Social Ventures: Doing Well & Doing Good.
With entries from:
Steve Guengerich   —   6 years ago

"Social venture entrepreneurship" is the kind of radical phrase that would make Ayn Rand roll over in her grave. But, it's also rather obvious, when you think about it, because what could possibly make more sense than applying market forces and incentives to identifying novel solutions to vexing social problems? While they may seem obvious at a high-level, there are many questions at the detailed, low-level that first-time founders of social ventures must answer.

Should you organize as a B Corp., a nonprofit, or some other special form of entity? What are situations (and the costs?) when it may be justified to have a nonprofit and for-profit with exclusive arrangements between them? Often, social ventures tackle problem domains in which there is significant regulation. What are techniques entrepreneurs can use to be successful in a regulated industry?

Experienced entrepreneurs are invited to share their lessons learned, best advice, and reflections on "if I had to do it all over again" in the world of social ventures.

Joe Milam   —   6 years ago

Benevolence, Purpose & Profit

These are not oxymoronic. Honest.

In fact, we think if just two of these are present angel investors will have invested in a 'good deal'.

Business Angels

There is much discussion about angel investors; who are they, where do you find them, and what do they look for in a 'good deal'. Most of the coverage in the media and online is referencing a business angel. AngelList has done a nice job of providing a service for business angels to go and seek deal flow, invest along side other business angels, network, learn, etc.

The growth of angel groups across the country is in large part the result of more people identifying themselves as (business) angels and seeking like-minded individuals to learn from and co-invest.

The interests of business angels is in large part modeled after the venture capital industry; large market opportunity, quality team, competitive advantage, IP protection, potential for a sizable exit. These are all appropriate due diligence criteria for a 'good deal' for a professional investor - and those seeking to invest like one.

But is that what all angel investors seek? And if not, what does a 'good deal' look like?

My friend Mike Millard - former Director of Research at Austin Ventures - and I had an interesting conversation about due diligence and the ability to identify a 'good deal'. One conclusion we came to was that the due diligence process primarily filters out bad deals, but a 'good deal' won't be known for some time.

Is there a broader definition of a 'good deal' that also broadens the definition of 'success'? We believe so.

First, it is important to define a good deal that appeals to a wider audience of investors. After all, wealthy individuals gave away $77B in 2013 in large donations to non-profits, vs. $27B invested in angel deals. Clearly there are interests beyond just profit that are highly motivating for large amounts of 'smart money'.

And while 290,000 investors made angel investments in 2013, there were 2,000,000 potential angel investors (4,000,000 total accredited investors under the stricter new Dodd Frank definition, with 50% indicating their interest per previous studies done by Jeff Sohl of the Center for Venture Research). 85% of the market is sitting on the sidelines available to get in the arena.

A Good Deal

Mike and I came up with the following definition which we believe covers the full spectrum of motivations, from purely for profit to purely non-profit, and everything in between:

A good deal is where an entrepreneurial team has identified an opportunity to satisfy an otherwise unmet need that will improve the human condition, and can provide a return for those (in)vested in the successful outcome of that opportunity.

This definition was meant to span the full spectrum of agendas: financial return (venture investing), double bottom line (angel and some corporate investing), triple bottom line (angel, corporate, community-based investing), not for-profit (some angel investing, some corporate investing, community investment), and non-profit (angel/corporate/community donations).

If your agenda is purely for profit - as is natural for the professional investor and many of the business angels - there is a growing trend to take 'smaller cuts' at each investment and spread it around - think 'small ball' angel investing. Better batting averages, fewer home runs. Again, AngelList is doing a nice job for those angels wanting to spread their investments among many deals in small amounts through the various syndicates available.

For a more professional - and intentional - application of the Moneyball style of venture capital investing one should explore Right Side Capital Management. Their approach, and performance, would make Billy Beane proud.

Benevolent Angels

But what if your agenda isn't just to make more money. What if you would like to be truly 'angelic' and apply both your business acumen and your philanthropic instincts. Can you still be 'smart' and benevolent?

Absolutely yes. Yes, please!

One could argue that this is in fact one of America's core strengths - to apply business acumen and a sense of purpose. There is no country in history that has impacted the human condition through innovation the way American business has. And there is no more generous group of people on the planet than Americans when philanthropic support, - both domestically and abroad - is measured.

Can we combine the two best American traits and mobilize a benevolent sense of purpose, and profit from successful outcomes? It happens all the time.

Participation, Prudence & Profit

For all but the most profit driven investors, one of the main reasons individuals engage in the entrepreneurial ecosystem, either though advice, mentor ship, or angel investments, it is to participate. Participate in the journey, the act of creation - to live vicariously through the entrepreneur. Unfortunately, entrepreneurs are not aware of the degree participation is a motivation. They believe 'all' (the 290,000 of the 2,000,000 potential) angels want is profit. They overlook the value and importance of including the angels in the journey through proper communication and engagement.

Angels have also been told that a good deal needs to give them a chance for a 100x return, and that any other agenda would brand them 'dumb money'. I doubt $77B to charity in 2013 was given away by dumb money.

What if an investor could invest in a 'good deal' and enjoy both the upside potential of venture capital and the tax deductions afforded non-profits?

In fact they can. Qualified Small Business Tax treatment under Section 1244 of the IRS Code allows for just that.

And should there be a positive liquidity event, some or all the profits can be rolled over pre-tax in a 1045 exchange.

The Ultimate Good Deal Is....

...when an entrepreneurial team has identified an opportunity to solve an otherwise unmet need that can improve the human condition, they inform the potential benevolent angels that they will be included in the journey and pursuit of that solution (through transparent and thorough communication and engagement), yet if their best efforts still come up short the investment can be written off against ordinary income.

But if they succeed, the investors would have in their own way impacted the human condition, been part of the act of creation, and helped the entrepreneur fight the good fight.

And should they choose, some or all of their profits can be 'paid forward' pre-tax.

Now that is a good deal.....and Teddy Roosevelt would be proud of both the entrepreneur and their benevolent supporters for being 'in the arena.'.

Matt Kouri   —   6 years ago

Social entrepreneurs of both the nonprofit and for-profit variety should recognize that they are operating in a truly unprecedented environment.

This emerging solution economy where new business models are being created and new forms of capital are flowing will challenge all of us to think and act very differently.

At Greenlights, a nonprofit organization that is Austin's go-to social sector resource and leader, where I serve as CEO, this has meant us being challenged by our board, our community stakeholders, and challenging ourselves to offer a bold new vision for solving our community's biggest and most complex problems in the eleventh largest US city, Austin.

This vision involves pushing beyond former "comfort zones", introducing innovative processes and services, including:

1. Accelerating many of our region’s most breakout-ready nonprofits through our Accelerator program.

2. Catalyzing systems change and systems leadership through our emerging collective impact work.

3. Engaging philanthropists in exciting, impactful new ways through our Social Venture Partners program.

4. Creating new means of financing great missions though our work on Pay for Success and related social impact investing methods.

But, our focus must remain on actual problem-solving, and on creating the social innovations that will result in problems being solved.

Mission-driven people and organizations must better balance collaboration with entrepreneurialism, profit with purpose, and mission with money if we are to succeed.

Hugh Forrest   —   6 years ago

The Dewey Winburne Community Service awards program represents, in many ways, the heart and soul of SXSW Interactive. It is an important platform for highlighting people who are strongly committed to giving back to their communities -- locally, regionally, and globally.

A few years ago, we decided to change the rules from being an Austin-centric program, to stretching the borders around the world. We believe that raising the program’s scope to a worldwide level was an important step, to show that social ventures -- founded, funded, and operated by people around the globe -- were increasing in steam.

When you talk about the social venture movement, it fits in well with what polling shows the Millennial generation wants: entrepreneurship with a sense of meaning and purpose.

So, the more that we can build the means to encourage social ventures into the SXSW Interactive program -- i.e., ways to reinforce the belief that you can follow your entrepreneurial dreams AND give back to the community at the same time -- then, the more we are comfortable with the direction of the event.

Greg Merrill   —   6 years ago

You can go about embedding a social purpose in your enterprise more than one way. In my case, our firm looked for opportunities that were environmentally impactful at the outset, with social impact being part of our original mission.

But, you don’t have to go about it that way. A business can evolve and, later down the road, develop into a more social-engaged and progressive venture.

The most important part of claiming a positioning that involves being a social venture is genuinely caring about the topic. If you don’t, then it probably won’t take off. So, you must put management and communications systems in place to stay true to what you believe in and are passionate about, on a day-to-day basis, as well as for the long-term.

This includes systems that help you recognize when you may have to cut some strings and wind down or put on hold a part of the business that is only marginally delivering value.

In the final analysis, social ventures are businesses that must be sustained and have growth-oriented paths, just like any other business. So, you have to constantly evaluate those products or services that offer the most potential -- both economic AND green, as an environmentally-focused tech company, in our case.

Kevin Koym   —   6 years ago

While the accelerator I founded, Tech Ranch, is well-known for our education programming, a little known fact is that it was started for social impact. Then, as now, we’re all about supporting entrepreneurs that have new technologies with the potential for global impact.

I call it transformational entrepreneurship. It’s the idea that there’s not only a high-tech component that allows a new venture to scale, but that there is also a social good component, with the potential to have a transformational impact on a neighborhood, on a region, or in the world.

My experience is that, time and again, an entrepreneur becomes more resilient when he or she is following what they care about most deeply – what is really in their heart – by considering the social impact of their work and building it into their startup. The work becomes more meaningful to them and their potential for impact increases. The mission and the plan for making money, likewise, tend to become much better aligned.

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