Consider the following statistics: in 2010 the Girl Scouts of America generated $760 million in cookie sales. That same year Wal-Mart topped the list of philanthropic companies by donating $288 million to charities.
As impressive as these results are, non-profits with earned income streams and for-profits with a charitable bent aren’t enough to solve the world’s most pressing social and environmental problems.
At Rudolf Steiner Foundation (RSF), we see that social enterprise — organizations that are created to use the power of business to directly improve society and our environment — have the potential of scale and replicability to address these equally large challenges. The only persistent obstacle to their expansion is a lack of capital.
Social enterprises struggle to attract capital because their structure and business models do not meet the expectations of traditional investors, lenders, and donors.
Conventional startups attract investment by focusing on growing markets and creating barriers to entry. Prospective borrowers obtain debt financing by demonstrating outsized margins and growing shareholder equity while most non-profits garner philanthropic support by exhibiting stability and effectively delivering on mission.
Contrast these characteristics with social enterprises and the financing challenge becomes apparent.
Within RSF’s Social Investment Fund there are good examples of borrowers maximizing social value which oftentimes conflicts with a conventional financing profile. Consider Common Market Philadelphia (CMP), a non-profit that aggregates and delivers local produce from over forty small-scale farmers to some of the biggest institutional buyers in the city, including the University of Pennsylvania and the Philadelphia public school system. Rather than creating barriers to entry, co-founders Haile Johnston and Tatiana Garcia-Grandos’ strategy calls for sharing their model with others who seek to create healthy, regional food systems.
This commitment to wide social impact above profitability is a defining feature of social enterprises and one which makes it especially difficult to attract conventional investment. Layer in Common Market’s aggressive growth strategy — in 2008, its first year, CMP had sales of $105,000; in 2011 it is was $1.05M; in 2012 it is forecasted to be $1.9M — and you can see why notoriously risk-adverse foundations might shy away from Common Market’s model as well.
This is where social finance plays its defining role — supporting those game-changing social innovations that don’t meet the standard expectations of conventional finance. We take the two-dimensional risk/reward continuum and add a third axis for impact.
The work around
RSF borrower RecycleForce is a classic example of a social enterprise locked out of traditional financing.
The Indiana-based organization recycles electronic waste while exclusively employing ex-felons in a six month program immediately following their release from prison. With a steady job and intensive support, graduates of RecycleForce become reintegrated into society and the program achieves a 25% recidivism rate, half the 57% county average.
A human resources strategy based on hiring some of society’s most dangerous and least qualified individuals, training them for six months, then sending them on to permanent employment elsewhere is a questionable way to make a profit, and a brilliant way to make permanent, transformative change.
RecycleForce’s growth and that of its imitators (Isidore Electronics Recycling, for example) hinges upon social finance – investors and lenders who value maximum social impact and sustainability more than they value a high return.
Our loan to RecycleForce financed a major piece of recycling equipment, affectionately referred to as The Beast. The Beast dismantles trash in a way that allows RecycleForce to increase efficiency and more effectively collect precious metals such as silver, palladium, copper, and aluminum. RecycleForce projects that this investment will permit them to hire an additional 80 employees over the next two years.
Another RSF borrower, Guayakí, is a California-based beverage company founded with the mission of preserving South America’s rainforests. Through its sale of yerba mate (a caffeinated drink brewed like tea) in the US, Guayakí provides a sustainable livelihood to hundreds of Brazilians, Paraguayans, and Argentines who would otherwise face intense economic pressure to destroy their rainforest lands to raise cattle or grow soy.
Like all true social enterprises, Guayakí’s growth directly increases its impact.
Rainforest preservation is no longer tied exclusively to the generosity of donors or the policies of government. This powerful and systemic shift, however, comes at a cost that challenges the notion that businesses must be profit-maximizing entities.
Guayakí’s decisions about what it pays for yerba mate, who it buys from, and how far in advance it commits to contracts are informed first and foremost by its social mission. Decisions that cause logistical puzzles, cash flow strains and gross margin challenges are outweighed by the tangible benefits Guayakí is delivering to the rainforest and its inhabitants.
Businesses that willingly sign-up for the dual challenges of deep social change and financial sustainability deserve similarly aligned capital. RSF’s line of credit to Guayakí relieves some of the financial strain faced by a company trying to compete against cola companies and make the world a better place.
Common Market Philadelphia, RecycleForce, and Guayakí each tackle issues of daunting scale. Until there’s a Common Market equivalent in every major American city we will not have achieved a healthy food system.
RecycleForce has served 400 ex-felons, but every year 650,000 more Americans are released from prison and an estimated 2/3 will likely be rearrested.
And Guayakí’s sales have led to the preservation of 31,008 acres of rainforest, yet 35 million more are lost every year to timber harvesting, cattle ranching, and monocrop farming.
The growing and maturing field of social enterprise requires an equally robust field of social finance if it is to reach its full potential.
RSF is a social enterprise – transforming the way the world works with money though its lending, investing and giving programs. Our model works because we’ve attracted a community of investors, donor advisors, borrowers, and employees who recognize that a balance sheet, a return on investment, and a pay stub neither capture nor represent the full measure of value. As a staff we do not work so much for what we earn, but rather for what we yearn for in the world. The real value is found in moving money for basic public benefit.
At RSF we ask the question, “Can money heal?”
We answer in the affirmative because we recognize that great solutions to big problems often require a dose of patient capital to reach fruition. In the US, financial markets have had a growing influence on society – employing a greater share of us than ever before, providing more liquidity than ever before, and creating and destroying more wealth than ever before. It’s this very dominance of finance which makes me hopeful for the future of social finance.
Rudolf Steiner wrote that
For a healthy national economy, it is important not merely that credit should further the spirit of enterprise as such, but that the right methods and institutions should exist to enable the spirit of enterprise to work in a socially useful way.
RSF is one such institution.
–Ted Levinson on Transition Voice