A new model for investing in “social”
I had the pleasure of sitting on a panel last night sponsored by GoodCompany Ventures, a very interesting shop that helps entrepreneurs with a “social investing” (but not necessarily a non-profit) mission get their start with advice, mentoring, and sometimes capital. I sat on the panel with some outstanding thinkers including Jacquie Novogratz (Acumen Fund), Fred Wilson (USV), Jacob Gray (Murex Investments) and Scott Edward Anderson (The Green Skeptic). I had never spoken on the topic of “social investing” before and, quite frankly, didn’t exactly know what it meant except I that generally thought of the term as pejorative from an investment perspective. Social investing? This means not really generating attractive returns, right? Well, after last night’s discussion and thoughts that came to me on-the-fly during the debate I have a very different perspective on what this burgeoning asset class really means, and how it has the potential to change the world in an array of positive ways.
First of all “social investing” is a really dumb term. If you’re going after conventional for-profit investors the social moniker will kill the pitch every single time. Fred Wilson raised an interesting point about the difference between short-term and long-term profit maximization. He is personally willing to take the long view on building an attractive, sustainable business even if its goal isn’t maximization of short-term profits (read: Etsy). And, in fact, he cites personal examples of companies that have been short-term profit maximizers that flamed out because of unhealthy business practices. But I think the issue is more fundamental than that. Many of the companies being incubated by GoodCompany or funded by Jacquie’s Acumen Fund wouldn’t make the grade even on the terms Fred laid out. It’s not strictly a short-term/long-term issue. It’s an issue of how you define capital and return.
My hypothesis is that we need a whole new regime for quantifying the value of businesses that have goals other than strictly financial profit. We need hard numbers - real metrics - to demonstrate the value of initiatives that create value for society beyond the payment of staff and the generation of profits for shareholders. For instance, Jacquie brought up the example of a company Acumen funded that provides treated mosquito netting for families in Africa. These nets provide people from getting malaria, saving enormous amounts of money on acute health care and work time lost, while insuring economic productivity among the youth for their lifetimes that otherwise could have been cut short by infection and disease. These benefits are able to be quantified: we have the economic data to do the crunching, and the econometric modeling techniques at our disposal to quantify the ROI of these investments. But the “R” - the return - isn’t simply financial profit: it’s economic utility, real benefits being enjoyed by society. These are the terms we should be used to define the benefits of this kind of investing - this asset class - which really does need to be viewed as an asset class separate and distinct from businesses principally focused on financial returns.
So if the appropriate measure is economic utility (which encompasses both financial and social profits), how should these businesses and initiatives be funded? I would argue that it should tap into capital from two key sources: Government and funds that have traditionally gone toward conventional philanthropy. Fishing around in the traditional for-profit pond is a waste of time: utility in this sphere is generally uni-dimensional - profits first and last. Let’s be honest. Investing in this asset class has the potential to generate traditional financial returns, but they are tenuous. And if this is the benchmark by which capital is allocated among projects, many critical projects will go unfunded because the measure is wrong. So if we can all shed the stigma of “social investing” and acknowledge that you can still “invest” and “do philanthropy” at the same time, I think it would go a long way towards improving the messaging of this vitally important asset class. I see this approach as addressing the capital allocation problem among philanthropies. By taking a disciplined, numbers-based approach to quantifying cumulative benefits, it will become increasingly clear which businesses with a social mission should attract investment capital and which should not. It will no longer simply be a marketing issue, but one grounded in logic and reason. Will some projects go unfunded that would otherwise have attracted capital because of its PR? Yes. But will many more important projects get done that otherwise would have gone unnoticed because they might have a low Q score but massive economic utility? For sure.
These are only my initial thoughts on this topic. I will definitely be applying more mental cycles to these incredibly important issues. I’m looking forward to both stimulating and participating in this critical dialogue.
