Monday, October 26, 2009

Good Capital: Innovation In Socially Conscious Investing-Part I

Last August, I interviewed Kevin Jones of Good Capital for a story for Case Western University's Weatherhead Schools of Management's Center for Business as Agent of World Benefit. BAWB is hosting a World Inquiry into stories of successful business innovations that are making a positive impact on society and the environment. Good Capital is a true example of just such a business innovation. This is Part I, the description of the innovation.

A San Francisco based investment firm, Good Capital is mixing up the ingredients of socially conscious investing in bold and dynamic new ways. In the process they may end up changing the whole face of philanthropic investment.

GoodCap, as it is often referred to, is leading the way in socially conscious investing b
y making available capital to promising and innovative social mission and profit making enterprises as well as to non-profit organizations with earned income.

Good Capital’s first financial product, the Social Enterprise Expansion Fund, has already provided much needed financing to established enterprises that are ready to scale up their business and expand their impact on their social change programs. GoodCap acts as venture firm that is actively involved with their investees by providing them with the expertise, knowledge and strategic advice to help them better realize their social mission objectives while increasing their bottom line.

The pioneering firm has undertaken a daring task: a commitment to their investments but also, perhaps more audaciously, to the investors as well, providing them with the opportunity to realize solid financial returns while investing in philanthropic endeavors. In such a way, Good Capital hopes to fuse profit with social change.

The founding principals, Kevin Jones and Tim Freundlich, met back in 2004. Jones had enjoyed success in a number of his own startups, including non-profits, and already had extensive private investment experience with a range of technological and social enterprises. Freundlich too had long been involved in the social investment sector, particularly in the development of socially responsible funds and financial instruments.
Together they started to explore the sort of funding available to social enterprises in need of growth. As they learned, numerous foundations offered grants to startup ventures with a viable concept, but none gave the growth capital needed to sustain and develop them.

They also researched the other side of the equation, checking to see if potential recipients existed. As Jones recalls, “This was 2004 when we started looking at it, did some research about demand to make sure there were enough social enterprises ready for that kind of capital. We spent about nine months in seeing what the demand by the entrepreneurs was, and whether it was far enough along for these kinds of resources.”

Immediately they realized that such a need existed, and so they set out in search of capital to launch the effort. They encountered, however, more than a few raised eyebrows. The idea of socially conscious organizations yielding profits for the investor was unconventional, to put it lightly. Kevin Jones describes the challenge of persuading one potential backer: “We were pitching a potential investor, a successful telecom entrepeneur and he loved our story. He said, ‘I love what you do, and I would give you ten million dollars, but I just can’t think like that. Investment is this; giving is that; and you are in this middle space. My head hurts!”

At last, though, Good Capital raised a few million dollars, and in April 2009, made their first round of investment, initially devoting $2 million, and then later another $2.5 million, to Better World Books, an online vendor specializing in used textbooks. Better World Books was at that point the first such company with a triple bottom line: selling used books, utilizing profits to support literacy programs, while also benefiting the environment by sparing millions of books from landfills.

Following that, Good Capital made their next investment move with $1 million for Adina for Life Inc., a company that produced organic and Fair Trade coffees and teas, as well as beverages made from fruit and plant-based ingredients founded on traditional recipes from around the globe.

In truth the idea of a socially responsible investment is not entirely new. Its early form favored companies that did no harm. More recently a new vogue has emerged: investing in companies that pursue socially responsible business policies. Now as philanthropists look to create the maximum impact with their donations, social philanthropy groups have proliferated rapidly, awarding grants to non-profits or social entrepreneurs. This is the milieu into which Good Capital has injected their dynamic innovation. Good Capital not only seeks to lead the in the creation a new way of investing in social ventures but in changing the mindset within the social investment sector by proving that philanthropically motivated investing can be as rigorous as any other investing. As Kevin Jones said: “That idea challenges people. We want to push the envelope the space between giving and investing is real and valuable and we want to change the way people think, (alluding to the potential investor) we want to make their head hurt.”

As Good Capital takes very seriously the investment potential of their funding, by looking to invest in and help grow businesses that can provide a return when they are sold. In spite of some scepticism they are already, as Jones put it: "doing embarrasingly well. " Yet they have one stipulation, that is, when the businesses are sold, they will not be selling out the mission. Kevin Jones reiterated several times, that they do not want to see a business like Better World Books become a Ben and Jerry’s, referring to their buyout by a giant conglomerate, where the social mission goes out the door at the exit. The way they seek to secure that the mission survives the exit is by having the mission “baked into” the business. “So if we sell, when we get a hundred million, which is good for an online retailer, and when buyers come in with their hardnosed look at what they are going to do;the mission keeps the cost low and the mission increases the margin because it’s the core of the brand and the mission might be more likely to survive the exit.” As Kevin Jones stated: “This is quite innovate, it is a new idea that hasn’t been completely explored ."

Good Capital may be in the innovation phase, but already it has "baked" up excitement and infused energy into the worlds of social enterprise and socially conscious investment.

In Part II, we will look at Good Capital's long and short term impact on business, society, and the environment.

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