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image credit: Annies.com

When we have talked about impact investing, it is often in the context of theory, of possibility, and of the past experience of emerging sustainable companies, start-ups, and organizations. But what about the financial viability?

Can your stock portfolio boom while championing corporations who are doing well by doing good?

Annie’s Historic IPO: March 28, 2012

If you don’t think so, don’t mention it to Annie’s, the natural and organic food company whose mission statement is ” to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet” offered its stock to the public on March 28, 2012 at $19 per share and closed at just under $36 per share. The surge continued, with Annie’s (stock abbreviation “BNNY,” an adage to the company’s signature bunny-shaped pasta) shares closed the week posting a gain of more than 80%.

To put it another way, not since LinkedIn’s IPO in May 2011 has a company experienced such a sharp gain on opening day.

Sustainability, In the Open Market

Just like the progress of the new crowdfunding fund bill making headway at the federal level, IPO’s such as Annie’s give the average Sustainability-Minded Sue and Triple-Bottom-Line Tom the chance to be impact investors.

The ability of us as consumers to vote with our wallets as well as our voices reaches a new level when we can plant sustainable stocks into our portfolios right alongside our usual picks. Especially when they are on track to bear fruit.

In Innov8Social’s earlier post, “What is Crowdfunding”, we talked about the concept of raising funds through smaller investments or donations as a capital-raising option for a start-up or social enterprise—and limitations to crowdfunding investment due to securities laws.

That post also outlined the efforts to pass new legislation that would establish crowdfunding mechanisms to support small business, create jobs, and pave new pathways for innovation.
The House of Representatives took on crowdfunding in November

In November 2011, the House took on crowdfunding via the Entrepreneur Access to Capital Act (H.R. 2930) which passed 407-17. You can read the full post about the House’s bill and its key features here.

Now, it is the U.S. Senate’s turn
Last Friday, on December 2nd 2011, the United States Senate introduced its version of a crowdfunding initiative to the floor. Key features of the Senate bill include:
  • entrepreneurs could raise up to $1M from unlimited number of unaccredited investors (without registering with the Securities and Exchange Commission)
  • entrepreneurs seeking to raise capital through crowdfunding must do so through a website and must disclose risks to investors
  • entrepreneurs must incorporate as a business according the applicable state law and must file with the SEC
  • individual investors could invest up to $1000
Unlike the Senate Bill, the House bill enabled a $2M capital raise through crowdfunding. It also specified that individual investors could invest up to $10,000 (or 10% of their income).
The ultimate balancing act: supporting innovation and minimizing risk
While there has been bipartisan support for ushering in new securities provisions to encourage innovation, investment by unaccredited (i.e. non-wealthy) investors, and spur local job creation—there is also concern that we are moving to fast towards a future that can create new kinds of risk for new kinds of investors.

One group voicing their hesitation is the North American Securities Administrators Association. It fears that legislated crowdfunding measures could lead to speculative investment that could be risky to new or small-fund investors.

Read More:
As we discussed in the post “What is Crowdfunding?”, there is a new crowdfunding bill making its way through Capitol Hill that aims to establish an SEC exemption for small investments to provide early capital to small businesses and start-ups.A Quick Look at the Entrepreneur Access to Capital ActThe bill, titled the Entrepreneur Access to Capital Act (H.R. 2930) would let small businesses use crowdfunding mechanisms to:

  • sell unregistered securities up to a total of $2M; and
  • would let investors individually invest up to a total of $10K (or 10% of their income) using crowdfunding
The UpdateThis week has been a big one for SEC reform. As reported by Portfolio.com, on November 2nd, 2011 the House passed Regulation A reform. Specifically the bill (Small Company Capital Formation Act) upped the amount of non-SEC registered stock that small companies could offer to the public from $5M to $50M.And on November 3rd, 2011 — the House made history by progressing the Entrepreneurship Access to Capital Act with its vote of 407-17.

What’s Next

The crowdfunding bill will make its way to the U.S. Senate for vote. If the overwhelming support in the House and President Obama’s endorsement of both bills are any prediction, it seems like SEC reform that could support social entrepreneurs may become law in the near future.

Quarter and PennyWhen you are contemplating how to fund a new social venture, the idea of reaching out to individuals to make small contributions may seem like a good option in addition to trying to secure funding from impact investing firms or established investors.If that describes your view on raising capital, you may already have a better idea of what crowdfunding is than you realize.

What is crowdfunding?

 

Crowdfunding is the process of raising capital through soliciting small contributions from a broad group of people.

As the arena grows, there are 2 main headlining flavors of crowdfunding:

1. Crowdfunding for Donations. A number of websites have successfully created a platform for crowdfunding on a donation basis. For example, KickStarter, IndieGoGo, RocketHub are established platforms allowing individuals to make donations to fund small projects. Similar new platforms in the space focus on niche areas such as making a donation for civic projects (CivicSponsor) or funding conscious media (LoudSauce).

2. Crowdfunding for Investment. Start-ups and small businesses may seek to raise capital using crowdfunding in addition to or in lieu of contacting investment firms or accredited investors. There are a number of laws surrounding such transactions and start-ups are advised to contact an attorney to make sure that there’s no breach in securities law.

What current law says about crowdfunding for investment

Set up a website, create profiles for social ventures, set out terms of the small investments and returns, let individuals small amounts in social start-ups, and you’re set to crowdfund investment, right? Wrong.

The Securities and Exchange Commission (SEC) has strict rules around who can invest in small businesses and start-ups. On the whole, small private businesses seeking funding are required to register securities with state and federal governments—a process that can be pricey and time-consuming.

As a result, small private businesses tend to solicit “accredited investors”, wealthy investors, who can more easily invest in private start-ups. There a few ways to try to steer clear of compliance issues, as were outlined at the Green Business Academy.

 

Crowdfunding petition submitted to SEC

To facilitate crowdfunding for investment, a petition for rulemaking was submitted to the SEC in July 2010 (see petition PDF) by the Sustainable Economies Law Center. The petition sought to:

  • create new exemption for securities offerings up to $100,000, with a limit of $100 per investor
  • exempt securities offerings up to $100 from Section 5 registration and from the extensive requirements imposed on exempt private and small offerings

New crowdfunding law proposed, the Entrepreneur Access to Capital Act

The actual legislation created, titled H.R. 2930 and dubbed the “Entrepreneur Access to Capital Act” (see full text here) includes the following provisions:
  • creates new exemption for annual aggregate individual investments of up to lesser of: (1) $10,000; and (2) 10% of investor’s annual income.

Obama White House in Support

The Obama administration has expressed support for the Act in Statement of Administration Policy issued November 2nd 2011 (read official statement here):

“In the President’s September 8th Address to a Joint Session of Congress on jobs and the economy, he called for cutting away the red tape that prevents many rapidly growing startup companies from raising needed capital, including through a “crowdfunding” exemption from the requirement to register public securities offerings with the Securities and Exchange Commission.”

The legislation recently cleared The House Financial Services committee, and is due for a vote in the House floor later this week.

When you are in the midst of an emerging field, there is often no shortage of related terms and buzzwords. Social innovation is a prime example. Associated words and phrases include:Social innovation IQ

  • social entrepreneurship
  • social enterprise
  • impact investing
  • conscious capital
  • double bottom line
  • triple bottom line
  • social accounting
  • benefit corporations
  • flexible purpose corporations
  • low-profit limited liability companies (L3C’s)
  • hybrid corporations
  • blended value
  • social ventures
  • maximizing stakeholder value
  • doing well, by doing good
  • corporate social responsibility
  • and more….
Terminology, a Social Innovator Does Not Make
Through Innov8Social or various other blogs and resources, you may be (as I am) building your familiarity with key buzzwords in the field. But, as I begin to read books, listen to podcasts, and become more familiar with questions that those outside of social innovation have about the field—I realize that terms and buzzwords may not be enough to achieve the overarching goals of building new kinds of businesses that generate monetary profit while positively benefiting society & the environment.
We Need to Collectively Build Our Social Innovation IQ
What makes social innovation an intriguing prospect is also what makes it complex: it blurs the traditional distinctions between sectors such as financial, government, social, and environmental and seeks to connect them in new ways that align with mainstream business.
Judging by the burgeoning number of social innovation fellowships and accelerator programs available, it looks like more people and institutions are seeking connect with and expand the social innovation arena.
If we are putting out time into engaging and investing ourselves in this emerging field, it may be helpful to build our collective social innovation intelligence.
Components of Social Innovation IQ
Full disclosure, I am not an expert in this field. But as I learn and grow into it, I find myself developing more focused questions about what it will take to succeed as a social innovator and what it will take for the field of social innovation to succeed in impacting the way business is done. Here is my (evolving) understanding of components that can make up a social innovation IQ:
  • Financial intelligence
  • Social & environmental cause intelligence
  • Adversity intelligence
Much of it, I suspect, will begin with understanding the flow of money. Even though capital is one element of the triple bottom line, it is the one that is often most identifiable with mainstream business. Currency is like the electric current that powers machines. Though causes and action often eclipse capital in their reach and karmic importance—to understand that even the most compelling projects will require steady, consistent, and adequate funding is to understand the important role it plays.
Additionally, if we do not have a clear understanding about the history, root, and context of the social and environmental causes we aim to address—we may not be addressing issues in the most effective ways possible. Worse, we may not realize future problems that we are seeding with our best-intention ‘fixes’.
Finally, any start-up entrepreneur will tell you that there can be a fair dose of adversity required to launch and succeed. And, this likely only multiplies when your business is focused on maximizing a triple bottom line (people, planet, profits). We have to be able to identify re-frame our problems, dwell in resilience, and connect with the social innovation community for support and guidance.
What to Read
I am in the process of trying to build my social innovation IQ. I would love to connect with others interested in doing the same. Here are a few books I thought could get the ball rolling:
If this topic interests you, and you are also seeking ways to build a social innovation IQ, connect through the comments below, on the Innov8Social Facebook page, on Twitter, via email.
Legal structure and funding for social entrepreneurs were key topics at the Green Startup Legal Discusson on Day 2 of the San Jose Green Business Academy, with attorneys addressing various aspects of legal set-up for startups. The panelists and topics included:

Glass with coins

Securities Law & Social Entrepreneur Funding
Before introducing key ways in which social entrepreneurs can raise funds, Attorney Jenny Kassan mentioned that current securities laws dictate with specificity how investors can and cannot be solicited.
(note: a security is a form of investment or ownership that can be assigned a value and be traded.)
Securities laws dictate that companies cannot offer or sell securities unless the securities have been registered with the Securities and Exchange Commission (SEC) and with applicable state commissions. And securities laws only allow sale of securities to accredited investors (i.e. those with net work over $1M or annual income over $200K)—unless one of the narrow exceptions apply. (Read more about this on socaltech.com)
Considering the rise of crowdfunding initiatives, a social entrepreneur startup may wonder—how can I raise money by tapping my friends, family, and the general public—who may not qualify as accredited investors?
5 Ways Social Entrepreneurs Can Raise Money
Attorney Kassan highlighted five ways of raising capital in her presentation. (You can also read more on cuttingedgecapital.com).(note: considering the specificity of securities laws, it is probably a good idea to work with your attorney to ensure you’re money-raising efforts are above board)

1. Try to avoid falling under purview of securities laws. For example, offer donations for a perk, lend money without interest, pre-sell product.

2. Form partnerships with local governments and non-profits. An example of this is Mandela Foods in Oakland partnered with a local non-profit to raise funds. Enables joint application for certain grants.

3. Structure the business as a co-op. Most states have certain exemptions for cooperatives, including exemption from securities registration requirements.

 (note: see Namaste Solar co-founder talk about what it is like to be a co-op here)

4. Do a direct private offering, but have a different audience. This could involve offering an investment without public advertising, or raising capital from unaccredited investors using state exemptions.

5. Do a direct public offering. Do full securities law compliance–like IPO but there is no intermediary. This method may enable entrepreneurs to seek funding from broader base of investors.

At the Green Startup Legal Discussion on Day 2 of the San Jose Green Business Academy, the attorney panelists covered important legal issues for social entrepreneurs. Topics included approaches to legal structure, options for incorporation, and funding.

Green dollar bill

Attorneys from Starter Law, a law practice focused on helping entrepreneurs launch and grow their businesses, outlined a few common ways investors fund start-ups. Below are overviews of the funding methods along with notes from the panelists.
3 Ways Investors Fund Social Entrepreneur Startups

1. Convertible notes.  Also known as convertible debt, this is money an early-stage start-up raises in the form of a loan. It usually “converts” to equity (i.e. shares) sometime in the future with a discount (so that the angel investor often pays 15-30% less than the sticker price on each share). Depending on the provisions of the convertible note, the debt may automatically convert to equity when the start-up receives its next round of funding. This arrangement may feature a maximum price per share the angel investor will be required to pay if the convertible debt automatically converts to equity.

Notes from the panel: Convertible notes are inexpensive to set up and do not generally require very complex agreements. They are fairly flexible. Notably, investors are not equity-holders, they are creditors (which only convert to equity by provisions of the note).

2. Preferred Stock Financing. As the name suggests, preferred stocks enjoy preferential treatment over common stock. Startup companies issue preferred stocks to investors, giving the company needed financing and giving the investor valuable stake in the company. Preferred stocks are generally valued higher than common stocks, in scenarios of liquidation or acquisition preferred stocks are paid out first, and preferred stocks often include voting and anti-dilution provisions.

 Notes from the panel: This method of funding gives investors equity in the company, a seat on the board of directors, and all the bells and whistles that come with preferred stock. One type of preferred stock financing is Series A.*

3. Series Seed Financing. Similar to preferred stock financing, investors receive preferred stock in exchange for investing in the startup. Series seed financing generally refers to simplified version of preferred stock financing, which streamlines & expedites the purchase of preferred stock by seed capital investors. This mode of financing may not include some of the protective provisions valuable to social entrepreneurs and impact investors.

Notes from the panel: This financing model is not as complex as Series A and gives some, but not all, of the rights as Series A.

*This post has been edited to accurately capture the points made by panelists. 

Green for All‘s Capital Access Program recently convened a two-day event focused on serving social entrepreneurs. The event, titled the Green Business Academy, was held September 29th-30th 2011, was a no-cost event, and took place at the University of Phoenix campus in San Jose, California—located in the vicinity of two of Silicon Valley’s noted tech & innovation pillars, Cisco and eBay.The Green Business Academy gathered green business leaders, socially responsible (impact) investors, legal experts, and support institutions providing local resources including legal services and mentorship necessary to build a social enterprise.Green Business Academy Day 2: Impact Investor Panel

Green Business Academy impact investors panel

Day 2 of the Green Business Academy in San Jose kicked off with a panel of impact investment firms discussing types of funding resources available to local SF Bay Area social entrepreneurs and how to go about pursuing them.

The panelists included:


5 SF Bay Area Resources for Social Entrepreneurs

The panelists largely spoke about their organization’s focus and resources. Below are key points about each of the 5 local resources introduced.

1. Opportunity Fund (@OpportunityFund) is a non-profit organization that supports local entrepreneurship by providing small business loans to maintain and grow companies. It has lent more than $17M to small businesses throughout California.

Panelist Alex Dang mentioned that Opportunity Funds has primarily served 2 types of green businesses: 1) smaller businesses that have had to go green because of regulatory requirements, and which have in turn formed marketing opportunity with new green business models; and 2) businesses that have chosen to source products sustainability.

You can read about Opportunity Fund success stories from their clients.

2. Hub Ventures (@Hubventures) is a 12-week program providing funding and guidance to Bay area social entrepreneurs, based in Hub SoMa and Hub Berkeley. Participants refine business models and investor pitches and build broader networks through weekly sessions, and compete for $75K in seed funding, as decided by their peers.

Panelist Wes Selke mentioned that Hub Ventures is raising $3M in funding to expand the program.

You can browse through the recent cohort of social entrepreneurs from the last Hub Ventures session.

3. Toniic is an angel investor currently comprised of 30 investors in 5 countries, with 3 global chapters, and is growing. Toniic has placed 18 investments with other $3M over last year.

Investors are interested in funding “tranformational enterprises”–that seek to do well by doing good. Toniic funds social ventures across the globe addressing issues such as poverty and climate change.

You can view selected investments by Toniic.

4. Investor’s Circle (@InvestorsCircle) invests in early-stage social start-ups and works to grow its base of “patient capital” investors. Patient capital investors prioritize external rates of return and optimize internal rates of return. Investor’s Circle hosts 2 social venture fairs per year where entrepreneurs and investors meet to discuss potential investment.

You can read about recent presenters at Investor Circle venture fairs.

5. GreenVC (@GreenEconomy) aggregates news and resources on green venture capital, funding, and startups. It is a go-to place to learn about green incubator programs, green funding resources, upcoming events for social entrepreneurs, and registration discounts.

This blog promises to explore social innovation. And at SOCAP 2011, there was a unique opportunity to do so by talking with individuals coming from diverse sectors of the field.

If you have been following recent posts and interviews on Innov8Social, you will have seen a few of these perspectives represented.  The interviews (or perhaps more aptly, interview-ettes) are 1-2 minute introductions that provide simple insight into the missions, goals, and structure of the various organizations represented. Enough to give a you a feel, with info on where to go to find out more.
Waiting for the punchline
And, just as no human is an island–social innovation does work in a vacuum. More often than not, you need the dialogue, the critical ‘buy-in’ from different sectors, to make an idea take off or continue.
So, in case you missed the individual posts, here they are compiled in one place. Four unique individuals representing four fascinating ventures. You can click the link associated with each video to read the full article where you will learn more about the organization and find related resources.
4 Perspectives at SOCAP 11, in Video

Impact Investing at SOCAP11: An Interview with Absolute Impact Partners



One World Youth Project’s Executive Director at SOCAP11


Namaste Solar’s Co-Founder Talks About Being a B Corp at SOCAP11




DayOne Response Waterbags Deliver Clean Water After a Crisis, SOCAP11

More on SOCAP11 from Innov8Social

You can follow our coverage of this year’s conference by clicking on the SOCAP11 tag on Innov8Social. You can also catch up on tweets from SOCAP11 (Sept 7-9 2011) @innov8social on Twitter and can search #SOCAP11 on Twitter for related tweets.

SOCAP11 logoThe 2011 Social Capital Markets Conference (SOCAP11) parsed out a number of issues surrounding social capital and clarified an important point. Impact investing is not just about money.In an insightful panel discussion, “Investing With Impact: A Partnership-Based Approach to Social and Environmental Innovation” moderated by Jeff Hamaoui, Founder and President of the Cazneau Group, representatives from 3 sectors–non-profit, government, and financial–talked about what brought them together to support a social capital initiative in Brazil and how building partnerships is a key component of impact investing.A few memorable quotes from moderator Jeff Hamaoui set the scene for the session:

“Collaboration is the process, innovation is the product.”

“Social technologies effectively bring people together to co-invest successfully & innovate together.”

“Opportunity leads, design follows.”

The Partnership Mindset

The session traced the path of how 3 distinct sectors could align on the same initiative. Hamaoui framed the discussion with the concept of the “partnership mindset”, i.e. social entrepreneurs looking beyond only a monetary ask when approaching investors, and engaging in multiple value conversations, marketplaces, and landscapes…that could in turn lead to capital investment.

So, what does that mean?


Luckily, to break down the concept of “partnership mindset”, Hamaoui outlined the 4 types of commodities (i.e. the 4 C’s) that can be traded by social entrepreneurs, investors, government, non-profits, thought-leaders, banks, etc.

4 Commodities Exchanged Under the Partnership Mindset

1. Capital is monetary investment, and is often the primary commodity sought.
2. Capacity is the ability to do something on the ground such as product design, product delivery, product assessment. Groups that are familiar with an area, region, or community may be able to offer capacity commodity to another group.
3. Credibility is name/brand recognition that can lend expertise or experience. This could be helpful in building networks, getting meetings with decision-makers, and building a presence in a new region or field.
4. Creativity is the out-of-the-box solutions that can result from connecting with another group in the same space/geography and leveraging each group’s experience and resources.

Key Points from Each Panelist

The 3 panelists were dynamic and enthused to tell the story of Imago, the joint project aimed to address 2 business challenges in Brazil: consumer financial education and packaging and recycling.

Lala Faiz, Partnerships Advisor in the U.S. Secretary of State’s Office of Global Partnership Initiatives (government)

  • one of the Secretary of State’s new initiatives is investing with impact, and the office sought to create a new partnership in Brazil to unlock opportunities for business and society
  • identified 2 targeted business challenges which had high market demand, for which there was a sizeable market opportunity, and which would yield significant social and environmental impact
  • but they needed partners to both invest in the initiative and provide intellectual capital through capacity-building, credibility, and creativity to create sustainable market-based solution

Cameron Peake, Mercy Corps Social Innovations Officer (non-profit)

  • social investment is a critical catalyst to longer term sustainable social change
  • mitigating risk, and seeding longer term commercial opportunities that can impact society …that’s why they (as a non-profit) got involved and provided seed funding for new ideas (innovation)
  • Mercy Corps was able to offer capacity, credibility, and capital via global best practices, knowledge of needs on the ground, and use of strategic subsidy

Michelle ViegasOffice of Outreach & Partnerships at Inter-American Development Bank (financial)

  • did not provide funding, but did provide intellectual capital and credibility via contacts (banks, investors, VC/private investors, govt, corporations)