The Paradigm Project, mentioned briefly in a prior article, is a perfect demonstration of the immense flexibility of the L3C structure and an example of what the right hands can do with this new tool. This organization subsidizes the sale of stoves to communities in need, reducing the amount of fuel, time, and energy required to cook. The reduction in fuel consumption results in the creation of carbon offsets, which are then bulk packed and sold to entities in Europe or the United States. Unlike Vestergaard-Frandsen, the Project was created with social benefit as a primary objective. A group of Wall Street veterans ― individuals with intimate knowledge of the challenges they would face creating a commercial entity ― wanted to create a positive social impact and saw an opportunity in the L3C structure. One of the first 10 L3C’s to register when Utah passed legislation permitting the structure, the Paradigm Project wanted to avoid the pitfalls of the 501(c)(3) structure, avoid the cannibalization of their core entity for project funding, and stand out as something different to investors who wanted to make a sustained and significant impact. They are achieving these goals with a tiered corporate structure.
Their primary L3C operates as a parent company. The Board of this organization oversees the development of subsidiary L3C’s to manage each of their regional efforts. There are currently three of these operations. Two are in development, and one is fully operational. This structure insulates the parent company and allows for freedom in capitalization. The L3C structure enables the subsidiaries to receive contributions from charitable organizations as well as private capitalization. The charitable contributions can only be used for program related investments (PRIs), but access to these funds is one of the primary differences between an LLC and an L3C. To this end, the Paradigm Project has established a 501(c)(3) to take donations and funnel them to different regional projects according to the donor’s desires. The donors can deduct charitable donations made to the 501(c)(3) and the non-profit entity then converts these donations into program related investments.
The subsidiary projects establish organizations according to the domestic laws of their host countries and operate as businesses in those locations. They train workers to market and sell the stoves that they provide at subsidized rates. This involves the community and stimulates economic growth in other ways. The stoves they provide create carbon offsets through a significant reduction of fuel needed for cooking. They also decrease the time necessary for cooking and through the diminution in fuel needs reduce the time devoted to gathering wood. The benefits to the community manifest as rapidly as the stoves can be distributed. The Paradigm Project handles the 3rd Party verification and registration of the Gold Standard offsets they create, and then Blue Source, an affiliated entity, markets and sells those offsets to American and European organizations seeking to reduce their respective carbon footprints. Blue Source keeps a commission, but the net proceeds are then returned to the Paradigm Project for distribution to the subsidiaries.
They plan to begin distributions to their investors once the project in question breaks even. Each investor purchases a 10-year equity position with an anticipated 15 to 20% return over the 10-year span. The Project just delivered its first set of offsets approximately a month ago and they expect to have a solid picture of sustainability and profitability within three years. Gregory Spencer, a co-founder of the Project noted in a phone interview on February 29th that it is “tough to find the balance between social and environmental impact and company sustainability,” but as the Board of the Project seems to be on the same page, no serious hiccups have occurred.
The Gold Standard carbon offsets the Project is marketing require the most rigorous registration process available currently, so they command a premium on the voluntary market. Image conscious corporations―those looking to make a difference and establish a reputation at the same time―pay top dollar for these particular offsets, and the future for this organization looks bright indeed.
The Project has created a time-savings for fuel gatherers and cooks, generated a cost savings for the same group, helped to establish local business and fuel economic growth in some of the neediest areas in the world, reduced the number of trees cleared for fuel, and figured out how to profit in a manner that is non-extractive. This should serve as a demonstration of the significant value of this corporate form and the remarkable potential it has for global impact given the right combination of cognitive capacity and capital.
For more information on the Paradigm Project, what they are doing and how they plan to accomplish their goals, please visit them at their web site.
Showing posts with label impact investing. Show all posts
Showing posts with label impact investing. Show all posts
Tuesday, April 3, 2012
Thursday, March 15, 2012
Talk on Gender-Based Social Investments and the Role of Social Enterprises
In a talk I attended on March 7, 2012 entitled “How Big Business is Empowering Women and Girls,” I identified three kinds of social enterprises that are not exclusive to women-empowering businesses: (1) investment funds; (2) businesses that embark on separate social projects; and (3) businesses that integrate social purposes into their business models.
As for the first kind, the impact investor and investment fund at the event were Ikatu International and Women Effect Investments, an initiative out of Criterion Ventures. Ikatu invests in businesses that would create employment opportunities for the youth. Women Effect Investments empower a community of women investors to place their assets in a diverse group of vehicles and create new investment opportunities with a gender lens. Social investment funds, like other investment funds, pool capital from various investors and invest them in businesses and financial vehicles. However, unlike traditional funds, social investment funds invest only in those that have social impacts. Grassroots Business Fund, which organization I wrote about a few weeks ago, is also an example of such a fund. These types of investments typically attract impact investors, but they have become increasingly appealing to ordinary market investors who are looking to make good money out of their investments.
For the second kind of enterprise―businesses that embark on separate social projects―the Coca Cola Company was one such example at the event. Large corporations nowadays typically have a corporate social responsibility (CSR) division or funds dedicated to conducting extra-curricular activities, such as Starbucks Coffee, Citibank, and Home Depot. Charlotte Oades, the global director of women’s economic empowerment at Coca Cola, spoke about their recent projects in helping female small business owners in countries like Brazil. Many have argued that the CSR model makes alternative forms of organizations, such as L3Cs and benefit corporations, unnecessary because companies could pursue social projects through a CSR division using allocated funds.
The last kind of enterprise―businesses that integrate social purposes into their business models as opposed to spinning it off into a separate entity―was represented by Vestergaard Frandsen (VF), a Switzerland-based, family-owned company that specializes in complex emergency response and disease control products, such as a mosquito net impregnated with insecticides and a water filter worn around the neck that makes filthy water safe to drink. VF did not start out as a socially driven company. For 40 years, VF was a textile company that made uniforms for hotel workers and retailers. When VF's founder’s grandson Mikkel Vestergaard-Frandsen took over the company, he transformed VF into a company that is “in the business of saving lives” and creates a business model that he calls humanitarian entrepreneurship―one that turns corporate social responsibility into its core business. One of VF’s projects is LifeStraw Carbon for Water that uses the carbon credit market to both fulfill a social mission and generate profit.
All of the speakers agree that one of the most important and challenging issues for social enterprises is to align the values of the management and investors. Jackie Vanderbrug of Criterion Ventures states that there are two kinds of investors: (1) the social impact first investors and (2) financial first investors. To make things more complicated, each investor usually brings in different theories of change and interests. The challenge for social enterprises is to accommodate all of the interests and priorities of the investors and channel their combined funds to investments that meet their needs and demands.
Now, what should people in the legal field take away from all of this? First, I believe that a market-based or business approach to solving humanitarian problems is proving to be more and more popular and effective. But because such approach is still at an embryonic stage, this field needs creative lawyers who can come up with structured transactions, legal structures, and financial products that would facilitate the convergence between business and social impact. For example, L3Cs and benefit corporations are legal structures that many argue could play a very fundamental role in shaping the course of social enterprises. Second, with new structures come new legal questions. Can investments in L3Cs constitute charitable contributions and therefore qualify for a tax deduction? Should social enterprises only be allowed to consider stakeholder interests or should they be required to? In light of these issues, some organizations have found ways to accommodate their needs using existing tools provided by current laws. For example, the Paradigm Project L3C has a sister foundation that obtains donations from people, presumably to allow for tax deductions. Such tandem structure permits fundraising from different pools of individuals with different legal rights as to the legal entities, use of funds, and accountability mechanism. As the field of social enterprises is growing rapidly, so should the number of lawyers working in it.
As for the first kind, the impact investor and investment fund at the event were Ikatu International and Women Effect Investments, an initiative out of Criterion Ventures. Ikatu invests in businesses that would create employment opportunities for the youth. Women Effect Investments empower a community of women investors to place their assets in a diverse group of vehicles and create new investment opportunities with a gender lens. Social investment funds, like other investment funds, pool capital from various investors and invest them in businesses and financial vehicles. However, unlike traditional funds, social investment funds invest only in those that have social impacts. Grassroots Business Fund, which organization I wrote about a few weeks ago, is also an example of such a fund. These types of investments typically attract impact investors, but they have become increasingly appealing to ordinary market investors who are looking to make good money out of their investments.
For the second kind of enterprise―businesses that embark on separate social projects―the Coca Cola Company was one such example at the event. Large corporations nowadays typically have a corporate social responsibility (CSR) division or funds dedicated to conducting extra-curricular activities, such as Starbucks Coffee, Citibank, and Home Depot. Charlotte Oades, the global director of women’s economic empowerment at Coca Cola, spoke about their recent projects in helping female small business owners in countries like Brazil. Many have argued that the CSR model makes alternative forms of organizations, such as L3Cs and benefit corporations, unnecessary because companies could pursue social projects through a CSR division using allocated funds.
The last kind of enterprise―businesses that integrate social purposes into their business models as opposed to spinning it off into a separate entity―was represented by Vestergaard Frandsen (VF), a Switzerland-based, family-owned company that specializes in complex emergency response and disease control products, such as a mosquito net impregnated with insecticides and a water filter worn around the neck that makes filthy water safe to drink. VF did not start out as a socially driven company. For 40 years, VF was a textile company that made uniforms for hotel workers and retailers. When VF's founder’s grandson Mikkel Vestergaard-Frandsen took over the company, he transformed VF into a company that is “in the business of saving lives” and creates a business model that he calls humanitarian entrepreneurship―one that turns corporate social responsibility into its core business. One of VF’s projects is LifeStraw Carbon for Water that uses the carbon credit market to both fulfill a social mission and generate profit.
All of the speakers agree that one of the most important and challenging issues for social enterprises is to align the values of the management and investors. Jackie Vanderbrug of Criterion Ventures states that there are two kinds of investors: (1) the social impact first investors and (2) financial first investors. To make things more complicated, each investor usually brings in different theories of change and interests. The challenge for social enterprises is to accommodate all of the interests and priorities of the investors and channel their combined funds to investments that meet their needs and demands.
Now, what should people in the legal field take away from all of this? First, I believe that a market-based or business approach to solving humanitarian problems is proving to be more and more popular and effective. But because such approach is still at an embryonic stage, this field needs creative lawyers who can come up with structured transactions, legal structures, and financial products that would facilitate the convergence between business and social impact. For example, L3Cs and benefit corporations are legal structures that many argue could play a very fundamental role in shaping the course of social enterprises. Second, with new structures come new legal questions. Can investments in L3Cs constitute charitable contributions and therefore qualify for a tax deduction? Should social enterprises only be allowed to consider stakeholder interests or should they be required to? In light of these issues, some organizations have found ways to accommodate their needs using existing tools provided by current laws. For example, the Paradigm Project L3C has a sister foundation that obtains donations from people, presumably to allow for tax deductions. Such tandem structure permits fundraising from different pools of individuals with different legal rights as to the legal entities, use of funds, and accountability mechanism. As the field of social enterprises is growing rapidly, so should the number of lawyers working in it.
Monday, February 27, 2012
Heart of a Development Investor, Discipline of a Lender
Takeaway: Grassroots Business Fund’s investment in social enterprises throughout developing countries enforces discipline investing using patient capital from impact investors.
Investing in social causes has for a long time remained an oxymoron. But with companies like Grassroots Business Fund (GBF), such investments are becoming real, abound, and very much desirable.
GBF was founded in 2008 by the International Finance Corporation of the World Bank initially as a Grassroots Business Initiative. As way of background, the IFC was created in 1956 as an institution through which private investors can invest in developing countries. Similarly, GBF intends to mobilize private capital from developed to developing countries. Unlike IFC, however, GBF’s investments are in a much smaller scale involving small start-up social enterprises.
In the talk about GBF I attended on February 24, 2012 at John Hopkins University, Harold Rosen, GBF’s CEO, very eloquently shared the company’s business structure and investment strategy. GBF is essentially an investment manager that invests in high impact businesses, which are for-profit businesses that create economic opportunities for people at the base of the economic pyramid. Unlike traditional venture capital firms, GBF incorporates both financial and social metrics to assess its investments, which Rosen stresses to be one of the main challenges in investing in social enterprises. The funds managed by GBF come from various institutions, including Overseas Private Investment Corporation (OPIC), DEG (German Development Bank), FMO (the Netherlands Development Finance Company), and Deutsche Bank. GBF charges a 3% management fee, and its average investment size ranges between $500,000 and 2 million with an average investment span of 6 to 9 years. GBF has investments in Kenya, Ghana, Tanzania, Indonesia, India, Bolivia, and Peru.
Rosen stressed the importance of obtaining patient capital for investment with an eye on development. GBF strives to identify nontraditional investors who are willing to wait for returns to finally kick in. This requires investors who believe in the underlying cause of creating positive impact in the enterprises’ surrounding communities. Such investors are now popularly known as impact investors. Factors that signify “impact” include the numbers of people employed and family members supported.
However, GBF’s typical investment structure in these social enterprises combines equity with debt, which Rosen refers to as quasi-equity or hybrid securities. These investments are debt-type instruments with equity features, such as convertible loans or redeemable structures, that incorporate a current income component. Unlike equity, quasi-equity holders have a known cash flow. GBF distinguishes itself from other sources of funding that Rosen refers to as “soft money”―grants and equity, investors of which do not care much about returns―by characterizing its investment as discipline investing. Through the current income component, these social entrepreneurs are obligated to bring steady investment returns to the investors. The reason for such a structure is to discipline the investees to allocate income on a steady basis, which would thereby affect their business planning, enhance investment accountability, and consequently strengthen their financial viability.
In addition to, or part of, its investment, GBF also provides technical assistance in areas of corporate governance, financial management, operations and supply chain management, environmental and social impact, and human capacity. GBF builds the portfolio companies’ capacity to create, maintain, and use simple management dashboards. By having the skills to build such dashboards, these entrepreneurs can leverage their data to obtain future financing for their high impact businesses.
One final but very enlightening point raised by Rosen: there is more capital out there than social enterprises. It took me several minutes to really understand and agree with him. My guess is that Rosen was not referring to simply any business ventures that call themselves social enterprises; rather, he was probably referring to social enterprises that directly benefit the communities while creating profit, or what our business friends would call reaching scale. The smooth and successful marriage between profits and philanthropy remains a mystery to most.
For the talk’s power point slides and taped talk, visit http://www.sais-jhu.edu/academics/functional-studies/international-development/events/index.htm.
Investing in social causes has for a long time remained an oxymoron. But with companies like Grassroots Business Fund (GBF), such investments are becoming real, abound, and very much desirable.
GBF was founded in 2008 by the International Finance Corporation of the World Bank initially as a Grassroots Business Initiative. As way of background, the IFC was created in 1956 as an institution through which private investors can invest in developing countries. Similarly, GBF intends to mobilize private capital from developed to developing countries. Unlike IFC, however, GBF’s investments are in a much smaller scale involving small start-up social enterprises.
In the talk about GBF I attended on February 24, 2012 at John Hopkins University, Harold Rosen, GBF’s CEO, very eloquently shared the company’s business structure and investment strategy. GBF is essentially an investment manager that invests in high impact businesses, which are for-profit businesses that create economic opportunities for people at the base of the economic pyramid. Unlike traditional venture capital firms, GBF incorporates both financial and social metrics to assess its investments, which Rosen stresses to be one of the main challenges in investing in social enterprises. The funds managed by GBF come from various institutions, including Overseas Private Investment Corporation (OPIC), DEG (German Development Bank), FMO (the Netherlands Development Finance Company), and Deutsche Bank. GBF charges a 3% management fee, and its average investment size ranges between $500,000 and 2 million with an average investment span of 6 to 9 years. GBF has investments in Kenya, Ghana, Tanzania, Indonesia, India, Bolivia, and Peru.
Rosen stressed the importance of obtaining patient capital for investment with an eye on development. GBF strives to identify nontraditional investors who are willing to wait for returns to finally kick in. This requires investors who believe in the underlying cause of creating positive impact in the enterprises’ surrounding communities. Such investors are now popularly known as impact investors. Factors that signify “impact” include the numbers of people employed and family members supported.
However, GBF’s typical investment structure in these social enterprises combines equity with debt, which Rosen refers to as quasi-equity or hybrid securities. These investments are debt-type instruments with equity features, such as convertible loans or redeemable structures, that incorporate a current income component. Unlike equity, quasi-equity holders have a known cash flow. GBF distinguishes itself from other sources of funding that Rosen refers to as “soft money”―grants and equity, investors of which do not care much about returns―by characterizing its investment as discipline investing. Through the current income component, these social entrepreneurs are obligated to bring steady investment returns to the investors. The reason for such a structure is to discipline the investees to allocate income on a steady basis, which would thereby affect their business planning, enhance investment accountability, and consequently strengthen their financial viability.
In addition to, or part of, its investment, GBF also provides technical assistance in areas of corporate governance, financial management, operations and supply chain management, environmental and social impact, and human capacity. GBF builds the portfolio companies’ capacity to create, maintain, and use simple management dashboards. By having the skills to build such dashboards, these entrepreneurs can leverage their data to obtain future financing for their high impact businesses.
One final but very enlightening point raised by Rosen: there is more capital out there than social enterprises. It took me several minutes to really understand and agree with him. My guess is that Rosen was not referring to simply any business ventures that call themselves social enterprises; rather, he was probably referring to social enterprises that directly benefit the communities while creating profit, or what our business friends would call reaching scale. The smooth and successful marriage between profits and philanthropy remains a mystery to most.
For the talk’s power point slides and taped talk, visit http://www.sais-jhu.edu/academics/functional-studies/international-development/events/index.htm.
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