Social Finance

Landscape and Trends

A product of the SEEP Practitioner Innovations Communities

Agenda

• Social Finance Market Overview• Social Investment Instruments• Social Investors and Expected returns • Trends, Myths and How to Get Money• Q&A

Social Finance Market Overview

Drivers Behind Social Finance

Source: SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

Credit Unions

Micro-Finance

InstitutionsETHEX

Government

Social Firms

Commercial Investors

Social Enterprises

Micro-Entrepreneurs

Tax-Payers

Philanthropists

Banks

Dedicated Intermediaries

Ethical Investors

VP Funds

Foundations

SIB

Charities

N-F-P Social Entrepreneurs

Co-ops Members

Market Transactions

DEMAND SUPPLY

INTERMEDIARIES

Landscape of Social Finance

CDFIs

Source: SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

Landscape Of Social Finance

Source: SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

Social Investment Instruments

Investment Instruments (1)

• Social (“soft”) Loan: Debt structure below market, e.g., longer term, interest only, low interest rate, etc.

• In-kind equity: Non-monetary contribution of founders, employees, business partners to equity financing round, e.g., intellectual property, consulting hours, facilities, services, etc.

• Program Related Investment (PRI): Social investments from within US based Foundations (usually social loans).

Investment Instruments (2)

• Equity: Ownership of a company which is sold in order to provide cash for a growing company. Equity appreciates and depreciates based on the company’s value. Equity defers all payment to the investors until the time of sale.

• Debt: Loans or bonds – usually require full repayment plus interest. Loan institution dictates terms like timeframe, collateral, interest rate, and default risk management.

• Grant: Donation without repayment expectation. Grantor expects social / environmental returns.

Social Enterprise Investment Strategies

Invest-mentRisk

Social Enterprise Life Cycle

High

Low

Seed Start-Up Early Expansion

Late Expansion

Grants Social Loans

GrantsSocial Loans

Commercial Loans

GrantsSocial Loans

Commercial LoansGovernment Loans

EquityCommercial LoansGovernment Loans

Equity

• Social Investors

• Foundations• Government

• Social Investors• Foundations• Venture Philanthropy

Funds• Government • Banks/friends and

foes

• Social Investors• Foundations• Venture Funds• Banks• Governments• Corporations

• Banks• Governments• Corporations• Foundations

Supply And Demand

Source: SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

Social Investment Options

1. Not-for-profit/charity that generates exclusively social valueo Non-market rate (grants)

– Social enterprise that runs a deficit and has clear social missiono Non-market rate/Submarket rates (grants-capacity building, startup,

bridge funds; PRIs, soft loans) – Social enterprise/business that is breakeven to profit-making

but also has a clear social/environmental purposeo Sub-market/market rate (PRIs, soft loans; market rate loans or equity,

“quasi-equity”)– Commercial opportunities in deprived areas

o Market rate/ Sub-market or tax reduction (government incentives)– ‘Social firms’ that employ disenfranchised members of the

communityo Sub-market/market rate

Equity Risk

• Dilutes ownership• Risks losing control over mission, decision

making, and direction• Can intensify pressure to make profit

and/or change legal structure• Fairly untested in social enterprise

“Its never too early to fire the CEO.”Eric Archambeau, VC and VP

Social Investors and Expected Returns

Investor Types

• Entrepreneurs: In-kind equity, equity• “Angels” or social investors - individual investors:

quasi-equity, equity, grants, debt (patient)• Foundations: Grants, Program Related Investments

(PRI’s)• Social Venture Capital: equity, debt• Venture Philanthropists: Grants, PRIs

o Can be individuals or foundations • Government: Grants and contracts• Venture Funds: Equity and• Banks: Debt, equity• Corporations: equity, debt, cause-related sponsorship,

partnership (brand and market leverage/access), and in-kind

Not all Social Investors seek high returns

• Venture Philanthropy (VP) does not seek a return on financial capital all the time: mainstream VP operations all deploy grants as financial tools of choice.

• In fact the vast bulk of VP activity from the US is based on non-returnable grants (Venture Philanthropy Partners, 2002)

• PRIs often turn into covertable loans (grants) based on performance.

For more information: Venture Philanthropy: The Evolution of High Engagement Philanthropy in Europe, Oxford Said School of Business, June 2006

Spectrum of Financial Return

“Blended” Returns

The Investor Universe

- 100% + 8%0%

Capital-protectedBlended ReturnsFinancially neutral(no losses)

Market-rate returnFinancial ReturnsSocial Benefit

Grant-makersSocial Returns

- 15%

?Blended returns Moving

towards Self-sufficiency

Trends, Myths and How to Get Money

Trends

• “Trendy” but more hype than actual dollars• Increasing funder emphasis on financial

sustainability of social enterprises• Market most crowded in financial returns segment

(social companies)• Many funders looking for market/sweet spot• Weak capacity of funds and social investors• Greater involvement from government - policy and

money • Focus on capacity building/long term engagement • Progressive foundations and venture

philanthropists best for grants and TA money.

Social Enterprise FundingAmong American entities focused on developing countries, over $US 900 Million is dedicated to funding social enterprise• Does not include foundations’ grant making • Slightly over 10% of this money is seeking market return

on investment, while the remainder looks at below-market rates of return

• Other funders simply wish to instill business discipline into the nonprofit world

Source: Keely Stevenson, Bamboo Finance

Critical Market Gap

- 100% + 8%0%- 15%

Social Investors

Foundations

Social Enterprise

Myths

• Clear target markets called “social investor” and “venture philanthropist”

• Tons of money for the taking• Fewer barriers to access social investor

money than traditional funding• Social investors won’t be affected by

financial crisis• Uniform “rules of engagement”• Less rigor/accountability

Felicitas Von Peter, Active Philanthropy

“The [social investors] we’re working with is very tricky, people don’t talk about money, philanthropy or any of their private activities with people outside their close peer group. And they are being hit on constantly from people who are only interested in their money, and are often “burned” by this experience. So we have made a commitment (which is the basis for our work) that we will never pitch to our clients, and only work reactively.”

Geoff Muligan, Young Foundation

“The truth is that despite the hype the real level of venture philanthropy is very small,  pretty similar to traditional philanthropy, and not much involved in innovation and the fields we work in [health and education].”

The Investors/Donors

• Limited experience• Little history of originating/outreach• Engaged approach• “Unrestricted funds”… not so much• Multi-year approach• More risk averse than public image • High accountability • Rigorous due diligence • A very thin pipeline between money and huge

need

Accessing Social Investments

• Process not an event• New plan: must start with existing funders

and stakeholders.• Long-term process (research/cultivation)• Relationship building with funders • Steep learning curve: business plans,

culture, terminology • Old rules apply for new vehicles

Appendices

Spectrum Of Social FinanceFinancial Instrument

Purpose of Finance Type of Finance Example

Private Grant Fulfilling Mission Capacity Building

(Venture) PhilanthropyPRIMRI

Impetus TrustFB Heron FoundationCalvert Foundation

Government Grant RegenerationMarket Development

Community Development LoansUnclaimed Assets

Community Development Finance Institution (CDFI)Social Investment Back

Government Contracts

Outsourcing Welfare Services

Contractual Exchange Greenwich LeisureEaling Community Transport

Debt Economic and Social Development

Micro-FinanceSME

Grameen BankCitiBankGrassroots Fund

Quasi-Equity Growth Capital Share of Ownership Bridges Community VenturesCatalystAcumen

Sub-Market Equity Growth Capital Restricted ‘Ethical’ Shares CafedirectEthical Property Company

Market Equity Growth Capital Standard Shares London Bridge CapitalCompartamos BankBamboo Finance

Joint Equity Start-up/Growth Capital

Co-operative Ownership (IPS) MondragonBayWind

Policy and Social Investment – UK Example

• Futurebuilders (2005) fund worth £215 million to offer investment packages of grants/loans/technical support for organisations to bid for government service-delivery contracts

• Two pilot funds (2006), worth £200k, for innovation in encouraging private sector investment in social enterprise

• £10 million fund for social enterprise (2006) in recognition of the need to stimulate growth

Growing Popularity of Financial Sustainability

• A growing numbers of indicators highlight funder and nonprofit interest in financial sustainability and the role of earned income and social enterprise.o Funders asking nonprofits to increase financial sustainability

o Managers and board recognizing the role of earned income and social enterprise in overall sustainability

o Research showing that earned income efforts lead to greater efficiencies and effectiveness within nonprofits

o A 600% increase in fee-generated income in the social service sector over the past 20 years

From Funding Them to Fish: The Case for Supporting the Earned Income Activities of Nonprofits, Social Enterprise Alliance, 2003

Earned Income: Funder Perspective

Principal motivators for funding earned income projects were:1. To maximize philanthropic investments• 83% of funders wish to promote the sustainability and self-sufficiency of their grantees

by diversifying income base. Especially to increase overall management and business capacity of the organization.

2. To build nonprofit capacity• Growing numbers of funders are supporting required technical assistance and

providing capacity building grants to support the entrepreneurial growth process.3. To increase public awareness of the organization4. To provide a platform for sharing “best practices” across sectors

Growing funder interest in the social enterprise movement• National funder organizations (GEO); Local giving circles of philanthropists (Social

Venture Partners International)• Rockefeller Philanthropy Advisors: High engagement philanthropy and social

enterprise• Financial Innovations Roundtable: Funding social enterprises

* Social Investment Forum** Funding them to Fish

Earned Income: Nonprofit Perspective

Nonprofit are pursuing earned income opportunities to achieve financial sustainability: (Social Investment Forum)• Growing numbers of nonprofit associations are holding conference

sessions on the subject of social enterprise• 655 nonprofits submitted proposals to the first Yale/Goldman Sachs

business plan competition• 400 nonprofits submitted proposals to the first Social Stimulus

business plan competition

Program (“earned”) revenue now represents the single largest source of income for nonprofit corporations according to the IRS*

Between 1982 and 2002 there was a 10 percent rise in the slice of nonprofits’ income that came from earned sources. (Kerlin and Pollak, Urban Institute, 2006)*

*Source: FUNDING THEM TO FISH: The Case for Supporting the Earned Income Activities of Nonprofits

Microfinance - the quintessential social enterprise

• Philanthropic foundations funding microfinance are mushrooming. Over 40 foundations have chosen microfinance as a key program area. 

• Purely commercially oriented funders are attracted by microfinance as an asset class: Citigroup, Deutsche Bank, TIAA-CREF, Morgan Stanley, and Société Générale

• More large foundations entering the marketo Ford (since 1976)o Bill and Melinda Gates Foundation (2005)

US$19 million to women's programs in West Africa (Feb 2008) o McKnight Foundation (Africa)o Mastercard Foundation o Omidyar Network (Tufts University)

CGAP 2008 Microfinance Funder Survey to release more data on microfinance fund flows (end 2008) http://www.cgap.org/p/site/c/template.rc/1.26.1426

Supply Side (UK)Risk level Minimal Low Medium High

Provider Banks(Triodos)

CDFIsCharity BankLocal Investment FundsBridges C.V.

VenturesomeImpetusAdventure Capital Fund BigInvestFutureBuilders

CharitableTrustsGovernmentEquity

Current Funds Available

Extensive £181m£62.5m£40m

£15-20m£3.5m£12m£250m1m EURO

£2.7bn£5bn>£10m

PotentialLoss

<1% 1-10% 10-50% 100%

Cash

Public EquityFixed IncomeCash Private Equity

Guarantees

Senior LoansSubordinated Loans

Grant Support

Market-Rate Investments

Below-Market Investments

Quasi-Equity

Social Investment Spectrum

Ragin (2005)