A coffee shop for the social capital market

Markets convene in conversations, not in taxonomies or on trading floors. That was true when investors in ships going to or coming from the spice islands convened in Amsterdam coffee shops to figure out how to share risk and return in the exploding opportunity ahead of them. Those transaction-intensive, one-off deals created the Dutch Bourse.

Similarly, a couple of hundred years later, traders in the new trading empire of Manhattan gathered under the Buttonwood Tree on Wall Street to devise on the fly a shorthand means of understanding the value held by the man under the other limb, abstracting the relevant elements, assigning a future value to the current cost, and making a deal. A gathering in San Francisco in October, Socap08, will be a significant step towards creating and clarifying the opportunity presented as the social capital market emerges.

The social capital market is a market with an additional dimension. It’s a market that says no to the old, Milton Friedman-infused definition of a business as purely and properly focused only on its own profit. This is a market that measures risk, financial return and the additional element of social impact. But it is still a market – a place where profit is an important measure of success, but social good is a measure of success as well. It is a market that is not willing to make compromises that have been made in the past but that still wants to create economic value.

Because of that new third element, what some would call social externalities emerging on the balance sheet, this event is bringing together a fundamentally new gathering of funders and investors with entrepreneurs. It includes foundations, development and aid agencies, and for-profit but mission-focused social investors breaking out of their silos to talk together. The third dimension creates what may perhaps be an ontologically new kind of economic value. The value that is emerging in the social capital market is what Jed Emerson calls blended value – a value that has many dimensions, social, financial and environmental, a systemic value that is greater as a whole than any of its parts.

Value that defies reduction

What is this blended value? To use an old-style scientific reductionist approach and break the social capital market’s value into its constituent parts might be destructive to the essence of that value in the same way that breaking down a perfume by separating out the various elements robs the scent of its considerable economic value. To break down this market for the sake a linear, spreadsheet-amenable translation is to rob it of some value we all know is there.

The need for new metrics

Typically measurement trails the creation of value; first you build it, then you count it. In this case, the metrics have been ahead of real capital flow. Definitions have been formulated in academically inspired conversations about metrics ahead of the current commitment of capital. The creators of these metrics will have to adapt to remain relevant or they will be left in the dust as others learn the fast-moving needs of this new capital and new consulting firms and analyst firms take the baton. New money has walked into the room and the definitions and their creators will have to change to satisfy it or be left out of the meaningful conversations.

What these new investors want is a system of assessing value that can be quickly traded as the new generation of social investments reaches maturity. What are being created are ways for an investor to exit an investment with his capital preserved and grown and still knowing that the social value is preserved after the sale. That is being done on a one-off basis, but the new system will make it easier, quicker and clearer to everyone at the table. Investors want to know how you assess social value inside a for-profit business, how you differentiate one business from another, what constitutes scalable social impact, and how you recognize it in the companies that have the best shot at creating it.

The significance of Socap08

Several experienced institutional investors will be coming to Socap08 in October and reporting that, on at least a case-by-case basis, you can know the answer to what constitutes scalable social impact within a for-profit company. Those experienced investors comparing notes in public, in a venue where those new to this space are not confused by a welter of insider acronyms, will be at the core of the October convening.

The social capital market is an emerging market that will be taken forward and translated across silos in conversations in October. It is also a market that is emerging in a web 2.0 world, where people realize that markets themselves are conversations, and in an America that has come to realize that being blind to impact has a serious cost to everyone involved. The social capital market is a self-conscious market, owing to that third element of impact being added to the traditional risk and return investment equation.

The market that is converging on 13-15 October includes social venture funds run by black Africans investing in Africa, major experienced development-related funds from the UK, established social venture funds and leading foundations, newly curious private investors from Hong Kong, health care NGOs and aid agencies from around the world who have discovered social enterprise as a way to support their mission, and social purpose businesses that have received eight-figure investments from traditional venture capitalists.

This is a market that is converging in spite of, and in reaction to, previous limitations on the definition of what constitutes value in the various isolated spheres of the philanthropic, governmental and market-based entities that are coming together. It is a market converging after the inconvenient truth of global warming has entered the common consciousness of American consumers, a market looking at all the structures that have gone before with a critical eye as new costs, planetary and now social, are counted.

Not that this will be in any sense another green investing conference. Traditional green investors who are coming to this conference are those who are willing to expand their horizons. The renewable energy companies present will be those built as a way to bring clean power to the poor. We are just feeling our way at the edges of the more firmly established clean-tech investing space for a few examples that use the market to reduce the cost of poverty.

Why we are conveners

The bulk of our expertise as conveners is on the social side of the social capital market. Our strengths lie in convening social venture investing in small and medium enterprises in the developing world; information communication technology, specifically telephony, for creating wealth-creation opportunities for people at the base of the pyramid as the next step beyond microfinance; all the beyond MFI initiatives; new-wave MRI investing by foundations; a few ground-breaking multi-asset-class deals that bridge grants, development money and private equity; and new market infrastructure to enable the flow of capital across previously sacrosanct silos.

We are adept at guiding the conversation that venture capitalists with a social bent, development agencies, non-profits and cutting-edge foundations want to have with entrepreneurs who want to make a difference in the world. That is where we, the organizers of this social capital markets event, think that the value will be created – by mission-focused investors and grantmakers coming together in new ways to support a common mission, as they learn to speak each other’s language.

Language barriers

The linguistic and cultural expression of value, the Rosetta Stone problem, is perhaps one of the biggest challenges of this market. People who think in terms of an arcane and myopic theory of change that reflects the particular character of a philanthropic foundation or development agency have trouble talking to fast-moving entrepreneurs and investors who need to just figure out how to add the dimension of social impact to their risk and return equations as they devise their investments or create their enterprises.

That linguistic shift has been accomplished, with great positive value created as a result, across a set of new indicators in the clean-tech market, and it is resulting in a greater prospect of saving the planet while preserving and growing capital. When new money entered the room, when angel investors, venture and hedge funds, serious investors (who want to be able to know the shape of the value created in rapid and clear terms in order to trade it), came into the then-nascent clean energy market around 2001, things changed. The world is better for it, and our economic future is less risky because of it.

The old-style parochial definitions of value held by a small group of insiders, people who invested out of belief rather than with real expectation of near-term impact or financial return, in 2001 had to yield to a more easily understood and translatable system of assessing risk, return and environmental value. New money with a positive mission produced new, more rapid creation of value and mission impact.

That is what we are hoping will happen at Socap08. We want people to learn to talk together and discover a new kind of economic and social value that they and their various resource-infusing and resource-demanding enterprises can create together. New value, measured in new ways, with more voices at the table saying what that value should include and what it should omit. We are bringing investors from the developing world with a critique of the Washington Consensus together with development agencies and venture philanthropy funds from America to see how they can work together for mutual benefit. It’s in that dialogue that a new market will emerge.

More voices learning to talk together to create a new kind of value, one that includes risk, return and impact, and where all the stakeholders get to chime in on what constitutes impact.

Kevin Jones leads market formation and engaging advisers  and companies at Good Capital. Email jones@goodcap.net

For more information
http://socialcapitalmarkets.net