SOCAPtv: The Chance to Reset with Jane Mitchell from The Reset Foundation

Posted by on June 2nd, 2016

Jane Mitchell grew up with six siblings, all redheads. As the second oldest child in the lineup, she admits she contributed to her fair share of sibling bullying and Mariah, her sister born a year and half after her, was Jane’s primary target. It was childhood stuff: incessant name calling and poking fun–she called her sister “Pig” for almost a year–but years later, when Jane entered college and she and Mariah were the best of friends, she realized how cruel she had been. Jane went to her sister and asked her to forgive her for all of those years of torment.

“I’ve already forgiven you,” Mariah said. “I forgave you every single day all along the way.”

It was a humbling moment.

Fast-forward to post-college, when Jane was teaching in the county jail. One of her students, Anthony, was in on a theft charge and revealed through a writing assignment that his mother never called him by his name. She called him “the devil’s spawn.” Day in and day out. Later, Anthony landed in jail where a corrections officer would call him, simply, “Thief.” These labels were more than demoralizing. They were debilitating.

Jane shares these contrasting stories live from the stage of SOCAP15, to share her point: We should all be given permission to reset, or as she puts it, “[Give] each other the chance to start anew, to be fresh, to change, to grow.”

The Need to Reset

s7Yo1_XW“The criminal justice system is an arena that typically does not allow for much resetting. What happens when you’re in the justice system is you’re pretty much in it for life. You get a mark on your record and then that mark is going to stay with you for the rest of your days. We know it makes it harder with that record to get a job, to find housing, to get credit, all sorts of things,” says Jane.

“Unfortunately, it doesn’t just hurt you, but it affects generations after you. In our country, we’ve developed a system that traps entire generations in a cycle of going back and forth from prison to poverty. We now have a community where young people are growing up actually expecting to spend time – as a rite of passage – in prison. It’s especially affecting low-income communities of color. We’ve got one in three black men in this country who will spend time behind bars. We are not creating those spaces in which we can reset,” she says.

So Jane set out to do that. She is the cofounder of The Reset Foundation, a residential campus for young adults, teaching the best practices for academics, careers, and social emotional support, to keep them out of prison.

“Our work is very relevant, it’s culturally sensitive, and the curriculum is interdisciplinary and very hands-on, very project based. When it comes to careers, if we’re interested in actually dismantling an intergenerational cycle, we can’t just help young adults get jobs, we need to prepare them for careers, and that’s what we do,” she said.

“Recidivism rates haven’t budged in the past 40 years,” she points out. “We still, to this day, have one-fourth of the world’s prisoners here in America.”

At the Reset Foundation, Jane and her team are trying to do something dramatically different, to create a real opportunity for young adults in the system to be able to actually “reset.”

Resetting, Jane admits, is a choice.

“At Reset we firmly believe that every human has the choice and ability and power to actually reset and change themselves.”

To find out more, and to hear the results of Reset’s pilot program in San Francisco with a group of 10 young men, watch Jane’s SOCAPtv talk, filmed live on stage from SOCAP15.

Can the Gates Foundation Make Markets Work for the Poor?

Posted by on May 18th, 2016

How the world’s largest philanthropic foundation is using impact investments to steer biotech, edtech and fintech to low-income customers at home and abroad.

Image source: The Bill & Melinda Gates Foundation

Image source: The Bill & Melinda Gates Foundation

By David Bank and Dennis Price

A new kind of strategic investor is sniffing around promising startups and innovative entrepreneurs.

These strategists are not corporate suits seeking a competitive edge. They are officers of private foundations looking for scientific breakthroughs on neglected diseases, technologies that can be steered toward disadvantaged populations and financing models that harness the power of markets for the benefit of the poor.

The biggest of these new suitors is the Bill & Melinda Gates Foundation. At the insistence of Bill himself, the foundation made its first “program-related investment” in 2009. Since then, it has made nearly 50 loans, equity investments, and guarantees to further the foundation’s charitable purpose, totaling more than $1 billion. In the last seven years, the world’s largest foundation has become one of the world’s largest impact investors.

To share what it has learned, the foundation provided unprecedented access to ImpactAlpha and Stanford University’s Paul Brest, a leading thinker and commentator on impact investing.

“Making markets work for the poor” is the strategic intent of the Gates Foundation’s program-related investment portfolio. That goal, lofty as it is, can sometimes create complications for entrepreneurs, co-investors and companies, as our set of narrative profiles shows.

“This is not all that different from what we’ve seen over last 40 years [from strategic investors],” says Larry Mohr, a veteran Silicon Valley venture capitalist who co-invested with the Gates Foundation in a promising edtech company. “The parallel is that they both have objectives that are totally unrelated to the company.”

The project, a 40-page supplement in the Stanford Social Innovation Review, includes narrative articles about eight of the foundation’s noteworthy investments, an explanatory overview and a meaty Q&A with Julie Sunderland, the founding director of the foundation’s in-house investment team.

“How do we create incentives and how do we enable the most overlap between our objectives and the objectives of the company?” asks Sunderland, who recently left the foundation to pursue biotech investing more directly. “If there is a lot of overlap and we can de-risk or we can provide capital in creative ways to enable them to do the things that they want to do, those are our best deals.”

Making Markets Work for the Poor, is a deep dive into how the Gates Foundation leverages its immense balance sheet to make program-related investments. We reviewed hundreds of pages of investment memos, strategic memos, emails and other internal documents and interviewed more than three dozen entrepreneurs, executives, investees, co-investors and foundation staffers.

In the package, we show:

  • How the foundation lost its entire investment in one biotech company – and reaped a 17-fold return on another.
  • How a minor financial misstep earned Root Capital a dose of “tough love” that ultimately helped the agricultural lender grapple with the dangers of rapid growth.
  • How the foundation used its deep pockets and superior market knowledge to steer pharma giants Merck and Bayer toward a low-price, high-volume strategy for contraceptive implants for women in low-income countries.
  • How the foundation saw something more in the off-grid solar revolution in Africa: a way to expand commercial lending for the poor.

 

Image source: M-KOPA

Image source: M-KOPA

Significantly, foundation officials owned up to trials as well as triumphs. In one case, an edtech company veered away from its target customers in order to satisfy the charitable requirements that came with the foundation’s investment. The lesson for entrepreneurs: the social and environmental objectives of strategic impact investors are sometimes at odds with a company’s commercial path.

Strategic program-related investments are not new. The Ford Foundation began making them in 1969. Since, pioneers like the MacArthur, Packard and Annie E. Casey Foundations, and more recently, the Kresge Foundation have expanded their toolset beyond traditional grants.

The Gates Foundation has pushed the boundaries of the new tools. Many of the examples cited by the IRS in its expanded guidance on PRI use could have been pulled from the Gates Foundation playbook, including for loans to smallholder farmer producer groups, equity investments in biotech startups and guarantees on loans to nonprofits.  

“We’re not delusional about the private sector and about capitalism,” continues Sunderland. “We know that markets don’t work well for the poor for very, very good reasons. It’s not theoretical.”

By strategically investing to prove new models, reduce financial risks, increase liquidity and, sometimes even, boost returns, foundations like the Gates Foundations are aiming to close capital caps and fix failures left by a market that all too often doesn’t work for the poor. Sometimes such investments work, other times they don’t. A critical question we sought to answer throughout the report is: why?

The foundation’s PRI portfolio includes 20 equity investments totaling more than $200 million, 11 loans combining for more than $100 million and 12 guarantees reaching nearly $600 million.

The foundation has made 14 investments, more than $167 million in sum, directly into biotech companies in hopes of a hit on vaccines and drugs for a range of neglected diseases such as malaria, HIV and typhoid fever. Most of the capital has been deployed for global development, including expanded access to finance and health services for the poor, and to agricultural development, primarily in sub-Saharan Africa.

The occasional home-run aside, the foundation anticipates an approximate 10 percent loss of capital on its PRI portfolio as a whole. “The reality is that the poor don’t have much money and therefore profit margins are slim,” Sunderland says. “The only way that you can create good business models to serve the poor is to get to high volume and large scale with small margins.”

About ImpactAlpha

Impactalpha creates editorial and data products that serve the growing number of people who believe social and environmental solutions are the biggest business opportunities of the 21st century. We’re on the impact beat, telling the stories, calling the trends, tracking the deals, and watchdogging the impact.

David Bank is editor and CEO of ImpactAlpha: Investment News for a Sustainable Edge. He was previously a reporter for The Wall Street Journal and a vice president at Encore.org.

Dennis Price is a writer and project director at ImpactAlpha. He has more than a decade of experience at the intersection of markets and development.
 

Here’s a full list of the package contents:

Making Markets Work for the Poor

How the Bill & Melinda Gates Foundation Uses Program-Related Investments

Philanthropy’s New Tools for Innovation and Impact by Susan Desmond-Hellmann

Investing in smart strategies and passionate people.

Leveraging the Balance Sheet

A conversation with Julie Sunderland, founding director of Program Related Investments at the Bill & Melinda Gates Foundation.

Neglected No More

Nudging biotech startups to tackle diseases of the developing world.

Unintended Consequences

How a strategic investment steered an educational- technology startup into trouble.

Banking on the Poor

Using the off-grid solar revolution to unlock credit for low-income customers in Africa.

Guaranteed Impact

Increasing supplies and cutting prices for contraceptives without spending a dime.

Investing for Impact with Program-Related Investments

A report on strategic investing at the Bill & Melinda Gates Foundation.

Tough Love

How a dose of banking discipline strengthened financing for smallholder farmers.

Eyes Wide Open

Good reasons for a bad investment in a low-cost HIV test.

Returns on Investment

How a broad bet on a biotech company paid off in promising drugs for neglected diseases.

Private Financing for Public Education

Investing in collaboration between public school districts and charter school networks.

SOCAP Voices: Ed Dugger Reflects on Lost Opportunity

Posted by on May 6th, 2016

By Edward Dugger III

Edward Dugger III is the President of Reinventure Capital and an impact investing pioneer. The reflections below were originally shared through the Reinventure “Ed Talks” series.
 

ed-duggar-at-socap15

 

What happens to a dream deferred?

I could not have been more excited. It was September 1988, and I was on a flight from Boston to Los Angeles to meet with Michael Milken. Several months earlier I had received a call from his representative asking for a meeting in Boston. “Ed, you are a venture capitalist who has pioneered in providing entrepreneurs of color with equity investments, and we think you can help us,” he said. Our conversation confirmed what I already knew. Milken and his firm, Drexel Burnham, had concluded that there was a huge, untapped investment opportunity in the form of founders of color, who were essentially invisible to the rest of the investment banking market.

More importantly, they had declared their intention to capture that overlooked market opportunity. To do so, they would bring billions of dollars to market. Now they were undertaking a methodical process of aligning existing sources of equity capital for founders of color, and partnering to create new ones. The first of these was Georgetown Partners, a $100 million fund. Other partnerships were under discussion. Mine was one of them.

Heading for LA, was I actually seeing the dawn of a new era in America? One for which generation after generation of people of color, aspiring to the American Dream, had been waiting?

Does it dry up like a raisin in the sun?

As an African American, it was hard not to think about how far we had come. The civil rights battles for human dignity and justice under our Constitution had already been fought in Montgomery, Selma, Birmingham and countless schools, public facilities and places of worship across the country. The first generation of people of color whose lives the movement had changed were emerging as seasoned educators, scientists, politicians and corporate executives. Blacks were beginning to appear on the boards of major corporations and Ken Chenault was on his way to becoming CEO of American Express. Surely now at last black entrepreneurs would begin to emerge and move into the mainstream of American business in ever increasing numbers as well.

The key to progress was moving into the mainstream, which had proven elusive. Few entrepreneurs of color had been able to navigate on their own. I understood why. As I grew up, I had witnessed up close the barriers to entrepreneurship for black folks. I watched my uncle search for opportunities to launch a significant business. A chemist at the MIT Lincoln Laboratory, a US Dept. of Defense research center, my uncle did advanced research on materials. Later he filed for and received several material patents. His dream for decades was to use his patents to build a global family business. When his first patents had nearly run their course, he used his savings to file for more. But his dream was never fulfilled. There were no investors or banks interested in backing his business proposition. All the “friends and family” money he could ever expect to raise would fall far short of the amount needed to commercialize his inventions. As his patents expired, his dream — the American Dream of turning hard work, innovation and determination into family financial security for generations to come — slowly faded as well.

There were sources of capital my uncle could have turned to. The numbers dealer, the loan shark or maybe the benevolent wealthy white guy. And many black entrepreneurs, facing no alternative, went to these sources of capital.  But, like my uncle, most decided not to, firm in the belief that the stakes were too high and the rewards would most likely accrue to someone else.

Maybe it just sags like a heavy load.

Langston Hughes, American. Poet, 1902 – 1967; Painting by Winold Reiss

Langston Hughes, American. Poet, 1902 – 1967; Painting by Winold Reiss

The wealthy white guy I was on my way to see was clearly cut from a different cloth. Milken had set his brethren in the investment banking world on their heels by being extraordinarily contrary. He didn’t buy the entrenched belief that a relatively small group of companies rated as “investment grade” deserved exclusive access to Wall Street’s capital. Pouring billions of dollars into hundreds of small, private and previously “un-bankable” companies, he had launched the likes of Ted Turner’s Cable News Network (CNN), Craig McCaw’s McCaw Cellular (now AT&T Wireless) and Steve Wynn’s Mirage Resorts (now Wynn Resorts) and put into motion a structural shift in global finance. He had also unleashed a wave of entrepreneurial activity changing the landscape of American business.

Then he crossed the tracks: he backed Reginald Lewis, a black lawyer and entrepreneur, whose business success beforehand was limited to the acquisition and operation of the $50 million McCall Pattern Company. Where prevailing Wall Street wisdom saw Lewis as modestly accomplished at best, Milken saw something else. He saw someone like Ted Turner, Craig McCaw and Steve Wynn, whose business acumen went far beyond the small platform he had masterfully built. Just black and overlooked.

So he helped Reginald Lewis leverage his success in the pattern business into the acquisition of the $1 billion Beatrice International Foods, a business consisting of 64 companies operating in 31 countries. At one fell swoop, this icon of Wall St. partnered with Lewis to create the first $1 billion company controlled by a black entrepreneur.

Milken and Drexel’s decision to back Lewis was strategic, not philanthropic. They had taken a cold, dispassionate look at their business opportunities.Their research and understanding of the changing demographics of America led them to a sharply contrarian conclusion: entrepreneurs of color, historically deprived of capital to grow their businesses, were a large untapped market representing a significant source of future growth for Drexel Burnham. Reginald Lewis’ test case had proven them right. Recent breakthrough successes by black entrepreneurs, such as Oprah Winfrey (Harpo), and Bob Johnson (Black Entertainment Television) building significant business in the media industry backed by white benefactors, were likely just the tip of the iceberg. A serious institutional infusion of capital into communities of color would unleash a much larger wave of entrepreneurial energy — and commensurate returns.

I intended to play an active role in unleashing that wave, and I was thrilled to contemplate the possibilities.

When my flight landed, I received a message stating flatly that my meeting was cancelled. Drexel Burnham was imploding*. The initiative died before it even started.

Or fester like a sore—

Nearly 30 years has passed. Drexel is gone. The architects of its visionary plan to invest behind entrepreneurs of color have dispersed. A new generation of investment bankers and private equity managers has emerged, but rather than seizing on Drexel’s insight, they are satisfied to provide financial services to a narrow network of clients just like them. They are apparently unaware of the vast missed opportunity, and blind to their contributions to our nation’s simmering social and economic inequities.

An entire generation has come and gone, but the new era has yet to arrive.

Or does it explode?

Like the Legend of Wall Street did so many years ago, Reinventure Capital has taken a cold hard look at its investment opportunities. The conclusion is the same, but even more compelling: entrepreneurs of color, still deprived of capital to grow their businesses, are a vibrant untapped resource pool representing a significant investment opportunity.

Today, that opportunity is further enhanced by the emergence of a new generation of entrepreneurs of color who are creating scalable businesses that deliver much-needed solutions to pressing social and environmental issues, and they are also creating life-changing jobs.

We want to tap into this pool and be a prime mover for rethinking the potential it holds. We believe that by creating opportunities within this pool, we will reap a wealth of opportunities with it. Please join us in reinventing investing. It’s time for a new era to begin.


 
Parts of Langston Hughes’ poem Harlem, often referred to as A Dream Deferred, are used in this blog.

*In Sept 1988, Drexel Burnham was sued by the SEC for insider trading and other unlawful acts, all of which involved Milken’s corporate finance department. The case was settled in 1989. In 1990, Drexel filed for bankruptcy.

Edward Dugger III is the President of Reinventure Capital and an impact investing pioneer. He previously managed The UNC Venture Funds as President of UNC Partners, Inc. As a prominent business and civic leader, Ed served as a director and member of the Executive Committee of the Federal Reserve Bank of Boston and is currently a Director and Member of the Executive Committee of Boston Community Capital, one of the largest regulated Community Development Finance Institutions (CDFIs) in the United States. He is the Chair of the Board of Boston Community Ventures and serves on the Executive Committee of the Massachusetts Business Roundtable. Based in Boston, Ed is a graduate of Harvard College and Princeton University (MPA-UP, Woodrow Wilson School of Public and International Affairs).

This article was originally published as Ed Talk #2 on ReinventureCapital.com.  It was reposted with express permission from the author, Edward Dugger III.

Watch Ed Dugger, along with Nikki Silvestri, Co-Founder and CEO of Silvestri Strategies, Decker Ngongang, Senior Fellow at Frontline Solutions, and Ben Jealous, Partner at Kapor Capital, on the Equity and Opportunity panel at SOCAP15.
 

Missing Infrastructure for African-American Wealth Creation

Posted by on May 2nd, 2016

#SOCAP365 at Impact Hub NYC

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The U.S. is battling systemic problems in terms of both wealth inequality and racism. Recent research from the Pew Center reveals some hard data connecting these two injustices: the average white individual has $144,000 in assets while black individuals, on average, have $11,000.  This has major implications for African-American wealth creation; it highlights the opportunity gap faced by black entrepreneurs trying to “bootstrap” or raise a “friends and family” round of funding, which then also raises the question for how wealth can be generated and sustained in black communities for the long haul.
 
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Jessica Norwood and Kevin Jones are tackling this problem head on, and presented some of their latest work at a SOCAP 365 event at Impact Hub NYC on Friday, April 15. Jessica is the Executive Director of Emerging Changemakers Network and a BALLE fellow; Kevin is the founder of SOCAP and the Neighborhood Economics platform. They are forming a unique partnership to begin building necessary infrastructure to increase the flow of capital to black communities in culturally appropriate ways with important core stakeholders along the way.
 
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The discussion ranged from blind spots within impact investing (Why does early-stage funding seem to flow more easily to start-ups in Africa rather than African-American communities?” “We recognize people through our dollars — we’re missing the opportunity to tell black entrepreneurs I see and value you”) to a much broader scope addressing issues of cultural exclusion, trust building, and ways market dynamics reveal and can potentially start to shift systemic racism.

@Kevindoylejones: “There are huge opportunities for financial inclusion to lead on issues of cultural exclusion. How can social capital shift the paradigm?”

@EmergeChange: “There’s a need to create trust and rebuild culture by deep listening & understanding of structural inequity dynamics — it’s the only true way to shift wealth.”

@EmergeChange: “We don’t have an airplane problem or a pilot problem — we have a runway problem.”

For more on this conversation, check out the #SOCAP365 buzz on Twitter and see additional resources below. We’ll continue exploring these themes as part of the Neighborhood Economics and Inclusive Entrepreneurship tracks at SOCAP16 and throughout the year at SOCAP 365 → sign-up for the SOCAP newsletter to stay updated on what’s happening next near you.

Learn more:

 

SOCAPtv: More than Motorcycles – Small Asset Ownership & Bottom Up Economic Revolution

Posted by on May 2nd, 2016

 

Tugende means “let’s go!” in Luganda, the main local language in Kampala, the capital city of Uganda. Tugende is also the name of Michael Wilkerson’s company, a financial inclusion startup in Uganda that provides motorcycles to recommended drivers in a lease-to-own arrangement. If paid on time, the drivers own the bike after 19 months or less.

From the stage of SOCAP15, Michael asks the audience to consider a different take on funding, thinking more about what can happen when people at the bottom of the pyramid can make investments in their own community.

Motorcycle taxis (bodas) are an enormous industry in East Africa, especially in countries like Uganda where 70% of the population is under 25 and unemployment is high.

 

Motorcycle Taxis

 

In Uganda, Michael explains, motorcycles help people move through traffic in cities, they help people in rural areas get where they need to go when there is no public transport, and they literally drive the economy.

However, driving a motorcycle taxi is difficult for many drivers because they can’t afford the upfront cost to buy their own bike. Instead, they end up renting from landlords indefinitely with no fixed contract, no end in sight, and no ability to build assets or stability.

 
 

TrafficwithMotoTaxis

“At Tugende we call this the rental poverty trap. Drivers earn enough to pay their rent and stay in the business but not enough to accumulate savings or move up in life.”

Tugende, he says, solves this problem with a fair, transparent, lease-to-own model. (Watch a 40 second video on how they do it.)

“We know that a driver who owns his own motorcycle goes from taking home about $5 a day to $10 a day. We also think about impact at the household level — the average household size in Uganda is five people, and if you can double the income of one of the primary breadwinners in that household from $5 a day to $10 a day, you’re literally lifting the entire household above the $2 a day poverty line.”

“Our customers are already moving themselves forward in life, we just provide an opportunity for them to do it faster,” Michael notes.

Watch Michael’s SOCAPtv talk to see how this business model goes beyond motorcycles, and how it can help people become micro investors in their own communities.