Social enterprise is a new way of doing business that creates a deep positive impact in the world while making a profit. They create sustainable, business-driven solutions to some of society’s most challenging problems. Our portfolio will consist of social enterprises that are for profit OR nonprofit entities. Examples include:

• Enterprises that incur additional costs to run a workforce development program within the context of a traditional, for profit company;
• Businesses that sell to, buy from, or employ a marginalized population; and
• Firms that discount their products and services to make them accessible to an underserved group.

No. We are indifferent to the tax structure of the enterprise. We are considering both for profits and nonprofits for this portfolio.

If an enterprise meets the above definition and happens to also be LOHAS (Lifestyle of Health and Sustainability) or Cleantech, then we will consider it. Being a socially responsible business, however, does not make a company a social enterprise. Socially responsible businesses avoid harm and may embrace a triple bottom line principle such as providing a healthy workplace, reducing an environmental footprint, or using "green" products and services. Social enterprises, in contrast, deliver social benefits as part of their business model and often incur a structural cost of doing good. Investors Circle, existing angel networks, the Cleantech Venture Network, and even traditional venture capital serve LOHAS and Cleantech companies well because these companies do not have an ongoing cost of doing good and can offer above market rate returns.

We are looking at expansion risk - not technology risk, basic management risk, or seed capital startup risk. We do not want to find out whether an idea will work, make some money, or get up and rolling. We are assessing whether an enterprise's system and management can handle expansion, how much it can scale, and at what cost. We understand cost to be the financial and hands-on efficiency lost when an entrepreneur who knows her business like the back of her hand tries to externalize what is instinctive and duplicate it. An enterprise incurs these costs when the entrepreneur has to learn to listen and manage in a new way, when her direct reports have direct reports, and when what's in her blood becomes something in her head, or even in a handbook.

We are investing in for profits and non-profits that enhance the quality of life for impoverished people around the world in several sectors, including economic opportunity, fair trade, healthcare, and education. There are commonalities among seemingly diverse sectors because all social enterprises share the same challenges of blending financial and social value. We have the specialized capacity to help them with these specific challenges because our team has deep experience in creating this blend. And we will set money aside from our management fees to add additional and specialized capacity to our portfolio companies as needed. We will also add outside expertise to bolster our own internal and advisory board skills and mobilize a network of professionals and MBAs (our “Enterprise Teams”) with the expertise and community connections to assist our portfolio companies with their critical path issues.

We will make this decision on a case-by-case basis. Some enterprises will need such high-level engagement, while others will be more mature and will not require our board presence. We plan on having a presence at board meetings but not necessarily board member rights. In addition, nonprofits are not necessarily well-suited for board seats due to their unique makeup and structure.

Oversight is based on strong relationships and deep engagement. We will maintain and cultivate our relationships throughout the course of the investment through fund staff interactions. Our enterprise teams will engage investment companies and require regular reporting intervals. These teams will add additional capacity to mission critical projects. All of this will be rolled up into fund management to allow for real-time tracking of progress and challenges.

A key element to our investment criteria is the “Cost of Doing Good.” This cost is internally managed, identifiable, and controllable. The organizations will measure this cost, and we will validate it. On the flip side, the Social Return On Investment (SROI) is also important. While we want to have metrics to measure what the investment is doing, we are not looking to a specific SROI tool to do that. SROI is very subjective and based on external impacts that may or may not be quantifiable. We will, however, invest significant resources on an ongoing basis to track, understand and contextualize the SROI in the portfolio (see Social Innovations Fall 2006 article “Drowning in Data”).

Professional, institutional capital that allows a more efficient process for sector growth is an essential step in the evolution of the social enterprise sector. This nascent and challenging space needs professional intermediation and fund management to reduce transaction costs for investors. We are setting up a structure to do this in a sustainable, “social enterprise” manner. In addition, we are operating on lower margins than is standard in the industry. We are working within the spectrum of conventional fund management fees, but doing more work to add value. This increases our own internal cost of doing good. We build crucial and complex partnerships among for profit and nonprofit enterprises that are willing to pay reasonable returns to investors, investors who understand that they are leveraging their dollars for social impact in exchange for potentially less financial return, and managers in the middle who are full partners in the costs of the equation.

We are at our core a social enterprise ourselves, and we know how to dig deep to create social value and change. We don’t seek to maximize our profit. We work for less than “market rate.” And, because of our compelling mission and purpose, we attract financial and human capital that add to our ability to bring value to life.

We will invest between $1M to $3M per deal in 10-12 enterprises, inclusive of reserves for follow on investment. We expect a positive return on investment. We are looking to the whole portfolio to do well, and not to one single investment to pull the rest of the investments with it. We are not seeking one massive home run, a double or triple, and then a bunch of singles and failures. We are looking for a more consistent performance from our entire portfolio.

We will employ a combination of mitigants to increase our success rate. We will:

• Look for opportunity to limit downside through partnering with philanthropic grants in the case of nonprofits;
• Engage enterprises in later stages of execution and revenue recognition where uncertainty is lower and management more proven;
• Add material human capital in tactical execution; and
• Seek a more moderate and balanced “living return” instead of incurring more risk to chase improbably high levels of financial returns.

Nonprofits pay market rates to commercial sources of finance all the time. Think of bank lines of credit, mortgages, and product purchases. The difference with our fund is that we’re “of, by, and for” social enterprises. We are not trying to maximize profit; we’re trying to maximize value. In so doing, we’re finding that nonprofit and for profit social enterprises alike are very excited to collaborate, and yes, pay a reasonable return on risk-taking expansion capital. We, in turn, can design creative investment structures that provide patient, venture debt to nonprofits and mission-protecting equity or debt to for profits.

There are three reasons why we are demanding a financial return from these businesses instead of setting up a donor-like fund which distributes a mix of equity, debt and grants:

1. There is a limit to donor capital; to bring new money to this space we need to deploy replenishable capital, which is capital that expects a financial return. New money is what's needed to fill the existing expansion gap. If we set up another venture philanthropy fund, we would take money away from existing philanthropic vehicles. It would be a zero sum fund. We are additive and bring new money to the space. If people get their money back and imagine this portion of their capital portfolio as an evergreen, renewable pool, it will likely make them (a) put more money into this space and (b) use the money returned after seven years to accomplish more good. In this way, we create a self-replenishing pool of money dedicated to doing good. There is not enough donor money available to plug the expansion capital gap.
2. By having to pay the money back, our investees align their incentives with ours in a way that does not occur in philanthropy. They succeed when we succeed, and vice versa. Demanding a financial return gives us more leverage in our ongoing relationship as we hand out additional iterations of our investment when the enterprise hits business milestones. An expectation of paying returns and receiving additional money in the future produces more accountability than simply giving money away.
3. Finally, by making expansion capital recoverable, we are widening the spectrum of capital to be used for good, which means grant capital can be used for grant capital purposes, debt where it's appropriate, etc. We are creating a more efficient capital market to fund good with more specialized instruments so that money goes where it produces the greatest results, not where it happens to flow because it is the only pathway available. li>

We aren’t. We’re trying to attain a certain level of engagement and impact as well as understand risk and return. Ownership is a tool in our kit that we will only selectively employ.

We want to bring new people into the conversation. That includes high-net-worth individuals, religious capital, and foundations. Primarily, though, we see this fund as an option for individuals who want to do something good with their money and magnify their impact; people who have money and are looking for more meaning in their stewardship of it without giving it away; and investors who want to take advantage of social enterprise’s unique power for change. The attitude of many investors has shifted over the last few years. More and more people understand the power of investing for social change. We see evidence of this trend in the increase in socially responsible investing, the rise of corporate social responsibility, and the proliferation of mainstream investments in microfinance and cleantech enterprises.

This process works for those who either have their own Donor Advised Fund (like at SmithBarney or Fidelity Charitable), or want to open a DAF specifically for this purpose at this time from scratch.

• Option 1: Your DAF as Limited Partner
  Your community foundation or national DAF can directly participate in SEEF, though it may be more trouble than it's worth. The best course is to check to see if they have done any investments like this in the past and think that they can move it through the internal system. GoodCap staff can assist in exploring this, but generally our experience is that if they aren't already allowing program related investment private debt and equity deals to be done, being the first is a tough place to be. If they are able to accommodate the investment, they simply become an LP in Good Capital's SEEF.
• Option 2: Your DAF Cannot be a Limited Partner, or you're Setting Up a New DAF for this Investment
  Working through our aligned DAF intermediaries (such as Calvert Giving Fund or RSF), you simply make a grant to set up a new DAF, and they take a Limited Partner position with Good Capital's SEEF.

Open an donor advised fund at Calvert Giving Fund or RSF through their normal application channel. When submitting the application, include the provided letter that recommends an investment into the Social Enterprise Expansion Fund (GoodCap will provide you with a copy of this). If you've opened it as your primary DAF, simply fund it with a tax-deductible donation. If you're transferring from an existing DAF, go through the standard recommendation process and have a grant transferred to the new DAF at Calvert Giving Fund or RSF. It's as simple as that. The amount can either be the principal value of the desired investment plus admin fees for the DAF, or you can even transfer over excess amounts to do other high impact social investments if so desired.

We estimate 2.85% as our management fee. As a smaller fund, we must collect a payment that covers all our operational expenses, but this amount is in line with industry standards. The biggest use of our management fees is our cost of doing good. These are the expenses related to the program elements that support the portfolio. These elements are the Enterprise Team program, Annual Summit, and additional consulting capacity and measurement tools available when needed. We are keeping our operations lean (and, yes, concessionary) so we can use these funds to provide necessary resources to our investments. In contrast, many community development venture capital firms have nonprofit advisory services that have the same goal but spend months in a fundraising cycle to cover the costs. Much like our portfolio companies, we do not want to be distracted from our core mission to fundraise for these advisory services. Instead we are asking our investors to support our cost of doing good in one integrated investment. We want to walk the social enterprise talk ourselves.

Technically, this is a venture capital risk profile, so it is private equity. But really it's a new kind of capital that defies conventional risk/return paradigms.

It is true that our three founding principals work roughly half time at Good Cap. However, we have a full team of staff that includes Marie Trexler, Deb Parsons and Wes Selke who, along with other GoodCap team members, work full time on our investment activities. The three principals provide important management, networks and strategic relationships. Tim Freundlich’s role at Calvert Foundation and Joy Anderson’s at Criterion Ventures help build our pipeline, expand our network, and provide the opportunity for new ideas to flow through the organization. Kevin Jones works on xigi.net, a market formation web property that is closely aligned with the mission and objectives of Good Cap. All non-Good Cap activities strengthen the value proposition of the overall firm. To this we add dedicated full-time staff, consultants, Advisory Board members, and Enterprise Teams to bolster and fill out our needed staff time and skills.

A DAF is a private foundation alternative, a donation to a philanthropic endowment to invest short-term and later give away. We are a fund that creates real social impact now through our investments, without giving it away in donations. The proceeds of the fund may be granted to a DAF or charity later if desired, but are not tax advantaged until that time. Do note, however, that DAFs can invest in the fund.

Good Cap wants to accelerate the flow of capital to investments to serve social purposes. The Social Enterprise Expansion Fund is its first project that will demonstrate that there are investors willing to put their money and more into this larger cause. Good Cap is also in the discovery phase of a brownfields to greenfields program and an international fund and is exploring a new solution to medical debt. Not all will be venture-like funds, but the commonality will lie in their ability to move capital towards a common good.

We’re a new kind of capital, a hybrid between philanthropy and investment. The Social Enterprise Expansion Fund closely resembles a venture capital fund. The main difference is our approach towards the investment, as we will consider both for profit and nonprofit organizations. Our return expectation will be lower than a VC fund, but our social returns are much higher.

Both are “strategic partners” of Good Capital, and both have an interest in the success of the venture. But Good Cap’s funds are in no way offerings of either of these entities, and there is no extension of recourse or liability between the parties, implied or otherwise.