Entrepreneurship

Integrated Capital for Social Enterprises

July 17, 2014

Originally published on the Stanford Social Innovation Review

Don Shafferby Don Shaffer

A thriving social enterprise sector is essential to increasing community resilience and improving the lives of those who’ve been marginalized by the global economy. Social enterprises—which are in business to solve social and environmental problems—are willing to tackle complex systemic problems, build new infrastructure, and develop products and services that address pressing needs even if their profit potential is not obvious or will develop only over a long term.

These enterprises’ ability to succeed is hampered, however, by the current division of capital resources into overspecialized sectors, such as venture investing and charitable foundations, that fund only narrowly defined types of enterprises at particular stages. This situation won’t produce the breadth of social enterprises we need to solve systemic problems, because these enterprises confound the expectations of conventional funders in many ways:

  • They may have to build a supply chain or other systems (rather than just plugging into an existing infrastructure), which results in relatively high up-front costs.
  • They may have slower revenue growth or relatively low profit margins—by definition, they aim to maximize social value before profit.
  • They may have hybrid business models that put them outside conventional for-profit and nonprofit funding models (for example, a revenue-generating business with nonprofit charitable status).
  • They think about growth as a way to serve their mission, not as an end in itself. They may intend to remain rooted in a community and serve as a model to others, for example, rather than pursuing rapid and far-reaching expansion.

To build a thriving social enterprise sector, we need to rethink the purpose of capital and employ an integrated capital strategy. Integrated capital is the coordinated and collaborative use of different forms of capital (equity investments, loans, gifts, loan guarantees, and so on), often from different funders, to support a developing enterprise that’s working to solve complex social and environmental problems.

Read the full article here

Don Shaffer is President & CEO at RSF Social Finance

Raising Capital: Challenges and Opportunities for Socially Responsible Businesses and Social Enterprises

June 27, 2014

cutting edge

This is a guest post by Cutting Edge Capital

Raising capital from banks, venture capitalists, and professional investors is a challenge—especially when your business falls into the category of a social enterprise or socially responsible business (“SE/SRB”). Despite the best efforts of SE/SRBs at sorting out financial projections, putting together business plans, applying for loans, and making presentations (a.k.a. pitching), most will be turned away by these types of investors.

It would be easy to declare the situation a result of a cabal of financiers that has it out for SE/SRBs the world over. But in reality, traditional finance just has its own evaluation guidelines for determining the companies that are eligible for financing. These guidelines have been devised to maximize the returns of business underwriting on a large scale, typically with no consideration of socially responsible factors.

The metrics employed by traditional finance are remarkably effective at streamlining the process of evaluating the many thousands of applications and pitch decks that banks, venture capitalists, and professional investors receive each year. This has led to a robust financial services industry and a large amount of capital flowing to forms of businesses that meet the standardized requirements of banks and investors. What this process has not done so well is channel capital to businesses that base their success on more than profits alone—that is,SE/SRBs.

RSF Social Finance’s loan recipients are growing businesses in the areas of food and agriculture, education and the arts, and ecological stewardship. As triple and quadruple bottom line businesses, they are also doing this while paying living wages, lowering their carbon footprints, and generally following sustainable business practices. And yet, if you were to subject these same companies to the evaluation criteria of traditional finance, these things would likely appear as extraneous liabilities, and many of these businesses would be passed over for funding.

Similarly, at Cutting Edge Capital we don’t believe in the one-size-fits-all capital raising solution offered by traditional finance—instead, we bring our experience, legal knowledge, and passion for social change to help our clients determine the best way to achieve their goals. Using a variety of innovative financing tools, including Direct Public Offerings (DPOs), we work with SE/SRBs to raise capital from both wealthy and non-wealthy investors in compliance with securities law.

A DPO allows companies to self-underwrite and self-administer public securities offerings to both accredited and non-accredited investors in one or more states. With a DPO, a company can market and advertise its offering publicly by any means it chooses—through advertising in newspapers and magazines; at public events and private meetings; and on the internet and through social media channels.

There are several legal compliance pathways that can be used to conduct a DPO. Depending on various factors, a company or nonprofit organization can use a DPO to raise up to $1 million per year and, in some cases, more.

Thousands of companies have successfully used DPOs to raise capital from the crowd. Ben & Jerry’s, Annie’s Homegrown, and Real Goods are just a few household names that have used DPOs in the past. Here are a few more:

  • Farm Fresh to You in California’s Yolo County, has raised over $1 million from its customers and is continuing to raise capital on an ongoing basis. Interest on the notes purchased by investors is paid in credits toward organic produce rather than cash.
  • Greenfield, MA-based Real Pickles reached its goal of $500,000 in just two months by offering non-voting preferred stock to investors in Vermont and Massachusetts and converted to a worker-owned co-op.
  • People’s Community Market in West Oakland has raised almost $1.2 million and will open a neighborhood grocery store that helps West Oakland families thrive by offering quality fresh foods, affordable groceries, health services, and a place for community building and recreation.
  • Quimper Mercantile in Port Townsend, Washington, raised about $750,000 by selling common stock to Washington residents and opened for business, ensuring that local residents could continue to buy essentials in their own community.

While SE/SRBs are hindered from accessing traditional sources of financing, a great deal of opportunity exists for raising capital with DPOs and other, non-traditional approaches. Our SE/SRBs clients are using these financing tools to engage their communities and raise capital from the widest possible circle of stakeholders—not just banks, venture capitalists, and professional investors.

Please continue to learn more about Cutting Edge Capital’s work with social enterprises and socially responsible businesses on our website.

Clients in Conversation: Building on a Shared Vision, Part II

April 17, 2014

This article was originally published in the Winter 2014 RSF Quarterly.

Interview with Mark Herrera, Senior Manager, Client Development

Allegra Allesandri Pfiefer transformed a struggling school into the first public Waldorf-inspired high school in the nation. Laura Summer runs a successful year-long arts education program that is completely tuition-free. Both women have experience with the challenges of starting new initiatives that defy others notions of normal. In each case, strong communities played a vital role in their success.

Click here for Part I

Mark: Laura, I’m interested in this model that you have created for sustaining support for your work in a gift economy. Can you talk about how it’s working?

Laura: Free Columbia runs completely on contributions from many individuals, including our students. Sometimes, I do wonder if it’s going to be working next month or next year, but so far, it is.

As a teacher, that gives me this amazing feeling of freedom. I can give the very best that I have to my students and it isn’t tied to what I owe someone for paying me a lot of money. You actually get to teach out of what you know is right for your students in the moment. It’s such a strong feeling that I have given up teaching in any other model.

I’ve also stopped selling paintings for money. We started two years ago having what we call an art dispersal, where we hang up lots of paintings and make them available to the community. Community members can become stewards of the art, which means they can take the art and keep it for as long as they want. They can pass it onto somebody else or give it back to the artist whenever they choose to.

photo courtesy of Free Columbia

photo courtesy of Free Columbia

It was an amazing experience when we first did it. People just came and took the paintings off the walls and took them home. They emailed us about where they were hanging them and sent us pictures. It was as if, until then, the paintings had been out of work and unemployed.

This has also become part of our financial model because people can contribute money to the endeavor and to support the artists.

Mark: Allegra, you’ve been cultivating this really practical and deep approach to educating. What have been some of the highlights or transformative moments for you?

Allegra: I’m actually inspired by some of the parallels that I’m hearing in what Laura has said. I’m reminded of a story about my students. They have a main lesson block in health and nutrition. In one activity, they harvest chard and kale from our garden and prepare it with eggs from our chickens. Students told us that they went home and cooked it all week long for their families—the most green vegetable they could remember eating.

It’s like the artwork going out into the communities, it’s this learning that the students realize, “Here’s something I grew in my own garden at school. We planted it, we harvested, and now, I can take it home and nourish my family.” When that happens, you have families that are being supported by what’s going on in the classroom.

The art of our education is leaving the school campus with these kids and going into their homes—it’s bringing health, nutrition, and love of learning home.

In the first year of the school, I would go into classrooms to visit. The classrooms were chaotic. There was little respect for the teachers, for the learning environment, for the physical space. I walked into one classroom and greeted the teacher in the class. And one girl looked at me and said, “Why are you always smiling?” I thought, “Uh-oh, this is a really hard question to answer, because she thinks I’m happy.” I was actually sad. I wasn’t sure that this experiment of bringing Waldorf methods into the public sector was going to work. I had to think long and hard before I could answer truthfully. I replied, “Well, I love teenagers. I’ve always worked in high schools; it’s the place in education I love. And that’s why I’m here.” And I literally felt like the earth shifted. The kids realized I was serious. They believed that they were in a new kind of environment where learning could be interesting and fun, and where adults would listen respectfully to them. This experience taught me about the incredible potency of Waldorf education. The potency is held in the relationships, the intentions, and the vision that we share which is transforming our communities.

Mark: To wrap up, is there anything that you’ve heard from one another that has really resonated with you?

Allegra: I really like hearing Laura talk about the movement of art in the community. I’ve heard John Bloom speak about the healthy movement of money. And I think it’s true for art and other things. In my world, it might look like trying things, experimenting, not holding fast to certain protocols about education or what it’s supposed to be, but rather exploring through relationship and a safe environment. This picture of movement and flow in an educational setting is really resonating for me.

Laura: Throughout this conversation I’m hearing surety that this deep level of intention does work. It isn’t just that it works in a small, limited, cloistered place where everybody has the same values or the same financial background. It can work for diverse groups of people. And when it does work, it can transform people and allow them to see things that they couldn’t see before.

Allegra Allesandri Pfiefer is the principal of George Washington Carver School of Arts and Science, the first public Waldorf-inspired high school in the nation.  She is a graduate of Sacramento Waldorf School and a founder and teacher of San Francisco Waldorf High School. Allegra earned her doctorate at UC Davis as part of her mission to bring Waldorf education to a wide variety of educational institutions.  Sacramento City Unified School District serves 45,000 students and is the only school district in the US to support three public Waldorf-inspired schools educating over 1000 school children.

Laura Summer is co-founder with Nathaniel Williams of Free Columbia, an arts initiative that includes a year-long program based on the fundamentals of painting as they come to life through spiritual science. She has been working with questions of color and contemporary art for 25 years and her approach is influenced by Beppe Assenza, Rudolf Steiner, and by Goethe’s color theory. Her work, to be found in private collections in the US and Europe, has been exhibited at the National Museum of Catholic Art and History in New York City and at the Sekem Community in Egypt.

Clients in Conversation: Building on a Shared Vision, Part I

April 15, 2014

This article was originally published in the Winter 2014 RSF Quarterly.

Interview with Mark Herrera, Senior Manager, Client Development

Allegra Allesandri Pfiefer transformed a struggling school into the first public Waldorf-inspired high school in the nation. Laura Summer runs a successful year-long arts education program that is completely tuition-free. Both women have experience with the challenges of starting new initiatives that defy others notions of normal. In each case, strong communities played a vital role in their success.

Mark: Laura what are some of the successful practices you have used in building your community at Free Columbia?

Laura: Well, it depends on what you mean by community. We have a small community made up of our students and teachers. Then, there’s our supporting community—the people that care about us. These people provide funding and participate in whatever way they can.

Building community in the two circles is different. In the smaller circle, we take between eight and ten full-time painting students and five to seven puppetry interns for a full-time program, all day long, four days a week. In that community, we’re really working closely together. We do biography work. We do group observations of the artistic work. We have a meal together at least once a week. We sing together. We do eurythmy together. All of these things really help to build this core group and a feeling of community.

Our larger circle extends quite broadly. There’s a circle of local people who are interested in the work. They send us donations. Sometimes, they come to a short course. But a lot of them just want this mission to work. And then there are people all across the country, and even in Europe, who are watching out for us. We also have larger public events including an end-of-the-year arts show, and puppet shows in all the public schools in our town. We hold these events to build our visibility and to give something back to our community.

Mark: Allegra, how have you been able to successfully build community at Washington Carver High School?

Allegra: It starts with having a successful practice. Having a clear vision and mission that is shared by people is what creates a community.

I stepped into a community where some of the leaders had grassroots experience and a shared idea of building a public Waldorf-inspired high school. My work began with clarifying what this high school would look like.

One of the communities I work with is the teachers. We meet weekly to do activities like singing, eurythmy, and storytelling so that we can practice elements of Waldorf education together and learn from and about each other. Building a strong working relationship as a faculty was essential so that we could communicate this vision to the larger community.

And more than half of our students and families aren’t necessarily familiar with Waldorf methods. They are involved because Carver is small and safe, and they share the part of our vision that values relationships and human development.

Archery is one of several unique extracurricular programs offered at the George Washington Carver School of Arts & Science

Archery is one of several unique extracurricular programs offered at the George Washington Carver School of Arts & Science

We’ve done a lot of work in these last six years to build our community of parents and students by celebrating together. A common practice is getting together regularly for events where students perform so that families can live some of the educational experience that their students have had.

Mark: What are some of the challenges or obstacles that you’ve faced in building these communities?

Laura: Free Columbia is still a small initiative. It’s interesting that people often come to the full-time program, and they don’t really understand what this year’s worth of artistic process is about. Some of them have no relationship with Rudolf Steiner’s work at all, but they are searching for something, and that draws them here.

So it means that we have to be extremely specific about the expectations we have for the students. We don’t have any set tuitions, we’re not accredited, and we have this donation-based financial model—people think it’s pretty crazy. But once they get involved, it becomes clear. It’s just reaching that level of understanding within our community that is really challenging.

Allegra: One of the biggest obstacles that we had was inheriting a failing school. It was a huge challenge because we had kids and teachers who were frustrated, angry, and marginalized. I had to learn how to absorb that and build our own community with them. We did that by fostering relationships. We treated people with kindness and respect. And people repeatedly said, “Are you for real? We’ve never been treated like this in a public school before.”

I liked what Laura said regarding being really clear about the program. Within my district, our sister schools ridiculed us because we weren’t understood. As we clarified who we were by building a community, by showing growth, both academically and in enrollment, it became clear to our peers that this was working in the public sector, it wasn’t just a private school model.

Another layer of challenges was in meeting district, state, and federal guidelines and requirements. In America, Waldorf schools have grown up and matured in total freedom as private schools. There was a lot of concern about these government regulations removing that freedom.

By demonstrating the education, the curriculum, teacher expectations, student expectations, and outcomes, we have made it clear to the public education system and our private school peers that the public Waldorf-inspired schools are valid, valuable, and thriving educational environments.

Laura: It’s so interesting because what you have created is the strongest answer to objections that a Waldorf school can’t exist within the public sector.

People told me that my students wouldn’t appreciate something unless they paid for it. Until we tried it, I didn’t have a great response to that. But once we established this new model and it worked, then that was the best response to our critics. The living example is so powerful.

Click here for Part II

Allegra Allesandri Pfiefer is the principal of George Washington Carver School of Arts and Science, the first public Waldorf-inspired high school in the nation.  She is a graduate of Sacramento Waldorf School and a founder and teacher of San Francisco Waldorf High School. Allegra earned her doctorate at UC Davis as part of her mission to bring Waldorf education to a wide variety of educational institutions.  Sacramento City Unified School District serves 45,000 students and is the only school district in the US to support three public Waldorf-inspired schools educating over 1000 school children.

Laura Summer is co-founder with Nathaniel Williams of Free Columbia, an arts initiative that includes a year-long program based on the fundamentals of painting as they come to life through spiritual science. She has been working with questions of color and contemporary art for 25 years and her approach is influenced by Beppe Assenza, Rudolf Steiner, and by Goethe’s color theory. Her work, to be found in private collections in the US and Europe, has been exhibited at the National Museum of Catholic Art and History in New York City and at the Sekem Community in Egypt.

Creatively Financing the Arts

January 30, 2014

This essay was originally published in the Winter 2014 RSF Quarterly.

Reed Mayfield 3 (2)By Reed Mayfield

Can you recall a moment when a song, a painting, a dance, or a theatrical performance moved you deeply? If you can, perhaps the experience caused you to gain a new or different emotional awareness. The arts have a unique ability to transcend age, socio-economic status, geographic location, and ranges of personal experience. The arts can simultaneously facilitate an artist to produce their work and a patron to enjoy the experience, piece, or production; the arts can also create economic value. Art promotes creativity, expression, identity, innovation, and aesthetics. These things are what we typically associate with the arts. What is less understood, however, is the multidisciplinary impact the arts have on social development, learning, and the economy. These three aspects are at the heart of what RSF focuses on through its lending activity to arts organizations, and they are the indicators of RSF’s values—the arts can serve the highest intentions of the human spirit.

Art takes many forms, and there are many types of organizations that foster the arts through their programs and services. RSF is committed to supporting arts organizations that promote creativity, spiritual awareness, and provide community to people of all backgrounds. Specifically, we fund organizations that contract directly with schools or community-based organizations; provide support systems for artists, or arts organizations; and facilitate the economic prosperity of the arts.

Non-profit arts organizations face several challenges to reaching financial sustainability. In particular, these organizations have historically relied heavily on foundation and individual giving. According to a 2012 report from The Stanford Center on Poverty and Inequality, the recent recession contributed to a 10.9 percent drop in individual giving between 2007 and 2010.  Another financial issue art organizations face is the reimbursable grant format: an organization must incur the expenses related to the programming before a grant is awarded. This form of grantmaking can cause strain on the cash flow of an organization, and make it hard to meet overhead responsibilities, let alone budget for program growth. Arts organizations also tend to have untraditional assets such as contracts, incoming grants, or pledges, which may limit access to credit for growth or operations.

With a strong history of supporting the arts and an understanding of how non-profits work, RSF is uniquely poised to address these financial challenges. In particular, RSF is able to provide critical financing for working capital, facilities renovations, construction projects, or acquisition of space—financing that arts organizations often could not receive from conventional lending institutions. RSF is able to do so by employing innovative financing structures. For example, for working capital needs, RSF is able to offer a Grants Receivable Line of Credit. This entails looking at a forward rolling year of confirmed grants and making funds available based on this total. This gives an organization access to capital when their cash flow may otherwise be strained by inconsistent funding and reimbursable grants. In other cases, some financing needs are addressed by Pledge or Guarantee Loans where the organization’s community participates by providing the assets necessary to secure a loan. This creates a strong financial relationship that involves organizational leadership, beneficiaries or customers, and donors.

As of late, RSF has reinvigorated its historical focus on the arts. Given the state of our culture, the arts and access to them are more important than ever. At RSF, we believe the social value created through the growth of the arts has deep, long-term positive impact in the world. We invite you to join the conversation and share your insights into the arts and how we can create the systems necessary to support their financial and creative sustainability.

Reed Mayfield is Senior Lending Associate at RSF Social Finance

Local Initiatives Fund: Integrating Capital for Impact

September 26, 2013

Kelley Buhles RSF Social Finance

This article was originally published in the 2012 Annual Report.

By Kelley Buhles

How does innovation happen at RSF? Where do great new ideas come from? In 2012, an extraordinary thing happened that reminded us all how innovation is truly a co-creative process.

Working in collaboration with donors, the RSF philanthropic services and lending teams launched the Local Initiatives Fund. With a focus on building socially and ecologically sustainable regional food systems, this fund utilizes an integrated approach to investment through the deployment of philanthropic dollars allowing us to leverage our expertise across two disciplines, grantmaking and lending.

One of the exciting things about this fund is how it was created. A donor approached us early in the year expressing their admiration for our work and their trust in our values. They asked us, “How can you put our philanthropic money to work to build local, resilient economies?” What was special was not the question, but rather the donor’s willingness to release the gift – we were freed to think creatively about how we could best use these philanthropic funds to create more impact. The spirit of the free gift created the space for innovation.

We recognized that our lending team needed philanthropic funds to better leverage their work financing local sustainable food systems. In the past few years, the social finance field has seen that social entrepreneurs, those trying to make positive social and environmental impact, need different types of financing than those offered in the traditional financial market. Because most social entrepreneurs work carefully to preserve or restore natural resources and provide fair working conditions for their employees, they often do not see the high level of returns that are expected in the traditional marketplace. As a mission aligned partner, we are able to provide the different types of capital needed by these organization to support their growth in a way that most lenders cannot.

Using the philanthropic funds as guarantees, the lending team is now able to make loans to younger and slightly higher risk organizations that have the potential for great impact, but do not yet meet the financial requirements of our Social Enterprise Lending program. The lending team is also able to recommend charitable grants to non-profit borrowers who need extra support for infrastructure or capacity building. Using these different forms of capital, we’re able to deploy the right form of money, for the right purpose, at the right time for an organization.

A portion of the Local Initiatives Fund has also been designated for the Shared Gifting program. In this model, RSF facilitates a process in which grantees work together to allocate grants to each other. The goal is to move the decision making power of philanthropic funds into the community. The process encourages grantees to collaborate and share resources to meet their collective goals. In 2013, we will lead a Shared Gifting circle in Skagit County, WA.

At this stage, the Local Initiatives Fund is a pilot. We look forward to evaluating and sharing what we have accomplished over the next year.

As we look to the future, we now see more possibilities than ever before for how we can use money in new ways and work with our clients in different capacities to create more impact in the world.

Kelley Buhles is Senior Program Manager of Philanthropic Services at RSF Social Finance.

2013 BALLE Conference Recap

July 23, 2013

BALLE_Logo_RGB

by Catherine Covington

 

It’s a beautiful morning here outside my sun-porch office at RSF and my spirits are high. I am reminded of the level my spirits reached during BALLE’s 11th annual conference in Buffalo, NY, last month. I came back so inspired by my fellow attendees, the projects they are working on, and the action they are taking in their communities.  RSF has been a long-time sponsor of BALLE’s annual conference. BALLE’s work, which is focused on creating real prosperity by connecting leaders, spreading solutions and driving investment toward local economies, is very much in line with our mission and the kind of collaboration we seek to support.

A theme that was continually referenced throughout the conference was a focus on shifting from an “egosystem to an ecosystem”, from a system focused on “me” to a system focused on “we”.  This theme resonated with me and the image of what such a community would look like continued to develop in my mind as the conference progressed.  Janine Benyus, Founder of Biomimicry 3.8 Institute, gave an incredible presentation on not what we can extract from organisms and their ecosystems, but on what we can learn from them.  She highlighted sustainable solutions that can be found by emulating nature’s time-tested patterns and strategies and left the audience awestruck with her visual images and analogies.  A similar presentation by Janine, given at a TED conference, can be found here.

What would our economy look like if everyone knew their neighbor, lived with less and wasted almost nothing, and could invest money in their local community?  Well, one aspect of community health that is important to all of us, the production of and access to healthy food, could be addressed in part if local investment models such as the Farmer Reserve Fund were replicated in other communities.  Tim Crosby of Slow Money Northwest shared the nuts of bolts of how the fund was established during a panel we both participated on called “Rethinking Investment for the New Economy”.   The Fund was made possible by a partnership between Slow Money Northwest, RSF grantee and borrower Viva Farms and North Coast Credit Union (NCCU), which serves Skagit and Whatcom counties in Washington.  Much more detail can be found on Slow Money Northwest’s website, but in short, the Fund is able to provide a pool of capital to help new farm businesses, which often don’t have a credit history, have their best shot at being successful.  The innovative structure of the Fund builds on NCCU’s internal system of risk management and rigorous due diligence, reduces the risk of the loans by utilizing Viva Farm’s expertise to provide technical assistance to the borrowers, and enhances the existing loan loss reserve balance by leveraging small foundation grants and gifts from individuals.

I highly encourage you to check out some of the video clips from the conference. In particular, there is an inspiring presentation by Nikki Henderson, Executive Director of People’s Grocery, a long-time RSF grantee (the clip begins 1 hour, 56 minutes into the BALLE Friday Morning Session video).  She never ceases to amaze me with her ability to engage with the audience so naturally while delivering a powerful message in a most memorable manner!  Her message focuses on moving from breakdowns to breakthroughs, the difference between intention and impact, and responsibility without shame.  My favorite part is the how she finishes out her talk with an emphasis on how she sees us being able to bring all of work together to “congeal” through celebration, culture, and rhythm (she likes to dance!).

Click here to view more conference videos

Catherine Covington is Senior Associate, Philanthropic Services at RSF Social Finance.

RSF Pricing Meeting: Resetting Rates, Recognizing Interdependence

July 8, 2013

by Jillian McCoy

Inspiration

For many years, we based our investors’ return rate on the 13-week U.S. Treasury Bill.  Each quarter we recalibrated the rate based on this well-publicized benchmark.  In 2006, we shifted to a different benchmark – LIBOR, or the London Interbank Offered Rate – which at the time represented the most commonly accepted barometer for short-term interest rates worldwide.

In 2009, well before the now notorious LIBOR scandal, RSF staff knew that a seemingly arbitrary rate, disconnected from the needs and activities of our community, was not a right fit. During a staff study group of Rudolf Steiner’s lectures on economics, we realized that the community of participants in the RSF Social Investment Fund were best suited to accurately determine a price that meets the needs of all parties.

Innovation

As of October 1, 2009, RSF adopted a community determined rate recommended each quarter through collaborative conversation with representatives of all three stakeholders in the RSF Social Investment Fund – investors, borrowers, and RSF staff.  A 4% spread (used to fund RSF’s operations) is then added to this customized SIF rate to determine RSF Prime, the base rate for borrowers in our Social Enterprise Lending program.

This collaborative process begins at each of our quarterly Pricing Meetings where stakeholders gather to meet one another face-to-face, discuss their needs and intentions, and share how an increase or decrease in the rate might impact them.

To date, we remain the first and only lending institution that has facilitated meetings between investors and borrowers to determine loan pricing.  With RSF staff at the table facilitating the conversations, all three stakeholders are reminded of the impact of their financial decisions. In this environment of direct engagement, the conversation is elevated beyond efforts to pay as little as possible or earn as much as possible. Instead, the stakeholders seek to achieve a balance between the financial and impact needs of everyone present.

Over 100 guests joined us for a community reception following our most recent pricing meeting in San Francisco.

Over 100 guests joined us for a community reception following our most recent pricing meeting in San Francisco.

Impact

In 2012, RSF Prime decreased by 0.25% to 4.75%. This was the first decrease since RSF Prime was first established. Since 2012, the rate has dropped an additional 0.25%. The driver behind the decrease was to ease some of the financial burden of existing borrowers and increase RSF’s ability to attract new borrowers.

Perhaps not surprisingly, at our most recent pricing meeting in San Francisco, there were requests from the investor community to increase the rate. However, over the course of the evening, their understanding of the impact of the interest rate shifted from their natural self-interest to an understanding of the whole system.

As one RSF staff member who attended the meeting commented, “One of the significant moments came when one of the borrowers talked exactly about how an increase in the interest rate would affect her company financially, and prohibit them from making a key hire at a time when her company needs additional staff to support growth. Investors could see in no uncertain terms the consequences of their stated need for a higher return. The resulting recognition of how their interest was directly connected to the borrowers was a transformative moment.”

In fact, although most of the investors noted that they would like an increase in the interest rate, they decided not to recommend an increase after learning how it would negatively impact the borrowers. At one point, one investor became emotional while expressing just how much it meant to her to be a part of this community, and learn more about how each borrower is having a positive impact in the world.

The borrowers were also touched by the conversation. One participant reflected, “It is thrilling to be a participant in the avant-garde of social finance. The current system is broken and we applaud this process where a more sensible and holistic paradigm can be practiced.”

Before the close of any quarter the RSF Pricing Committee, an internal RSF team, meets to discuss and reset the interest rate. The committee considers the input from the Pricing Meeting attendees in addition to reviewing macroeconomic conditions and the competitive market. The committee determined that the interest rate will remain the same for Q3 2013 – 4.5% for RSF Prime and 0.50% for investors.

Jillian McCoy is Senior Associate, Communications at RSF Social Finance. 

7 Tips for Social Enterprises Looking to Raise Capital

July 2, 2013

Originally published on The Huffington Post

Don Shaffer - Defaultby Don Shaffer

Raising growth capital is a challenge for most businesses, but social enterprises face an extra hurdle–they have to show how they’re going to maximize their positive impact and demonstrate the qualities investors generally look for, including a strong management team, a unique approach to the market or problem, and growth potential.

What does it take to succeed? Based on my experience as an entrepreneur and now a social enterprise funder, these seven strategies–a mix of fundamental business building and savvy approaches to fundraising–will put your enterprise in the best position to get the capital it needs to realize its vision.

1. Build a stellar management team. Just as real estate is about location, location, location, raising money is about management team, management team, management team. The first question funders have is “Who is running the business and what do they bring to the party?” Do a ruthless assessment as early as possible. And if you have a gap, say so. Don’t force funders to hunt for weaknesses in your organization–it makes you look bad.

I recently met with a potential borrower that gave us no information about the management team other than their names. They have a couple million dollars in revenue and it’s a pretty complex business for the size–and they botched their financials to us. The business was a perfect fit for us, but it made us nervous that they not only didn’t seem to have a finance person, but also didn’t seem to understand that it was a problem.

2. Ditch the 70-page business plan binder. Funders don’t want to plow through that, and they won’t. Go with a one-pager that focuses on the top questions on the funder’s mind: Are you addressing a real problem? What’s unique about your business? Why you? Is this a growth business or a lifestyle business?

3. Have a practical plan as well as an inspiring vision. This applies to impact growth as well as financial growth. What’s your story about how you’re going to get from where you are now to the next level? Be realistic: if all your graphs zoom up to the right as sharply as possible, a serious funder will think you don’t have a prayer.

4. Seek the right kind of funding for your goals. Social entrepreneurs often buy into the culture of venture capital–they position their enterprise as a growth business, look for a miracle angel investor and start giving away equity. They’re not thinking about how the investor gets their money back. Consider at the beginning what you ultimately want to do. Are you planning to sell this business? Do you see this as a legacy business that you’re building to last?

A long-term, slow-growth plan won’t destroy your chances for funding; you’ll just need to look at different kinds of funding. At RSF Social Finance, for example, we don’t need borrowers to be a rocket ship, as long as they can steadily pay off debt.

5. Search out specialist funders. Dedicated social enterprise funders typically specialize in one or a few areas where they have a passionate commitment and deep knowledge. Look for funders that focus on your sweet spot–they’ll have a better understanding of the market opportunity, and won’t expect your business to compromise its mission in order to grow.

6. Ask for advice–sincerely. Brazenly pitching everyone you meet like a madman is likely to annoy people. Figure out what value you can bring to a discussion, and ask funders for advice. People love to give advice. But as in dating, don’t be desperate. If you’re only pretending to earnestly want advice because you’ve heard this tip, people will see through that.

7. Show that you can go the distance. A funder wants to understand not only why your business is needed and why you’re the one to build it, but also your level of stick-to-itiveness. You could be brawling with your partner and lots of things are going to be a disaster– the point is to tell the funder a couple of things that demonstrate how resilient and determined you are.

Don Shaffer is President & CEO at RSF Social Finance.

 

Impact Investing: The Challenge of Job Creation

June 14, 2013

This is the third post in a series by Morgan Simon on the trends, challenges and opportunities of impact investment, focusing on an exploration of the mechanisms which allow affected communities to lead and shape investments.

What is impact investment? This might be the most important, and simultaneously, most overplayed question of our industry. Forgive me for repeating it; however, it is critical we return to the conversation to consider how communities can better engage in, and benefit from, impact investment.

What should count or not count, and who gets to make that decision? What types of activities deserve subsidized capital in a capital-constrained universe, and which financial institutions should receive your investment dollars? So far, impact investment has been largely defined by investors themselves—the Global Impact Investment Network (GIIN) has put out a general definition, “the intention to generate measurable social and environmental impact alongside a financial return.”  There exists a myriad of investment activities that attempt to generate such impact and return.

One of the primary impact investment activities pursued has been job creation to address worldwide poverty. The World Bank estimates we will need 600 million jobs by 2020 to keep up with population growth globally—and 200 million of these jobs will be needed in developing economies.[i] Small and Growing Businesses (SGBs) , the preferred instrument of impact investors to encourage job creation after microfinance, have been shown to be critically linked to GDP growth and overall poverty reduction in developing countries.[ii]

SGB growth is therefore supposed to help poor people through two mechanisms—it creates jobs, which provide much-needed income, and it encourages GDP growth, which, in theory, supports the overall economic health of a country and reduces poverty.

These arguments have a few fatal flaws that need to be addressed before we can wholeheartedly support job creation as a strategy for global poverty reduction:

  1. We live on a planet of finite resources. By design, GDP cannot grow infinitely.  While in the short-term it’s nice to show impact investors graphs that trend up, you can’t rely on short-term fixes for long-term global solutions. This is particularly important for those of us with a regional agenda, given that one country’s success may mean another’s ruin in the context of a global race to the bottom on wages and environmental standards. It’s imperative that people focused on poverty reduction rethink GDP as a benchmark. It simply doesn’t take in to account all of the variables for truly positive social and environmental impact.

  2. GDP and poverty reduction might grow in tandem; but evidence is inconclusive on its correlation to inequality. Certainly, there are many examples of countries like India and Brazil, whose miraculous growth in GDP did not change the fact that they are ravaged by inequality and host the greatest number of poor people in the world.To take the extreme case, the US has the highest GDP in the world—and in 2012, the top 1% of the US population received 93% of the income growth. Often, SGB development is ultimately an attempt to replicate the US model of a free-market economy internationally. Should we promote a model that enables such extreme inequalities? As one International Money Fund economist commented recently in the New York Times, “When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.”[iii] Indeed, focusing on job creation without an equal focus on equality just reinforces this dichotomy.

  3. Most importantly, poverty is not caused by a lack of jobs; it’s primarily due to the proliferation of low-paying jobs.  Gary S. Fields provides several striking statistics in the great book Working Hard, Working Poor. He notes that globally, 85% of the poor are in fact working.  The International Labour Organization defines a “working poor household” as one in which at least one member is working but the household lives on less than $2 per person per day. The working poor constitute 39% of total employment in the world, and 80% of total employment in South Asia and Sub-Saharan Africa.[iv] Millenium Development Goal data for 2011 shows that 61.2% of people in developing regions were working—and that 18.2% of those working people were still earning less than $1.25 a day, with percentages as high as 38% of workers in sub-Saharan Africa and 35% in South-Eastern Asia.

    Is this employed person better off than his self-employed, equally poor counterpart? Or does he run a higher risk of income uncertainty given that he’s more likely to be an economic migrant with limited access to productive means such as land? I will leave this question to the statisticians, but let’s just assume for the sake of argument that living under $2a day is quite challenging whether you have been paid that $2 or generated it yourself. And I would assume that in both scenarios, your opportunities for advancement are minimal. To borrow a phrase from Fields, indeed, we don’t have a global unemployment problem—we have a global employment problem; in that the jobs we create are precisely what are keeping people poor.

    This is why organizations like the Aspen Network of Development Entrepreneurs have put an emphasis on defining “quality” jobs—and others argue that we should not focus on jobs at all. Recently I sat on a panel with indigenous leader Winona LaDuke—who shared with us, “Lots of people come to the res[ervation] to talk about job development. We don’t want FTEs. We don’t want to leave the res to work for Walmart. We want the preservation of our historic ways of generating our livelihood.”

  4. Employment and assets are very different and critically important. Assets (items of ownership convertible into cash) are based on a variety of factors beyond employment, such as inheritance, home ownership, and education.[v]  While a job may provide a short-term income boost to a household, it would take generations to make up for the asset short-fall that family is facing. Furthermore, assets are better indicators of inequality, including limits to economic, social, and political mobility. For example, the average wage for an African American man in the US is 25% percent lower than their Caucasian counterpart—but the more frightening statistic is that African American families in the US have twenty times less assets than Causasian families. So while a job may provide a short-term income boost to a historically disadvantaged group, it would take generations to make up for the asset short-fall that family is facing; even if incomes are relatively equal in a society. In this context job creation might help address income distribution, but would do little to address asset distribution.

 

Let’s take a step back from job creation to consider what it means to be poor. I define poor as a lack of choice to live life in a way that respects your physical needs, cultural values, social and political context, and familial obligations. This of course varies country by country, region by region, which is why as impact investors I invite us to rethink how we consider poverty reduction to be more than just a simple economic equation.

Let us consider:

-     Rather than income, what if we focused on asset-building for individuals and communities?

-     What if we focused on culturally-appropriate livelihoods, rather than limiting our viewpoint to wage employment?

-     What would it look like if we focused on equality just as much as growth?

Perhaps we would still consider job creation to be an important cornerstone of impact investment. My hope would be that we feel a greater level of confidence that our impact investment dollars were really leading to global poverty reduction and more autonomous communities.

I’d like to offer two of examples of organizations addressing these job creation challenges. First is Liberty and Justice, a West-African company which has a strong focus on livelihoods and asset-building. Co-founder Chid Liberty, a Liberian who largely grew up outside of the country, came home as an adult wanting to address poverty, and the 90% unemployment rate in Liberia. He then built Africa’s first fair trade factory—a clothing manufacturing facility employing 60 women.  These women not only have access to high-quality jobs—they own 49% of the factory, and are being trained to one day run the factory themselves. Investors (including several Toniic members) participate in a US trading company, which partners with the factory and ensures it complies with global quality standards. Chid’s vision was not only to create good jobs for women, but to help close their asset gap.

Another company that has similarly worked to level the playing field for its workers is Namaste Solar, a profitable Colorado-based solar company led by CEO Blake Jones. Their 100 employees are given the option to buy a share of the company, and have an explicit salary scale where the highest paid employee cannot make more than 4 times the lowest paid employee. This activity created a company of co-owners, which has significantly reduced turnover and helped drive profitability. Their recent investment round was oversubscribed. ­­

Who are the others like Chid and Blake? What projects have you seen that create high-quality jobs, livelihoods or grow assets while also creating viable returns for investors?

Morgan SimonMorgan Simon is the co-founder of Toniic, a global network of early-stage social investors. Toniic members share deal flow, due diligence and monitoring on global investments in this action-oriented community looking to move $100 million into global social enterprise. She is also the co-founder of Innovacion Investments, the first community development venture capital fund in Texas, and was the Founding Executive Director of the Responsible Endowments Coalition, leveraging the $400B managed by US colleges and universities. In all her work, she emphasizes community empowerment, leadership and ownership.

Thank you to Allison Basile, Grassroots Business Fund, for her contributions to this post.

 


[i]  IFC Job Study Report: Assessing Private Sector Contributions to Job Creation and Poverty Reduction; January 2013 http://www1.ifc.org/wps/wcm/connect/d3b612004e3468c783d5ab7a9dd66321/IFC_FULL+JOB+STUDY+REPORT_JAN152013_FINAL.pdf?MOD=AJPERES

[ii] Poverty Reduction through Job Creation and GDP Growth: Understanding the Potential for High-Impact Entrepreneurship http://www.endeavor.org/blog/fight-poverty-move-the-gdp-needle/

[iii] http://www.nytimes.com/2012/10/17/business/economy/income-inequality-may-take-toll-on-growth.html?pagewanted=all

[iv] ILO, Global Employment Trends, January 2011

 

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