Most of us who consider ourselves world-changers place our personal financial assets into two distinct buckets: investment capital and philanthropy. Investment capital includes money that we put into real estate, pension funds, stocks, bonds, and the like. When we make these investments, we weigh the risk and the potential reward, and balance the two to maximize return. Then we set aside philanthropy dollars to donate to those organizations that we believe in, and hope can make a difference. Most typically we donate our money with a completely different set of criteria than what we used to invest.
A third category of personal asset management is emerging, and it blends our concept of investment capital and philanthropic giving. On the cutting edge of this trend sits Good Capital, a fund management firm increasing the flow of capital to good -- blending investment, business, and philanthropy.
Good Capital is raising a $30M fund "Social Enterprise Expansion Fund" this year to make investments in about a dozen for profit and nonprofit social enterprises. It offers a financial return to investors who want to fund social change, and are willing to sacrifice conventional market rate yields to do so.
The principals behind the fund bring a solid background in social enterprise. Timothy Freundlich is well known as the director of strategic initiatives for Calvert Social Investment Foundation (which is interested in Good Capital for its R&D value and has given Freundlich license to grow the enterprise while he keeps his Calvert post). The other two principals are Kevin Jones, a serial entrepreneur best known for the founding of Net Market Makers, who has also been on the boards of Social Venture Partners International and Social Enterprise Alliance, and Joy Anderson, president of Criterion Ventures, who has worked for over a decade to launch social purpose ventures.
Anderson does not shy away from the unique features of a risk capital social enterprise fund. "Doing good often costs something," she says to me frankly. For that reason, Good Capital does not promise its investors returns expected by traditional venture funds. Nevertheless, the fund is looking to return principal plus an "appropriate return" to its subscribers. "We want to enable individuals to recycle their philanthropic gifts," Anderson explains. In so doing, the fund is filling a critical capital gap for enterprises where there is friction baked into the model that scares away less committed investors.
She compares it favorably to the increasingly popular microfinance funds that allow investors to see the impact of their investment, and then watch it get recycled for ongoing virtuous benefit. It also picks up where Calvert Community Investments leaves off (a fund that Freundlich helped build).
Good Capital is on target to close $7.5 million in the first quarter of 2007, and will invest those funds immediately in a diverse portfolio. When asked the kind of enterprises that will be the recipient of its funds, Freundlich points to Evergreen Lodge, a for-profit resort lodge located just outside of Yosemite National Park that places a priority on hiring at-risk low income youth. Evergreen is seeking a capital investment to replicate its successful operations - it created nearly four million in revenue with an EBITDA of $1.1 in 2005 and grew those numbers in 2006 (final results still outstanding).
As the Evergreen Lodge example suggests, Good Capital targets enterprises that are generating healthy revenue streams and offer a sound business model that ensures the sustainability of their operation. But where Good Capital really diverges from the pack as a venture fund is its willingness to invest in nonprofits. Freundlich emphasizes that, at the moment, nonprofits have a hard time finding capital to fuel their expansion plans because it is considered too audacious for most philanthropic foundations, and too risky for debt from foundation program related investments or social investment capital from funds like Calvert Community Investments.
An example of a nonprofit that Good Capital likely would fund, according to Freundlich, is Commonwealth Care Alliance, a nonprofit, health care system operating in several regions of Massachusetts. Its mission is to provide personalized care to people with special health care needs, primarily low income elderly populations. Commonwealth generated $12 million in revenue in 2005, with an EBITDA of $856,000. It's projecting a four-year revenue growth of 140%.
Investing in a nonprofit raises the obvious question: How will the investor ever see an exit? Good Capital expects to play the role of a niche merchant bank down the line, refinancing their positions to foundations and/or private investors once much of the expansion risk has been eliminated. "Admittedly, we're counting on a trend of maturity and adoption of new investment models in the philanthropic community," Freundlich tells me.
Good Capital is as much a symbol of a new wave of investment as it is a catalyst. Expect to see both individuals and investment funds blend their values with their asset management. I expect to see this concept of a "third pocket" - as Anderson describes it - that blends savvy investment with passionate enterprise. I will have my market-yield investments for personal security, philanthropic gifts to aid the vulnerable and urgent, and my social enterprise investments to build sustainable institutions in the middle. If this third pocket proves viable, it would be a godsend to enterprises that use innovation to better the environment and social living.
|
