The Good Capital Project will convene for the first time this June in New York City. This new SOCAP initiative will bring together a cross-sector collection of experts, practitioners, industry leaders and other stakeholders to drive greater collaboration and accelerate capital flows into purpose driven investments.
In the months leading up that event we will be interviewing key pioneers and leaders in the impact space who have partnered with SOCAP to help make the Good Capital Project a success.
John Kohler serves as Executive Fellow and Sr. Director of Impact Capital at Miller Center for Social Entrepreneurship. He is co-founder and Director of Toniic. He is an active impact investor and leads impact manager training for ANDE. Kohler brings his experience with technology companies, start-ups, and 15 years in venture capital to his role at the Miller Center. He recently published a report through Miller Center entitled: “Total Portfolio Activation for Impact: A Strategy to Move Beyond ESG” and has several previous publications on impact investing.
What led you to become involved in The Good Capital Project?
I received an invitation from Kevin Jones whom I’ve worked with to generate content and thought leadership for SOCAP. The Good Capital Project will be an expansion of the scope and perhaps leadership that SOCAP provides to the sector. The connection of money and meaning has been the byword for everything that SOCAP has done. It has been localized to a major event on the west coast. They’ve had some SOCAP sessions in Europe in year’s past and some convenings on the East Coast through the Impact Hub. I think that the idea of Good Capital is really an evolutionary jump, saying look, let’s bring the key stakeholders not only from capital deployment, but also from measurement and from capacity development, and include a strong international voice. From a practice standpoint, let’s talk through how we move beyond the wonderful, but siloed efforts into more coordinated efforts in the impact sector.
Why is Collaboration in this Industry so Important?
The practice I’ve seen within venture capital, involves a more uniform approach in terms of the capital deployment to support start-ups, the objective to create significant value and become rewarded for undertaking the associated risks. There is also more homogeneity with the investment tools employed, which is primarily equity, and the single minded nature of portfolio assembly. In other words big markets, disruptive technology, and global expansion.
In contrast, the impact investing sector is comprised of a much more heterogenous group of stakeholders, some coming from government development programs, such as DFID and USAID, and some program related support coming from foundations and corporations which address stubborn problems of poverty such as eradication of diseases, or providing maternal care, education, food security, and so on. Some of the participants want to help small businesses grow in certain communities as a different approach to solving poverty. And some are motivated by the fact that the next two billion people on our planet will be added in base of pyramid markets-and they see that as a huge opportunity. So there are many different stakeholders here. The wide variety of actors, intentions, desired outcomes, and forms of capital, amplifies the need for collaboration.
In terms of capital tools that can be used, we have many different forms that reflect the nature of each impact sector participant. These include grant capital or concessionary loans, program related investments (PRI), and traditional investment capital. The actors and the form of investment they employ need to learn how to ‘play’ together nicely. Because we are usually working in less than fully developed economies, we often have less than fully developed efficiencies of scale. There are any number of issues affecting start-up success, such as bad monetary policy or regulatory mishandling or sudden changes in import/export bonds or currency devaluation…etc. which can make it more difficult rather than easier for small businesses to develop. Consequently, social enterprises need a longer gestation period than might be expected in New York or London. They need more hand holding, or what we would term business support, and all of these stakeholders are playing a role in ultimately determining what could be successful. This is another reason why I think that collaboration is needed.
What are the Three Biggest Challenges Facing the Space?
We need to identify the appropriate capital to support an investment-ready enterprise. We need to recruit both or help develop both. That is the first challenge. That marriage is still rough. We often have a lot of mishandling with expectations held by both the entrepreneur and investor. This results in skittish investors and a longer fund-raising cycle for entrepreneurs. I often ask our entrepreneurs this question: “Is the promise you are making to your prospective investor one that your business model will allow you to keep?” The answer is often “no”.
The second big issue is to get reliable return of capital. If the thesis with impact investing is to used business and market building mechanisms to create prosperity from within underserved communities and solve some of these problems like access to water, electricity, or food security, then we have to demonstrate a ‘round-trip’ of that invested capital. At this juncture, reliability of return is more important than absolute return. Developing more investment-ready start-up businesses and utilizing more appropriate investment tools like risk debt or variable payment obligation (VPO) structured exits will help increase the success ratio of impact investing.
A third challenge is that we need a simple set of consistent metrics for the impact being earned. I think a related challenge is to not allow impact to become green-washed. The way we get meaning with a “capital M” is to measure it with a “capital M” in a way that is very easy to do verifiable, and with a distinct outcome that stands above lighter definitions of “impact” that we sometimes encounter.
What are the Three Biggest Opportunities?
First, we need to invite in, or shepherd in, new actors who are already showing signs of interest, including people from the INGO community and people from mission based organizations (from Pope Francis on down) who want to move beyond ESG and take a direct role in helping create beneficial outcomes through impact investments. Additionally, more traditional financial advisors who are coaching high net worth clients or asset owners who are running a family foundation and want to understand how they might organize a portfolio of 100% impactful investments need to be invited in. So that is an opportunity to bring in people who might have used a different tool in the past (philanthropy), but in their hearts and in their actions, they have the same objective and now they want to embrace impact investing.
The second opportunity is to concentrate on some of the game changing or leap-frog technology developments. These are technology innovations that allow poorer communities to avoid large infrastructure investments that have been holding up progress such as implementing electrification, water distribution, last mile health services…etc. How do we use some of these technologies to put in micro grids for electrification or micro-insurance for income protection against crop and climate disasters? We’ve seen that already happen with mobile money services where we’ve been able to skip having banks build brick and mortar branch offices and instead jump right to the ability to have depository services to cell phone accounts and later to be able to have credit access in those same accounts and institute a form of banking that heretofore hasn’t existed. So, there is an opportunity there to keep on that innovation path because very many revolutionary developments are being thought of that can help poor communities jump into being included in the global economy.
The third opportunity is making sure that, in our own efforts, we don’t forget there are a lot of young people who are starting from a values orientation versus from a “how do I make a lot of money and build my career” orientation. Today’s students are really well prepared. They are amazing young people and they begin their careers with a values orientation. They want to vote their values first before they vote their income. Income is secondary to the type of job they choose. If we cater to, or at least include, this current generation then I think we will see a lot of motivated young adults who have bright ideas that will help the other two opportunities come to fruition.
What would you most like to see come out of The Good Capital Project ?
Well, it is very ambitious endeavor which is great because incrementalism isn’t going to move the needle here. So what I would like to initially see out of the Good Capital Project is a discussion where we rethink a coordinated approach to existing problems in a way that gets the actors working together.
There could be emphasis on best practices and there could be an identification of six or seven key initiatives which Good Capital would start working on. My hope would be that rapid progress is then achieved through formation of sub groups of interested and motivated parties.
Have the foundation of Good Capital be organizations that can fund or lend effort or talent to take the best of what we are doing today, rethink it and try to create much more efficacy. Whether it is achieving greater, more reliable capital or inventing new instruments or deciding on and really promoting a simple but effective and accurate measurement tools, the goal should be an evolutionary blueprint that we can all buy-in to. Whether we are looking at new instruments to allow for better capital or layered capital to allow different investment capital that have different objectives some might be development directives some might be return objectives to participate at the same time. Whether we have simple but effective measurement space on Sustainable Development Goals (SDGs) or derivative works on the SDGs and ways of gathering that in the lean data way, such as Acumen is talking about. Whether we tackle how do we have a shift of the deal generation and support for impact investments come from the global south as opposed to driven by the global north. Any number of conversations that we have could flip the game in our favor so that is what I am hoping for.
As a Key Leader in this Space, is there Anything you are Working on that you are Particularly Proud or Excited About?
At Miller Center, for the past many years, we’ve taken an integrated approach–we’ve had a social entrepreneur facing aspect to our work and an investor facing body of work. We also enrich the educational experience of the students that are at our university through our programming, but the work is all very practiced based. So what we’ve learned with our entrepreneurs we feed to the investors and what we’ve learned from investors we feedback to our entrepreneurs. We’ve been very active in this way and I think it positively informs our perspective in terms of the true needs and nature of entrepreneurship around the world. We have paid particular attention to achieving investment readiness for the enterprises that come through our programming.
The second development is that we’ve pioneered different forms of investment other than equity. We love equity in Silicon Valley. We love using equity as a tool. But it is not always the best tool with social enterprises. One of the topics we’ve been presenting at SOCAP over the past couple of years has been how to rethink capital formation for social entrepreneurship, where risk capital can be more widely available while increasing the likelihood of successful investment return. We also like to promote impact capital as ‘continuous flow’, from philanthropy to investment return. Too often we see investor mind set rooted in one or the other pocket and not imagining that there is investment opportunity that lies in-between. This can restrict the amount of impact capital that participates with our entrepreneurs. Developing confidence building ways of investing such as new tools or impact across asset classes will help the interested but hesitant capital that sits on the sidelines today.
Finally, I think there is always a rapid and innovative set of ideas that come up every year. We are happy to have Miller Center participating in the Good Capital effort.
Original Story: Socap Capital Markets