After stock markets worldwide collapsed, bringing down 401Ks and people’s personal assets, common sense would tell you that traditional assumptions of the market and modern portfolio theory needs to be reevaluated. We need to move beyond the “OR”: I either maximize profits OR give my money away. The social capital markets offer investors an opportunity to both earn a return on their investment while having a social impact – creating a more holistic return on their investments.
It’s encouraging that despite the economic downturn, social investment funds are continuing to grow in their asset bases are earning steady returns. Additionally, there is growing interest among large institutional investors who are beginning to look at the social capital marketplace as “smart strategy”. However there is a ways to go in developing the marketplace to make it a more widely accepted medium for investment.
Going back to the points made yesterday, the advancement of this sector is going to require ultra-transparency and generally accepted metrics that illustrate the social impact of an investment, or the social return on investment (SROI). Furthermore, we need to take the time to develop the infrastructure that will allow the sector to scale. New standards like IRIS and GIIRS should really help in bridging the divide between traditional financial investors and the social capital marketplace.
Entrepreneurs are continually in search of capital investment to launch their enterprises forward. Venture Capital firms and traditional capital markets were designed around the concept of earning quick and really high yields on their investments.
Social entrepreneurs, too, are in continual search of capital to launch their enterprises forward. The difference, however, is that quick and high-yield profits are not part of the equation. The social sector requires “patient capital” with an added interest in “Social Return on Investment” (SROI).
The panel discussion, “Showcasing the Social Capital Spectrum” featured multiple representatives of the “social capital” investment funds. There is a movement to mobilize “social capital” to really have a dramatic global impact on development (both economic and social). There are several major impediments, however, to bringing the social capital markets to the mainstream:
Need to Educate People on Role of Capital in Poverty
There are two flawed assumption of the poor:
1.) That they lack purchasing power
2.) That they lack the power of choice
These misconceptions really shape people’s understanding of how “social capital” and bottom-of-the-pyramid (BOP) markets work. What they do for investors is add a level of perceived risk that prevents the social sector from accessing investment from traditional models.
Metrics and Language
It’s really critical for social enterprises to be able to communicate their pitch to investors in a universally understood and accepted language with standardized metrics. Social entrepreneurs need to be able present that their models are accountable, producing measurable change, and fully transparent.
Investors need to be involved in the process of redesigning the metrics and tools that they use to analyze their risk. The current economic crisis in the US is case and point. Their metrics need to be able to better capture “total costs”, as well as incorporate social impact.
A phrase used I liked was “Sustainability Quotients” – this notion that we all have varying degrees of acceptability when it comes social metrics. For example, how green is green enough?Fighting Mainstream Traditional Models
Those of us in the social capital movement are placed in a position to combat a traditional worldview of social investment. There is a desire to stick with the models that are perceived to work (eg. Giving/Philanthropy), rather than adopt new “riskier” models like “investment.”
The first “breakout” session I attended was “The Future of Social Innovation on the Web”. Panel participants included: Premal Shah, Kiva.org; Jonathan Greenblatt, All for Good; Steve Newcomb, Virgence; and Ben Rattray, Change.org.
Some very interesting and critical discussions were raised ranging from for-profit v. non-profit, competition v. collaboration, and how to develop and foster social engagement through the Internet.
Where Web 2.0 was all about creating 2-way interaction over the Internet, Web 3.0 adds an “offline action” element. This is a great way of describing the “social innovation on the web” movement, and how online platforms can effect offline social change. The challenge faced is creating a vibrant and active user base. Premal Shah told us that 5% of Kiva users drive 50% of activity, and there is a huge amount of dormant capital in inactive user accounts.
The solution really lies in the “user experience”. User engagement tends to be more of a “consumptive decision” as opposed to an “investment decision”. There’s so much untapped potential out there that creating a system that users enjoy using lays at the heart of creating a system that can maximize its social impact. More often than not, this is best achieved by opening your code/API to developers to build their own platforms.
An interesting discussion took place over the friction between socially driven for-profit businesses and the non-profit sector. Premal Shah of Kiva (non-profit) mentioned flack that they get about “crowding out” the microfinance opportunities of in-country banks that could be generating profit and creating wealth. Jonathan spoke about Ethos water (for-profit) and how they are able to generate millions of dollars from selling bottled water to invest in sustainability projects worldwide, but receive flack from nonprofits who say that by selling bottled water they become part of the problem. The discussion concluded we need to get past the for- vs. non-profit discussion and just build high-impact solutions that work, placing less attention on labels and more attention on models.
Today at SOCAP09, Sonal Shah, Director of the White House Office of Social Innovation, opened the conference with a Keynote addressing the work being done by the Obama Administration in determining the role of government in the social innovation arena. At a time when US communities are in need of new and high-impact solutions to social problems, entrepreneurs and the institutions in the social sector are struggling in the current economic climate.
Ms. Shah broke down the Administration’s goals into three categories:
Directing resources to the most innovative and effective solutions
Through the new “Social Innovation Fund”, the government can assist in directing much needed capital toward “high-impact” models that work. The goal is not to duplicate efforts already taking place, but to provide the assistance to scale proven programs nationwide.
Facilitating Stronger Multi-Sector / Cross-Sector Partnership
The government can play a role in bringing together nonprofits, the private sector, and government agencies. The goal is to defeat the silohs that these sectors frequently fall into, and to share knowledge and innovative solutions to create a more high-impact society.
Identifying Tools to Help Leverage and Foster a Culture of Social Innovation
In part, this has to do with engaging more Americans with the social sector through programs like Americorps and volunteering. But also creating policies that enable the social sector to thrive. An example of this could include creating the appropriate incentives for the flow of patient capital to social enterprises.
The following panel discussion focused on how the social enterprise movement has developed to the point that the government has acknowledged it and begun to see how to build upon it. In social enterprise, we speak a lot about “ecosystems’ and creating environments in which innovators can thrive.
Some of the critical issues the social sector faces right now are institutional (eg. L3C incorporation status, financial incentives/disincentives, etc.). With the creation of an “Office of Social Innovation”, we can now see opportunities for policy reform that create an ecosystem better suited for the implementation of innovative new programs that impart high-impact social impact.
One of the key question was, how can we approach the government to get the change that we want. The challenge we face is being able to present meaningful metrics and a direct plan of what change we want to be implemented, particularly when the sector is very decentralized and segmented.
It was also noted that for-profit businesses should take more of a central role in the discussion of policy around social innovation. It is more that corporate social responsibility (CSR) and implementing programs to advance your own programs within your company, but it’s contributing to the overall ecosystem.
I'm at the airport right now on my way to San Francisco for this week's Social Capital Markets Conference (SOCAP09). SOCAP presents an awesome opportunity to those of us engaged in the social enterprise / business-for-development movements to come together, meet one another, and discuss some very important issues concerning the future of the movement. This year's conference has an awesome lineup, and should prove itself to be a extremely valuable experience.
Since I'll be traveling and attending the conference, I won't be publishing my "Daily Briefs" this week. Instead, I hope to have cool treat for all my readers -- updates from the SOCAP conference! I'm planning on blogging and twittering throughout the week, sharing with you all the cool stuff I'm learning!
I'm being rushed onto the plane right now, so I'll report back later! Cheers!
I came across this video on Hulu in a series called Vanguard, and thought it worth sharing. About a month ago I dedicated a post to the Role of China in Africa, which I highly suggest you check out! I wrote about many of the issues and concerns raised here, but the video delivers some great imagery to the concepts and realities of China's growing foothold in Africa.
We are taken to the country of Angola, a country scarred by almost 30 years of civil war. After the war, Angola sought financial assistance from the West, but was unable to secure investment due to the many conditionalities attached. The Chinese, however, were quick to court the Angolans – particularly given the wealth of natural resources (diamonds, minerals, and oil) and the country’s strategic coastal location. Five years after the end of Angola’s civil war, with the help of China, the country had become Africa’s fastest growing economy.
Angola has seen rapid growth in the local Chinese population. At the time of filming this video, China had an estimated US $6-11 billion extended to the Angolan government in loans. Under the loan agreements, 70% of all projects were to be built by Chinese companies – importing their own labor and materials ranging from light bulbs to heavy machinery.
For Chinese expats living in Angola, life is less glamorous than what they imagined – notably the level of poverty that they witness. Creating an incentive to stay, though, the average Chinese worker in Angola makes about three times (3x) what they would make in China.
The negative arguments remain, however:
The Chinese “Mutual Respect for Sovereignty” policy gives Angolan politicians a blank check for bad behavior (Rise in Corruption)
Chinese investment does little for Angolan employment
Angolans at bottom of the totem pole in their own country
Continued reliance on the informal sector
No utilization of local resources (everything is imported from China) means that Angolan businesses hardly benefit
Once the natural resources have been depleted, the Chinese will leave and what will Angola be left with? Is it worth it?