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.
Integrated capital addresses the funding challenges social enterprises face in a number of ways: It allows for longer development times by including some types of investment that don’t need to make a return, such as grants. It gets enterprises through the “valley of death,” where they have a promising business model, technology, product, or service, but need more capital to realize its potential and don’t qualify for traditional financing. And when community foundations and local investors participate, integrated capital creates a community commitment to the enterprise’s success.
Integrated Capital in Action
Viva Farms, a social enterprise that addresses the twin problems of a shortage of farmers and lack of access to farmland near consumers, provides a good example of how integrated capital can work. The farm incubator in Washington’s Skagit Valley works with a mix of highly skilled migrant farm workers who have no access to land or capital, and young, educated urbanites who have little agricultural experience. Viva Farms provides training in sustainable farming practices, small land parcels with shared infrastructure, and marketing support.
The integrated capital approach gave Viva Farms access to funding that would not have been available otherwise. In 2011, our organization, RSF Social Finance, provided a $50,000 program-related investing (PRI) loan for equipment even though Viva Farms had no collateral, because the RiverStyx Foundation made a 100 percent loan guarantee. In 2012 and 2013, RSF provided gift funding for three AmeriCorps positions and a farm manager to coordinate winter education and farm planning programs. A new $200,000 loan for farm stand improvements and additional equipment will involve $50,000 from the Seattle Impact Investor Fund through a revenue loan agreement; $200,000 from RSF; and a loan guarantee from RiverStyx.
This support has allowed Viva Farms to train about 250 people and launch 15 farm businesses that produce on more than 70 acres.
Another prime example is Common Market, which provides a distribution link between threatened Delaware Valley farms and urban communities that lack access to fresh foods, largely through sales to institutions. The enterprise has grown rapidly through a series of integrated capital financings, the most recent one enabling purchase of a $945,000 warehouse space that significantly increased its capacity. Common Market at the time (2012) was not large enough to support the mortgage loan, but RSF was able to fund it with the backing of $350,000 in pledge contributions (which can be called upon in case of default) from W.K. Kellogg Foundation, the Claneil Foundation, and the 11th Hour Project; a $35,000 guarantee from the Common Market community placed as an investment in the RSF Social Investment Fund; a $250,000 RSF Local Initiatives Fund guarantee; and a $100,000 Local Initiatives Fund grant.
The warehouse has enabled Common Market to exponentially increase its product stock, which translates into increased purchases from local producers and more good food for those who need it. Common Market has also used the expanded facility to provide affordable shared space for other food entrepreneurs, creating an ecosystem that reinforces shared values around remaking the food system.
Tearing Down Walls, Opening Up Collaboration
As this work illustrates, RSF has the advantage of being able to draw on a diverse mix of both investment and philanthropic funds under one roof to support organizations we see as models for systemic change. We’re ideally positioned to serve as a laboratory for the integrated capital approach, and we’re taking on that challenge by reorienting our entire funding operation around the concept. We’re finding that it requires we break down the internal walls between investing and philanthropy—a reflection of the need to break down the walls between these sectors generally.
It’s encouraging to see that others are thinking along the same lines. Integrated capital shares collaborative and creative aspects of Nonprofit Finance Fund’s complete capital approach, which brings together financial, intellectual, human, and social capital to help nonprofits succeed, and Pacific Community Ventures’ catalytic capital concept, which recognizes that grants, guarantees, and seed funding can trigger additional financing that otherwise would not have been available to an enterprise.
The fact that we’re seeing this fresh focus on the uses of capital to achieve social benefits tells us that there is a real opening now for vastly greater collaboration between impact investors (individuals, networks, and firms), foundations (community and private), and community banks. As intermediaries working in social finance, it’s up to us to create a finance infrastructure that enables social enterprises—and the communities they serve—to thrive.