the quality of service they get is very poor.

At the same time there's been a lot push about using market-based solutions to go for social good. Perla wrote a book on it. And what we observed is while conceptually all this should work fine, it wasn't on the ground. We weren't finding organizations at scale. And Jean-Philippe wants to give them money to scale, but if they aren't scaling what's the point of the expansion capital?

So that's the place we started from: What's going on? Why aren't they scaling? And what we realized is that the fundamental element is the business model. End of the day, for something to scale you need a robust business model such that the revenues cover all the costs, and I say all the costs, because we've come across a number of organizations which get some grant funding which allows them not to look at the entire cost structure, and have a problem.

Let me give you I'll give you an example of what I mean. First and foremost, what we realize is when you're working with low-income households, their situation is very different from the top of the income pyramid. And therefore the business models that work at the top may not work at the bottom. Case in point, microfinance.

End of the day, what is microfinance? It's a personal loan. If anyone of us in this room wants to walk in and get a personal loan, we walk into a bank; we meet the bank officer. He looks at us, looks at our credit history, looks at what outstanding liabilities we have, what our assets are, and then decides whether he will give us a loan or not, and what interest rate to charge to compensate him for his risk, and a tenor which matches what we really need.

Now, if his low income customer earning 100 dollars a month walks in, there is no way that bank officer will even waste his time looking at him. The cost to serve him is too high. Now that's what microfinance did. First, instead of one person, put six of them together, so your ticket size went up. Secondly, you can't do detailed credit risk, put six of them together and say hey, you don't pay, the others all suffer.

You guys will never get a loan again. So it's not, you know, milk of human kindness, it's very very practical. You've taken the thing that matters to them, access to finance and used that to enhance credit. And the third thing is, no fancy tailored product. It's one size fits all. It's a one year loan, 5,000 rupees, that's all you get, which allows me to use a very low-cost distribution system.

I don't need a fancy bank officer with a Bachelor's degree. Fundamentally different business model to provide the same need all of us have, a personal loan. And that's what we started realizing, as we started getting into different organizations, we realized that some of them had understood this and were actually getting at extremely interesting business models.

And this report, sort of, talks about all of them. It's 160 pages, guaranteed to put you to sleep. We've come across seven really interesting models, and then what we've been doing now is seeing how to get them to scale. I think that's where the challenge is. When you're coming out with a new business model, you often have to build all the pieces of the ecosystem because when you're working with this income group, the other pieces aren't there.

In a higher income group you make cars, you don't have to actually worry about supplying gasoline.

In a lower income group, when you're starting to put together a microfinance organization, not only do you have to give the loan, you've got to train those guys, who have no B. Com degree, no Bachelors in Commerce but are just 10th standard graduates. You've go to put the whole value chain together.

All I want to say is: (A) traditional business models often won't work for low-income households; (B) those business models are going to take time and energy to actually get to scale. Therefore, when we think of expansion capital we have to be very, very cognizant of that. I actually see the bridge between what George was saying, offer a little bit of soft funding to help develop those models so that Jean Phillipe can actually invest in them and get large pools of capital to come into it.

Sorry, I'm taking a little bit of time, but I thought I'd give you the context. That's exactly right. I should be sitting in the middle though.

We can move around. We were into getting up, getting down, all these kinds. In a second I'm going call, actually, on a few people in the audience, but I just wanted to follow up sort of on one point that came up. We were having breakfast this morning, talking about this and to that conveyer belt concept.

I think that one of the framing questions that one of asked is, why do we do any of this stuff?

The question to some degree got to, there are some areas where capitalism and markets work, some where it might work, and it might not, we don't know. To the point of venture philanthropists seeding something and taking that risk to see if it takes off or not, and there are some areas where it won't, but we need to come up with an efficient model to do that.

It was, for me, a really interesting lens to think about the latter, and I have all sorts of questions I want to ask you. But first I want to you know, one of the nice things about being at school is you have people every bit as qualified as all of us who are sitting in alliance who have done great work.

So, again, a couple of other examples I just see in a crowd of people that have raised expansion capital for Social Impact. Ron from Shorebank, maybe if you could grab a mic for a second and just in, in 60 seconds, the organization, what it does recent capital raise that you completed with expansion capital, how you did it and why you think it worked.

Thanks John. The Shore Bank is a regulated bank holder company. We created it thirty five and a half years ago, initially to do inner city rehabilitation. First in Chicago, it expanded to a number of other cities and we created the nation's first environmental development bank on the west coast twelve years ago.

We also got involved probably about twenty- five years ago, the international side. First, what's going to mean and back and then with many countries in eastern Europe. The last, with John referring to the most recent capital raise. We raised $31 million of new, mostly common equity, for ShoreBank Corporation, the holding company and that was raised in the same old fashioned shoe leather way that we've raised capital forever.

Writing an offering circular, having a business plan while going out to the likely prospects and just raising capital. The other one that you didn't ask about was a 62 million dollar our capital rate debt, our consulting company Short Bank International did for BRAC, it was a debt offering to enable BRAC to enlarge its programs in Africa.

There was a pretty interesting structure to that. I won't get into to it especially since I don't know all of the details, but what I found most fascinating about it is that the smallest piece of it was both the lowest return and the highest risk. And that piece was necessary in order to make the larger amount work.

And Lori Spangler and her colleagues did a great job there.

And one other thing on the Brack raise, which we invested in for someone is, it's a good illustration of the conveyor belt principle, which is, Brack, when they first started in the particular countries, which were a couple countries in North and East Africa. Grant funding and then this raise, which includes some sort of discounted capital, mainly from development finance agencies and some foundations and some, a chunk of capitals a little more commercial and so, that's, kind of, you're putting the conveyor belt to work to raise these chunks of capital and then I'd seen Peter Kelner in the audience, but I think he got up and left, who just had a happy announcement raising seventy million dollars yesterday for Obalpay, a business that does base the pyramid model payments, but we can't hear about the success story 'cause I think he ran off.

David Green, do you want to take maybe a sec to talk about the Same four questions as Ron.

The ifund hasn't closed yet but we're hoping that it will next month this is a 16 million dollar debt financing for icare programs that are already sell financing but funding to scale. And this is also accompanied by a 1.6 million dollar grant fund to provide capacity building services. Kind of as a credit enhancement to the loan recipients.

The I-fund is a collaboration of bank, the fund manager, and International Agency for of blindness which is a large consortium of Viking organizations that's global and in and so, it was through IPB, the Global Affinity by care that Deutschebank was able to source their investing pool and similar to the fund just Deutsche Bank took the first last question position with one million dollars and then there were a couple of other investors that that put in funding at one percent return being the first loss cushion piece and then we have overseas program investment corporation of the several foundations like the Bernard new comb foundation and the French government and store brand and norwegian insurance companies, so it's a layered fund with different levels of risk and return so, the whole iPhone was kind of built on the premise that through.

work that myself and my partners have done. We've created like 250 eye-care programs that are self-financing from user fees but need funding to scale so this is an attempt to bring in that financing to augment the grant financing.

As i understand it, it's kind of to the concept George had earlier. One of The uses of funds is there is an upfront cost to transition from the traditional developing market healthcare model of very low volume high cost to very high volume low-cost and there's a cost to that transition. Once that cost is paid, you can be sustainable, but you know, it's. You got to pay for that cost to get to the new sustainable business model.

Yeah. many of the Icare programs I've developed that are self-financing. Also the manufacturing that I've set up to reduce the price of Icare supplies all of that was started with donated money. But with the plan in place, where right from the start, the entities could become self financing. So, definitely grant money played a a key role to get things rolling, and we were fortunate we carefully planned out to not have too much grant funding, so most of the entities that that we've developed our self-financing within the first period.

Thanks, David. So, I guess before we turn it over to all of you, I have a couple of questions that are accordingly to the conversation One is in the description of this panel, words like trail-blazers and re-inventing and innovation are in this description, yet in...I marked in three of the four talks, people used either the phrase old-fashioned or tried and true or proven.

And so I'm a little confused. Are we being old-fashioned and using tried-and-true methods or are we being innovative and doing something new and different?

I can do it. In our case, we are mixing and matching. I would say we're adapting some methodologies that were tried and true in one context and seeing if we can place them into another context. So in our case, what's tried and true is large, syndicated capital campaigns for permanent things like buildings and endowments.

The twist, which is is very different than history, is an accounting treatment that creates an equity category for a non-profit. Now that doesn't mean you get your money back. You don't. I mean, defining, it's funny, they call them nonprofits. Actually, if you truly are a nonprofit that means you're going to bankrupt soon, so you have to be profitable in the American tax code, the 501c3, really is about is that you have a non distribution constraint.

It means you can't distribute your profits and so When people look at that way back when they said well, if you can't distribute profits, you don't need to keep track of those and therefore we don't need equity, so we're going to do away with the concept of equity. I think that's too bad because there's a stakeholder roll that goes along with being an equity stakeholder that has to do with protecting fledgling organizations, until they become strong enough to be so compelling to their perspective costumers that the costumers just wanna use them to turn their money into program execution.

So that's the innovation which is somewhat trailblazing combined with the tried-and-true approach which is a capital campaign. -yes successfully
-yes, maybe a word, you know I spent the last eight years trying to convince private investors to come in microfinance and now, into other stuff. And I came to realize that revolution doesn't where if you want to get to the big pulls of capital.

You have to talk and talk to the guys that, you know, that they are sitting across the table and not scare your intellectual brief with the, you know, mixed signals saying you know, I'll be social but don't worry I'll get you money back in the. So, I do believe that you have to talk of the private investor and then once you get the trust of the private investors.

Once you have established a connection with a private investor, then you push the envelope, but it going too rough, too hard, too quickly doesn't work in my little experience, and we've taken time to develop trust with a significant number of significant investors from the product will of capital, building trust on the micro-fund side, and now you know insidiously slow talking about, you know, interesting full profit team over hospitals investing full profit in, you know, supply change in rural areas in for profit schools in some ways and but from within, change from within not change against a system.

That's really what i believe in. then one other thing and this really struck me in the prep conversations that we had because i sort of started the conversation with okay. Let's, you know, scale in. Let's go scale and how do we scale is gonna be great and basically everyone tried in me quite externally that and actually i left the first conversation feeling it was quite a downer basically that in some cases as she said the scale, this isn't going to happen.

In other cases, as George says, scale is this albatross of dependency and excess cost that you know, that it's not this unambiguous that's the end point, that's the goal. And I think I just, you know, as you guys had some wonderfully good thoughts in terms of how to think, you know, where it is useful, where it's not, the things to look for, the things to fear.

Well, I would just comment that it's helpful to place this in the context of the exercise you did at the beginning of this talk. We're talking about - when we talk about scale in this context, it might be from a budget of five million a year or three million a year up to a budget of twenty million a year and that wouldn't even get you out of the, what did you call it?

Nano cap? And scale economies in the for-profit world don't really kick in until you're really quite large, and everything else you're kind of in that awkward teenager level. Too big to be small and too small to be big. in my experience ban that when organizations are looking for scale economies they become quite illusive and and that really be the more successful reason to scale, for organizations, has come out of a moral imperative to scale.

It, it's to say we have something so important here that to deprive people of this innovation, which is helping society so much, is something that morally I don't feel I can do despite the pain of scaling, despite the awkward that we may be common we're kind of in this, that teenager zone and and she had a good thought that you know they're once again down to that business model question, which is there's some business models where scale makes a difference and somewhere, it doesn't.

I think the end of You'll see me coming back to this again and again, you've got to be commercially viable. Otherwise, it's not really going to impact large volumes. But that doesn't mean every organization has to be huge. The model has to be viable. In fact, there's some which are very viable because they're small.

They actually work with the informal sector. They don't actually give full benefits, but they give employment and they replicate well across different organizations. So again, the fundamental thing what is the model that is robust and then scale can happen in very, very different ways. In fact, the other thing we've noticed sometimes in and this will go back to some of the eye care examples, while the actual operational unit that is doing the surgeries can be relatively small.

also doing the manufacturing with equipment has to be much bigger. So, even in the value trade, your scale can vary depending on where you already get the benefits and the economy of scale. So, unfortunately "scale" is a much more nuanced word than just one answer for everyone.

I would add to this too that We often use the language impact, scale of impact, as opposed to the scale of the enterprise and that leaves room for strategies such as replication. Or dissemination, the words, that sometimes uses a way to get a model, just out there. And one thing I'd say about the work that we're all doing is, we may have an impact that is more important than the capital raising.

I think what's going on, what I've observed in the last, really a brief time, in the three or five years is kind of an awakening of an enterprise perspective for non-profits, where it's less of a program orientation and it's more of this orientation that programs in the absence of, Dan was calling it a resource engine.

Some people call it business model, some people call it a sustainability model, they're all different words for it. But this notion that you can't just have a program, you need to surround the program by an enterprise and think holistically about what is the business model that you're working average firm.

And what that does is it reveals the role of growth capitol and it allows people to think more clearly about how they're gonna reach their sustainable impact was. Right now, the way the nonprofit sector has worked as I've observed it, is because we conflate thee ongoing revenues with the growth capitol.

An infusion of growth capitol actually masks whether or not an organization is making progress towards, its long term sustainability goals. And that's a very powerful problem. So, it's one of the reasons we don't write big checks. I'll write a big check, and you're going to see, if you write a big check the organization's going to have a surplus, maybe for years to come, and you will not be able to detect whether or not the organization is growing the more kind of healthy version of its revenues.

It's like good cholesterol and bad cholesterol. Right now, we can't spell the difference between those two.

Yes, sir. I mean we agree with that, the only thing is that you can commit significant amount over time, then you just release as the company grows and meets targets, right? So, the big check doesn't prevent, you know, wise management of your big check. I mean, you can commit for the long term and then release.

Yes.

And push for growth and push for targets.

And we're on the horns of a dilemma, because then we get into the death by a thousand lashes. You know, as a venture capitalist, I hear two phrases all the time. One of which I also hear all the time in the philanthropy world and one which I never hear in the philanthropy world. The one that I never hear in the philanthropy world is this phrase, that sometimes you hear, the first 20 million is the hardest.

Oh, excuse me, I got it wrong. It's the easiest, right? Because what happens is, if you've got a good business idea and a reputation as an entrepreneur you go visit your venture capital friends, you raise 20. million over six weeks and then you spend the next five years figuring out how to sell 20 million widgets out of bucket piece but that first million is so easy.

And that never happens for non-profits. The non-profits don't have that turn key capitalization or formation capital that they can go to. The other thing, the other phrase that you hear very often is from management teams. They are Like complaining, and this is for profit as well as nonprofit. They say, 'man I just wish we could finish this capital raise, so I could get back to running the business'.

Well, in the nonprofit sector you never finish the record. You never do, you know, because you need to kind of prove yourself in such small Little steps. You end up becoming as one of my clients called it, he said, you know what George, I'm in the chameleon business. I feel like I'm in the chameleon business.

Business. I have to keep changing who I am over and over again.

Let me, just to fish on scale, because something is important that I'd like to mention on our approach in Bamboo and oasis, you know, we also look not only at the scaling of one specific business, but the replicability of the business model across, you know, countries and continents, that's very important.

Growth of the specific business through franchising models is also quite interesting when you want to reach scale. You have a proven business model, you just multiplied by franchising and I think it's an avenue that's definitely worth exploring, and then in our particular case and I'm sure it's true for others, we very much believe in the connection between microfinance and the companies in which we invest in other fields because, you know, in many businesses you need distribution networks.

You need to reach out to millions and millions of people. Well, we believe that micro finance organizations with their outreach to millions of people could certainly be one distribution network for other products than just financial services that's one thing and then on the other hand, micro finance institutions could become the source of financing of clients of you know, the companies in which we invest.

So, this connection in the field between the, you know, our investment portfolios in micro finance and the tiny bamboo and oasis is now, you know, slowly growing. That's a That eventually to again reach scale.

So I have about eight more questions but I'm gonna shut up and turn the questions over to folks here while reserving the right to maybe sneak I have a question or two of my own, as things go on. So I guess raise your hand. We have our roaming microphones.

First of all John, you did a nice job. I never heard of NanoCap. The Nano did launch this week. So, it's really good that you brought that up. It was a really great panel. I belong to from Intersight Ventures. We're Actually a firm founded by Clayton Christensen in Harvard Business School and we apply disruptive innovation and all this good stuff, but we're actually a venture capital firm that uses proprietary capitol to incubate pro-poor, scaleable enterprises, okay?

So, we invest our own skin as a private equity firm actually build a ventures up to a certain level of revenue and then we look for investors to scale it up. Now, the question to this really great panel is, you know this incubator model, as far as I can tell, most private equity, and <FONT style"BACKGROUND-COLOR: #ffc0cb">p</FONT>lease raise your hand if you are incubating, are looking for just the deals to invest in.

There not actually building on the ground ventures, you know, like we are. Now, we're torn. Because we obviously put equity and we put in resources, now we want to scale these, and we've got them, a few of them that are doing that. What's our best way? Is it to you raise the fund, which is what we're planning to do or we are doing, or is it just bring somebody else into the entity and just continue to pour equity into it eventually later.

sell it off.

This is something I know you guys have thought about and acted on very directly as folks that have gotten on the ground working with these businesses.

I'll take a couple of things here. One is there is actually a model in a prior equity word on what they call an entrepreneur-in-residence, and one of the best example's in India Warbuck Thinkers that started the company called W and S, which is the largest outsourcing firm in in India today. So, I think that's the historical model.

It's also had very mixed results. Warbuck also hired for guys in pharma etc. and came to nothing. It's a model which is, like everything else, pluses and minuses. I do think one of the challenges in this space is, a lot of the people who get into the space of social impact. Part of the problem is, if you really look at the opportunity even though Prelot pointed out and said how huge is.

Most people working in developing countries have other equally large if not larger opportunities. If I think of education, the entire education market for the bottom 60 percent of the economic pyramid in India, sized by WRI and IFC, is Five billion dollars a year. Big market. HP went chasing that for the laser printer market in China.

And did a lot to get there. But, if you just run a bunch of coaching classes for middle income kids in India it can be a seven billion dollar business. So, as an institution and let me tell you that to generate five million dollars of revenue from low income kids, in a school, you need to run a hundred schools.

Not exactly an easy proposition. So when you start thinking about the complexity of doing this, you realize that trying to build commercially viable businesses in the low-income population is a tough job. As a result of that, most people who just have a commercial had dawn going there. The people who do tend to go there coming back to your point have much more a sense of more purpose.

They may not have all the commercial skills. So, you're done on why you can say I've got this guy who's got a good idea and believe me, there's no lack of ideas. We don't need a hundred new ideas. How do I have the guy scale up versus. I think there is an interesting idea. but this might not be the right guy, and I need to bring somebody else in to really help escape, and I struggle with that because in , in India, we actually started a housing low income housing venture.

We spent the time we developed the model sorry we had to be innovative in deciding. And I'm having a devil of a time getting real companies to get in there. I have now incubated a low income housing finance company. They got their license two weeks ago. I've also got an entrepreneur who started a software company and sold it to actually start a low income housing company and he wants to build one million houses in the next decade.

So, I think there is a lot of value in the incubation model where it's not easy and one of the problems with entrepreneurs who gave your ideas. They'll do it the way they want, not the way you want. So that's actually the east part.

Ya. What I. Ya. What we found is that basically they would decide whom they want to bring in . We don't have that much of a choice. And it's very easy if they actually could and have the review models to get the money coming and the tough part of that initial part of getting them to prove that it works.

And one of the teams, it feels like from the panel is it's hard, whichever model you want them to So, if there were a magic easy answer. One of us would have probably chimed in and said, "Go".

I think it's an interesting question. I mean if I were If I were you, you know, and I've put my own skin as you say in those companies. I certainly want to somehow keep control of those and at least keep involved in their development and stay and remain involved. Do you build another fund of which you are in control?

You may run into conflicts of interest, right? Obviously. How do you deploy this capitol to your incubated companies and how do you make the calls, you know, which ones you help and you know, that's a tough one so but I'm sure creative funds can find, you know, partnership opportunities in that sector.

Definitely.

To John's point, in the early days Capital One we had, I don't know, maybe 500 people. And we were growing very rapidly. We ended up with 27,000 people. And somewhere along the journey we had a board meeting. And I remember, one of our board members was a co-founder of AOL. A very tough marine type of a guy.

And we said, you know, How do we grow? And he said, "Well. You could do it organic. You can do joint venture. You can do acquisition." And they all suck. But, thanks a lot but one thing I think that is true in the conveyor belt, I deeply believe in this conveyor belt concept. I think that the skills that come from your investors and the things your investors can bring other than money, change - radically - depending on where you are in your journey.

So, in the early days, an angel investor will give you informal advise, will be right down there with you, and all the way, when you get all the way to becoming, you know, "going public," you have very low involvement capital, but lots of it. And the price of admission there is that you need to conform to all the many, kind of, comfort building aspects that more investment-grade investors are looking for.

And there are a series of handoffs. People who do series A do different than people do series B, and the private equity world has different skill sets. And by the way, Roladex is more important and it's kind of where you are, right? But later on, perhaps financial engineering acumen is more important, and so on.

And I think that what we're doing, if you step back a level, which is, I love the way we set up this panel, is we're trying to create this conveyor belt so that there's always a takeout. If you can have a takeout, from which you're working backwards at any level that becomes a beacon for a management team and I do believe that once we.

When we get some more of these well capitalized scaling stories told, it 'll become a little bit like when a company is preparing to go public, they start getting visited maybe two years before that by the investment bankers, and the investment. Bankers come in with their checklist and they say, here's what you're gonna need to look like to be attractive to the capital market.

And the entrepreneurs say oh, ok. That's the way we're gonna look because we wanna scale. And that happens before each hand off and I think that's kind of, that's collectively where we're all trying to get to.

I see two patient hands in the back, so maybe, actually, we'll get both questions and then we can tackle those.

I'm Paul. I'm at New York University and we've done a lot of research on social entrepreneurs. At the heart of your question earlier, was this notion that there's some kind of conflict between being socially entrepreneurial and well organized. The tried and true versus the, you know, social edge and I think this panel kind of the notion that there's great value in capacity building and that we have to accept the tried and true sometimes.

Maybe we have a human resource office. Maybe we have an accounting package that works. And there's this feat among social entrepreneurs sometimes that if they get these things, it will kill their ideas. and I wonder whether you could talk just a little bit about that.

I think that was maybe well said.

I reject as false, the distinction between organization and innovation.

Yes, exactly.

So, and, and not to be somewhat chiding and schoolmarmish, but if we could focus on the question side maybe a bit, as opposed to the statement side.

Hi. I'm Audrey Selian from Rianta Capital, an investment advisory to Family Office, focused on social investing in India. And I just wanted to ask the panel from the investor side, as the universe expands and as there are many more of us around this table looking at the usually the same deals and focusing specifically on the small and growing business end of the spectrum.

I'd like to ask the panel what, what role do they see for venture philanthropy in all of this? I'm asking just the general question, because obviously for the projects that entail physical infrastructure investment, we, you know, we understand generally that there have been subsidies that have been given them to have to be able to allow developing Developed countries to have the infrastructure that they have and, therefore, subsidies in that arena in emerging markets make sense.

But, how do you know. you know, the good cholesterol, bad cholesterol question. How do you know when the funding that you're putting in is indeed required to sort of grease the wheels and create in a second round or third round of finance that will actually unlock the commercial potential versus when is the [xx] when you see the company to a couple of million solar panels in a couple of areas and you find out that it's all because of a USAID grant.

So, is it how to know when the money That you're putting in is kick starting a potential high leverage conveyor belt that transitions you to economic sustainability versus helping something limp along and masking real progress. so how do you, knowing that you may well need subsidy, how do you keep it accountable and focused?

I think it begins with defining something, which by the way you can redefine and almost inevitably will redefine several times during your journey, but at any given time, define what constitutes high quality revenues, and track those separately from what constitutes perhaps expensive revenues or disruptive revenues.

So, for example, if writing grants that have heavy reporting characteristics, and a grant makers agenda, that perhaps differs from your enterprises agenda, you may call that, you know, expensive. In the trick, I believe the trick is to track those separately. and, thereby revealing whether or not you're making progress on those types of revenues which feel more attractive to you, which may be inherently scalable.

There are many sources of revenues in this world that are still great but are not scalable. And I think that you know it's kind of candy, like. revenues that don't have great nutritional values. And sometimes we make the metaphor. This is metaphor on parade, but we make the metaphor its like climbing a tree in an effort to reach the moon.

Those early branches feel great, but unless we can recognize them as such and track them separately we may fail to make the upfront investments that they're required to get those truly scalable and enduring revenues in place.

Actually, I'll go back to the revenue thing because I think that is the key problem we've also found, that people don't really understand their revenue model. So I think when investing in an organization, understanding where the revenue is coming from and cracking that is great we have knowing how sustainable the business is.

Just pushing back on a second on that though. If the idea is some of the venture philanthropy money. will take a chance on an unproven business model where they may not know their revenue model yet, and they may not even know if there's going to be a revenue model. How do you drive accountability to try and at least answer the question, whether the answer is yes or no.

And I think the trick there is again, absolutely reserve the right to change your definition over time. But to go and totally blind, maybe is not that well advised. One thing that also, I found incredibly helpful in thinking in terms of enterprise sustainability is to kinda formulate what it is that a non profit firm is in the business of and they use language slightly different then we there.

What I'd like to say is that the non profit, just like a for profit by the way, a non profit is in the business of turning money into program execution. It's like, charity is not about just raining money down from a helicopter someplace and people's lives are better. You're buying something, so instead of buying tutoring for my kid from Kaplan, I'm buying tutoring from a non profit for some kid in Dorchester.

and if we can think of those terms, then the other money, which is venture philanthropy money, is what's used to build the thing that people use the term 'their money' in the program's execution. And if you can get that distinction down, the builders versus the buyers, that often unlocks a lot of these quandaries.

To be, I mean, sorry, I'm a very pragmatic guy. I mean, drawing a, trying to answer your question, drawing a parallel with the microfinance world that I know best. You know, All the big microfinance banks have been talked about on everybody's xx have been created by you know grant money [xx] We were starting this NGOs, and as they grew, we realized slowly sometimes that to transform into full profit models, it would enable them grow faster and [xx] their product ranges, become regulated, etcetera etcetera.

And on the road, philanthropy, grand money was used first to start the program, the project, and then to build the enabling environment, for the growth of this transformed company. And you know, you talk about writing funds about paying for audits, paying for, you know, off-the-shelf IT systems, etc.

All this has been developed by grant money. And then, we now see, you know, the emerging leaders of the micro finance world needing anything else. You know, not anymore grants, purely commercial money. And, and maybe I'm wrong, but I believe that, you know the non-micro finance social investing part will ensure to follow the same track, that is you know, the US venture, finance to be the beginning you create, those companies you take the risk, you have the matrix of course, you know where you had it over time, you know, you have the little bamboos of the world are slowly growing, still in need of grand capital to assist the companies in which they are investing for several things, you know.

you know training of their staff, whatever. And building the enabling environment, and then hopefully one day we get to last stage where this grant money is not needed anymore.

As Andre said, we forget sometimes we massively subsidize a lot of these things in the UK, the EU and US. And we must be purely commercial, and if you look at a diagram of the subsidy capital going to provide grants and other support to small businesses in the developed world, it's a complicated, multi-faceted [xx]

The thing
is... just one... the thing is grant money should know when it should stop.That's also very important you know and I have the capacity to say I have built it and now I pass you know and that's a tough one of course.

There is this point with the offender where eventually you have to say sweetheart stop meeting this way.

[xx]

Can I
just still add though, this is something that often complicates conversations like these isThat a lot of the most successful investments in this impact investment world are into organizations That at some point can be sustained through a revenue xx there is also another class which is the we work more is the reason for non profit sector exist that's there are places where xx xx going to have viable business there is different type of market its a market that says a group of people would like to help another group of people there are themselves because they thing society is better often that's something that they'd like.

And that's where things get a little bit tricky, because the people who are writing the check for the capital are the same, sometimes, as the people who are writing The check for program execution. And when that becomes conflated, we lose the benefit of the distinction between the role of equity finance and being just a customer.

Next question.

In here in ten years social enterprise has become an established industry on a larger global scale than it is today, supported by an established banking system, where global capital can reach the corners of the world, so come back to Ashish's comment which I will always remember, you know that grass roots effort in India in healthcare and education how can it find sort of the software money and investors of George's organization, sort of venture capital, private equity type, then reaching to perfecting model reaching out to the larger pools of money that Jean Phillip is in touch with.

The establishment of that flow of capital, is that going to be driven over the next ten years by market forces? Or is that going to be driven by self-regulated and organizations that act in the interest of social enterprise, supported by initiatives that have been taken to government globally turned into policy, as supported and encouraged by international organization perhaps IMF or World Bank.

So let's do two more questions, and then we'll tackle the batch, right next door. Vincent Dyewonce from Virtue Ventures. Maybe a question of somewhat delayed but a bit more specific in the same context we've been talking a lot here about capital funding coming from the private sector and very successful models like this Blue Orchard for instance.

I'm just specifically In looking at the assets that are held by foundations in the United States and around the world, I've always found it rather odd that we are asking private sector to invest in social funds, while as far as I know, many foundations are investing in other traditional instruments.

What is your track these foundations finally mean what they actually supposed to be doing money into these these funds as well and then a third, up in the middle investment fund. I've got one question more from the other said of the spectrum, from the regulatory environment that actually is overseeing the social sector and the split between nonprofit organizations and for-profit organizations having implications, not pleas to the text haters and other things that are related to the business model.

My question is, to what extent do you believe that has implications of for social enterprises in accessing these new types of investors that actually are seeking profit in one way or the other in addressing social models what actual indication is there that is a hurdle for social enterprises accessing this group, or, ask the question differently, is it about Time that we leave, also, in a regulatory environment, behind as the era where the definition of whether something is social or not social has been link to whether it is for profit or not.

So three questions answered to be one for the conveyor belt. What's going to dry and make it really work. Is it going to be market forces, is it going to be people from the dedicated social sectors, is it going to be government. What's going to really be driving it? Number two is foundation assets. third is this question is non profit distinctions in terms of driving with social enterprises and I may this may be my own particular version of the question, which is one of the issues that comes up a lot, is do we need new structural forms to support a lot of this work, or do we need to work more effectively with the existing forms?

And I guess, maybe take the first two questions first, and then I want to get back to the third question as sort of its own question.

Okay . Let's start. On the driving force, I don't believe in directed flows of capital from super, you know, organization. I believe the driving force will be two-fold. One, on the receiving end on the investees, it's just showing that there are investment opportunities, you know, fast growth, successful companies that will inevitably attract the attention of investors, I do believe, and second, the genuine desire of a growing number of investors to touch base with reality in their investments and to, you know, value to their portfolio and more on just financial value.

I really do believe that, you know this global crisis we are seeing today to this is a chance, for this sector, to actually convey the message that yes, there is another way of investing your money. So, I'm confident that it's going to be a major driving force in a few years indicates. So, I don't believe in this red lettering buddy that health company or channel flows of capital, directed planning or directed investment don't work, in my opinion.

And then, sorry, and the second question may beyond the foundations' money. I wish to see more of it, to say the least. And I'll stop there. I would wholeheartedly agree. I'm a big believer that local market entrepreneur is going to come up with better solutions than a constellation of funders, each of whom may have a different theory of change.

It's a little bit like good old Copernicus who would have the, you know, who put the Sun in the middle instead of having the Earth in the middle. It's just a lot more only if we have the enterprise that's actually doing the work, have a single strategy around which everything revolves. And I have a belief that those strategies and innovations, because they come up out of reality as opposed to coming down from ideas are more likely to be successful in that they will, they will draw capital over time.

On the foundation assets, it's just such a difficult problem to solve and I think we're making good progress on it. But if you sit on the board of a foundation, you have to be prudent, and it's written right in the by laws, you knowinvestments are not something that you can do and fulfill your obligation as a board member, that are also practical problems, which is that you have highly compensated people of managing the corpus of the foundation, and you have to work with the compensation plans that says OK, we're going to subject you to some investments that don't perform as well as what you would probably find if you just had your pure profit hat on, and so they say well then you've got to pull that out and put it outside of what I'm managing, and then all of a sudden you've got the board managing a set of investments themselves, and that's kind of a governance no-no and and so we need to work, we need to learn a lot more before we can have this work smoothy.

I think it can be done, but it's a lot of work. on the first question about whether it'll just happen organically or there's going to be somebody broader driving that. There needs to be market forces. But I do think it won't be commercial market forces. It'll actually be venture forms which will step in.

Different people will try different things. Everyone has its own way of thinking and that will lead to some interesting models that other people will follow. And on the foundations question, I think at the end of the day, if you really look at the behavior of many foundations, they are actually quite risk adverse so expecting to start put their endowment money into this is not natural.

I think it will happen, but, again, you'll have the leaders who'll start innovating and others will follow.

I'll just take a tiny comment on the second one because that's a little more my day job. it's hard. There are challenges, there have been some great leaders and there's real progress being made. Annie Casey Foundation just integrated their social investment team with their investment team . You know, the Kellogg Foundation carved a hundred million dollars out of their endowment to do mission vesting.

The Skoll Foundation, our hosts, do some actually really interesting work. So there's, is there more that could be done? Absolutely. There's been a little bit of a people who are talking past each other problem. I mean, I got an email from some people who are advocating that the foundation is just carve out five percent of their money in the next two months to go support some troubled asset purchases with the U.S. government.

I'm not joking so, but what that's illustrative of, is, not that it's assumable you have people talking past each other. Which is when the investment people hear that, and say 'Well that doesn't make sense and the conversation ends as oppose to starts and I think we ourselves see, the first question over seeing is a bit of a secular movement, we see people from government, people from commercial markets, people from venture philanthropy, people from all these different sectors kind of starting to push the ball forward in different ways, and so simple as these people will follow and these people lead.

But to the second question--this is one of the questions I had wanted to make sure is covered--is new legal structures, new legal forms one of those new organizational forms, is that an important critical enabler bottleneck that needs to be dealt with to help more expansion capital for social impact, is it A waste of time, is it, maybe important, but not top priority?

In your work what have you guys found, what do you think?

Datsata Forno. You know, again sorry being pragmatic, I take a step at a time and I, in my little, you know, scale of abilities and capacity to work, I raise from, you know, for now, venture philanthropies. I hope to raise, you know, in ten years time, billions from large pools of capital. And again, I talk their talk and I'm using what exists today and I'm, you know, going in with what exists today and I'm transforming from within when I'm in the fortress and if, sometime, you know, some brilliant minds find new ways or new formats or new structures, I'm very happy to look at those, but for now, my goal is 30 millions to the great companies xx xx where do I get to their expansion phase if in a new form of organisations of capital, you know, is created one day.

Absolutely, great, but that's not my focus today.

I would have to say as well that I don't think we feel particularly constrained presently by things like corporate structure or what's written. You know, the lack of a formally hybrid entity that's both non-profit and for-profit because I think the distinction is not so much the structure as it is the underlying viability of the business model.

and the question we need to answer more is how do we capitalize the growth of a business which capitalists aren't going to like because it doesn't throw off money, but it's still very good at doing something that we really do like, which is turning money into program execution that we can never do for ourselves.

So, if I had a wishlist, though, I suppose the thing that I would love to see is changes in the accounting rolls that make it possible to track nonprofit equity is a separate class of money from the remedy so that we could unmask whether or not progress has being made on the good types of. I wanted to compliment my first again drawing on my little experience on micro finance.

You know we have learned to micro-finance organizations in countries such as Columbia to non-for-profit organizations that were by far better performers than commercial banks, you know micro finance like excellent efficiency strong governance but unfortunately i don't know today they are reached that were the need to transform into a for-profit model and company, so that, first they can attract capital that they need to scale, because, you know, the re-investments of retained earnings and a minimum income just sets the base of your growth and if you want to grow much faster than what you are able to plough back in your business, by bringing in fresh capital, well, that's it.

You have to transform today. And the second thing is that, they would force what they are being forced to do, so that they can offer different products to their clients. They are banks! You know, credit-only institutions today are not fulfilling, in my opinion, their social mission. Savings is much more important for poor people in emerging markets than credit.

Talk about insurance, etc., etc. So, again, being agnostic about the not-for-profit and for-profit models of companies in which we invest, but eventually realities of the market catching up in two ways. That's again the experience of micro-finance, but I suspect it's going to be applied to other sectors.

Question. The question through what exactly do you promise your investors so students of the Capon model and so longer, where there's a relation between risk and return. What do you promise them or returns because the risk associated with this seems to be quite high. At the same time you have to assume some horses that are probably higher than other things.

In our case, we always try to draw that analogy that we're building something permanent. It's not a building, but its an enterprise with staying power. So you don't get any money back but as a first step what you do get is the right to claim credit for having capitalize the establishment of this permanent thing, so it's a little bit like a naming right.

The other thing that we have are information rights, and every quarter. We have a dashboard that all of our clients present that cover all, many facets, both social impact but also what percents, you now how much growth capital did you burned through the last quarter and how much is left and with the other growth capital raised in which case the investor subjected to dilution so there are some of these equity like matrix that are in place we don't have in our arrangement now.

Any control rights or, you know, for example I could imagine in the future having an right of first refusal for future equity-like investment or blocking rights, even, for future equity investment, which is a scary concept but it might be an interesting one to explore. We also don't have even governance rights at this point where automatically an investor can sit on the board.

We kind of leave that as a side deal.

The good news is, you have a very clear expectation u know you are going to be the negative 100% financial return and you know you can deliver on that
what the premise is but the thing is that usually you get negative 100% and then nothing else right and so our whole premise is The big question is, will you or will you not sustainably enhance this organization's ability to deliver a program that somebody loves?

I love this program. I could pay for next year's execution or I can use it as growth capital and pay the money while the organisation gets something else to pay for execution every year so the whole thing is did the ratchet step happen or not. And we have extremely clear reporting; as to when that happened and then the other thing is, did you get diluted?

Well, I can be very specific on your question. When we talk about micro finance fixed income investments, the funds we're managing depth is this for micro-finance. I guess over the last ten years, one of our funds, the largest one is plus two percent net in U.S. dollars over the last ten years. And so no defaults, by construction we don't mark to markets of course no volatility, So its sort of attractive to private investors institution first is going to what micro finance is looks like it's a first entry into the world of micro financing investments.

Then we launch these private fund for micro finance. We targeted 20% IR over the next age and given or knowledge of the shield and the way we are currently building a boat for you we believe we can deliver that and i think we need threshold of some major private activity funds. But it's risky, obviously.

You never know.

And then finally, on the Oasis Fund, what we tell our investors is, look, we get the 15 to 25 percent on our equity investments if it works, so it's extremely risky, it's new, we have never done it, we are non-specialized, we go cross the board, cross-sectors, cross geographies, we are a team of three but, you know, we've done it in microfinance.

It seems to be working. So, do you want to take the risk to build the path with us, to help us build a track record, and your money will be leveraged and on top of it, if we are successful, you will get decent financial returns on top of major and social impact, that is what we are saying to the investors.

One of the points you made at breakfast is, regardless of the investment, the importance of understanding what investors are looking for, being clear about the explanations, and doing your darnedest to deliver on what you promise.

Yeah. yes I am interested particularly in exits and you've got a belt. You start with small and you get bigger and then you have a fund and then you have a fund of funds and it gets very exciting, but what happens at the end of the convey about do we neeed a social stock exchange, and I'm about one of your points about structures in there, to social enterprises I'll call that in the UK and started some decades ago, one being Guinness an the other being, very clear social missions.

But they completely loss it, when they floated and the whole the if he done measure value even the value in the measure the single definition that we're left with. I'm struggling with it. I'm just interested in your ideas.

So, unpacking two elements there, one is exits, and how do they happen at the end of this merry-go-round, who's writing the cheque, and two is, what are the risks in terms of mission that are associated with that.

This is a topic that I get kind of passionate about. Again, this distinction between what are revenues, which is money that a firm turns into execution of some form verses what is capital, which is money that's inherently a one-time infusion of something. And if you look at the history of a typical for-profit company, you know, take Apple Computers or some thing like that.

Through the history of that company, may be 1% or 2% was paid in capital. Everything else was money in exchange for computers. If you take Kaplan Tutoring, maybe one percent of the money paid the bills while Kaplan got good enough that others would want to bring the and ask Kathlyn to return their money into two great sessions so the vast majority of money that goes into whether be a full profit or non-profit.

Is money in exchange for execution which is revenue that's not capital by my culture. So, that's an important thing because it said that our capital market problem actually it's a lot smaller in magnitudes than perhaps we thought. We also have to understand the concept of take-out, because many people who are intimately involved in capital markets may not know this.

When a company goes public this actually a big sucking sound for capital. It is not the VCs or the private equity people, or whoever, get their money back, right? But they don't get it from the company. They get it back from other investors who swap money for shares in the secondary market.

So, but, I mean, the significance within our conveyor belt. So where is that money coming from?

So within our conveyor belt the Lets go to the end first and then you work backwards. At the end, you get taken out by the customers. Basically what happens is you burn through the money and then in its place is this entity that is turning money into program execution forevermore. And you never, no money ever comes back, but in its place is your program gets executed for ever and that is a successful exit.

So then on the commercial side, because we are basically just out of time, maybe she should jump ship on the commercial side, and then we'll get to concluding remarks.

Okay, well that's a tough question and that's the number one question we ask ourselves when we invest because, obviously, our fund has limited lives and we need to exit at some point. But before addressing that exit question the mission drift, I mean the risk of losing of the social, you know, view of the social.

That's something again that's being very debated in micro-finance, right? I mean, you have the NGO's forming in a British company becoming a bank you know my god JP Morgan or government officer coming in we are going to lose you know own soul could be, but, but I would say you have to be very again sorry, pragmatic on a case-by-case basis and you don't just invite anyone to your capital if you want to but I do believe that, you know, specific in the microfund sector if you become a bank it's not bad for your social impact, again, because your capital is serving better your clients.

And as long as you don't lose the focus or the initial, you know, mission of keeping in touch with the low income, you know, segment and bankerize. Many people there have no access to financial services. Nothing prevents you from, on top of that, you know, the missing one that is now the SME sector and then, you know, a company that grow off of your clients and so, one is not necessarily, you know, excluding the other and I don't believe in this automatic mission drift, because you become the full profit company and the bank and the regulated company.

I don't believe in that. It may happen, you have to be very careful about it, but it's not automatic. Now, to come back on the exit one, you know, for the private equity fund, I have a dream, and it is that the private equity funds that will be launching the next 10 years, could be all be bought back by a global holding sitting any where, I don't know, that would have this industrial vision of keeping the stakes in those microfinance banks and keeping, you know, the focus and the mission, so not necessarily selling those stakes in seven years to the highest bidder, but transforming, you know, this capital that we have put it to work during the next 7 or 10 years into something that is permanent, hopefully.

And then after that, you know, we'll see and we float or whatever, a part of it, but you maintain control on something that you are building progressively. That's, that's really all vision. I don't know if it will be successful in doing it.

Actually.

And for the other one, frankly, it can take many forms, it can be buy back from promoters, can be a buy-back from other private equity funds interested in taking the next step, I don't know, can be IPO, can be strategic sales to large companies seeing that what you're doing is actually expanding in the markets, and if they appreciate the value of your markets they're not going to sell or destroy.

So you know I think there are many ways that you can exit those investments and you have to be creative, and work from the very first day, towards this exit, not ask yourself the question 7 years down the road.

So, I am going to make a quick excuse so I don't get a moderator demerit, which is, we were told to start 5 minutes late, so people got back from lunch, and so our finishing 5 minutes late is actually finishing right on time.

Number two, just a couple last points that, you know, I was writing down throughout, just in terms of trying to summarize a couple of things that sounded like came up a lot, and then A lot of the detailed issues, please come up and talk to panelists and hopefully none of them will run off, and to continue the conversation.

But number one, business model matters. At root, having some engine, where money comes in relative to where money goes out, that can work over the long term. Whatever it is one is doing, whatever form one is, is a really important endgame. It can look a lot of different ways, but that's at the center of it.

As somebody said, it's about the enterprise perspective.

Number two, size is not a panacea. In some cases it's not doable. In some cases, as you were saying, for a lot of businesses, you saw, it's not going to happen. And for some reasons, it's not desirable. There are far better ways to scale impact than scale in the organization. Number three is this conveyor belt concept.

You know, this idea that number one, subsidy is not a dirty word, that's fine. And the goal is to actually make it so that it's a bridge to somewhere, not a, well, I could make a Sarah Palin joke but I won't. And, the last thing is really that a lot of this takes patience, discipline in execution, kind of boring very old-fashioned things, but it root, that's really central to a lot of this work.

There is no quick and easy answer, which in some ways is reassuring because it means we all haven't been morons that have overlooked it. I mean, the reality this is, this is really hard stuff and I think one of the things I took hard in this, is a great vision for the payback for people who will take risk, either entrepreneurs or its funders and it's not guaranteed.

But that there's an emerging ecosystem, an emerging set of tools and techniques that if people will take that risk when the business model may not be clear, when there may not be other people for other interests that will come in. The chances that there is a real longer term pay off for social benefit down the stream of that risk capital, is greater than before.

Ever before. So that's, those are my take a ways, if other people have other thoughts come up, join other questions. But thank everybody for their time and sorry for maybe going a little bit over

Expansion Finance For Social Impact

MEDIA RESOURCES

SIGN UP FOR OUR NEWSLETTER

JOIN OUR NETWORK/SHARE

VISIT THE SKOLL NETWORK