The Social Capital Markets 2008 conference was held last week in San Francisco and had an impressive turnout. I couldn’t stay for the whole event but just long enough to come away with one good insight worth sharing, and one good question worth exploring with you. Before jumping in, I should remind everyone of the basic premise that gave rise to the conference: An increasing number of people want to manage their money to maximize financial return and social impact. By adding impact to the traditional risk and return tradeoff, investing becomes a lot more complicated. Without the research, performance history and social financial services infrastructure in place, this field is still in very wild and hostile territory. For some present-day pioneers without a real Wild West to explore, this is simply exciting. For most, it’s still not somewhere you’re willing to go with your own money, especially in today’s market. How much money do you really have invested in these funds?
Insight: People are much more attracted to a fully paid-back donation than a high-risk, low return social investment.
For all those social entrepreneurs looking to disrupt the financial system with a blended value financial services company, I’d recommend looking at the most important decision that Kiva.org had to make before launching: whether to offer their lenders zero percent interest loans (no profit) or low interest rates loans (for-profit). They chose the former primarily because it would allow them to launch right away without a lot of investment and time into regulatory compliance, but it was consistent with a more important communication and branding decision: The Kiva experience is perceived by most as a fantastic donation, not as a fantastic investment!
The point is that when we sit down and try to convince others that investing for return and impact is viable, some people get it on an intellectual level, but it’s still not an easy sell. We desperately need people to push this blended value investing field forward, but it’s still very far from coming together. We are much closer to a tipping point in getting people to allocate their philanthropic monies towards high social impact initiatives that have a high probability to repay in full. Kiva trail-blazed the way with a good model that does just that, and there are many more models out there just waiting to be offered to the public (disclosure: I’m working on one now for socially relevant blockbuster films!). Smart entrepreneurs—especially social entrepreneurs—are advised to start picking the low-hanging fruit.
Question: Is blended-value investing going to grow the pie or displace pure philanthropy?
Most people argue clearly that blended-value investing will grow the pie. Trillions of dollars are traded daily in the financial markets while only approximately $300 billion is donated annually in the US so tapping into the financial markets must be the answer to all our problems. In fact, as an MBA, I subscribe to this rationale myself; but this sort of thinking misses an important consequence. Leaving aside religious and education contributions, the strategic philanthropists who think the hardest about maximizing their impact per dollar invested are quickly realizing that their money goes a lot farther if they get it back in six months and can reinvest it again in the same good social program. If this is the case, very good organizations without any self-generating revenue stream are going to be increasingly hard-pressed to raise money from strategic investors (most foundations and intelligent philanthropists). They will be crowded-out by social enterprises that can pay back donations. The results will be that legacy organizations will slowly be forced to evolve themselves to have a revenue model or be displaced. In many important cases this could be very destructive and deleterious, but in most cases it will probably strengthen the social sector considerably.
Lloyd Nimetz founded the online giving market HelpArgentina.org. While pursuing his MBA at Stanford Graduate School of Business, Nimetz has focused on for-profit business models that address social challenges. This summer he will launch a payments platform for India’s bottom billion.