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Capital is Fuel in the Social Capital Market

Kevin Jones June 29, 2011

Capital is fuel for changing the world in the social capital market. Do-gooders often upon capitalism with horror as a wild force of nature.  But capital is not untameable: it is a tool that we created, and that can be put back under our control. To paraphrase the proverb: the past decade has shown us that those who seek money without meaning are dangerous, but those who seek meaning without capital are limited in their ability to scale.
The social capital market, at at the intersection of money and meaning, seeks both. And that’s where the juice is.
The social capital market looks at value across asset classes and we are finding that impact lives in the commons, not on the balance sheet or even in our impact metrics, which are both only single inputs into a much more complex system. In words that Jed Emerson said a long time ago, what we want is value; and we are willing to pay for, or invest in, or give to, things that provide value. We define value through both relational and financial lenses.
In this way, the social capital market is a cognitive landscape, including both what you care about and whether or not you are making money through your work. People historically have thought of giving from one pocket to do good, and investing into another to make money, but this space partakes of elements of both. In this market, our individual and collective assets are both on the balance sheet and in the commons, weighing what’s good for the investor and what’s good for all of us and our planet.
Because of this creative tension, people need to be at the core of this movement. Money is a fuel for a movement that operates within planetary boundaries; a market where grandchildren can have a voice.
The traditional capital markets rely on the big investor dollars, from J.P. Morgan to Warren Buffett. Capital in the social capital market is much more democratic. In this space, the power of money alone, of investor dollars, is growing smaller. The greater scarcity is among those entrepreneurs who can build something beyond themselves. The social enterprise movement began with a hero phase – and to be sure the starter has a vital role. But it’s time to get past the hero. These are the days of the ones who make the dream a reality, who follow the visionary to build something bigger than she could imagine.

While the big dollars in the social capital markets often go to the heroes and the visionaries, it is the people on the ground who are defining seed capital. We see Village Capital, a seed funding network where the entrepreneurs themselves do due diligence on their peers. The experience transforms the entrepreneurs, who now have capital to deploy; and it transforms the investors, who have to let go of the total control that has a tendency to corrupt. We have seen well-run co-ops since the birth of the social capital markets. We are seeing the growth of collaborative commerce to crowdfunded investing, as the tools for making change are made available to all of us. They work best when enmeshed in learning loops that enhance our collective intelligence.
People-powered capital shows up in your wallet: in the way you buy, and in the way you invest at the level of the cash that’s in your wallet. The average person can’t issue a bank loan, but just $25 can make a big difference on a loan platform such as MicroPlace or Kiva. People can make a bigger difference through the modality of sharing – using Zipcar instead of buying a car; sharing a desk at the Hub instead of renting office space.  We can reduce our use of scarce resources while creating a more socially constructed economy where personal and collective relationships, managed well, reduce costs.
People-powered capital works for the social capital markets because the market is partly in the commons. The work of Elinor Ostrom, Charlotte Hess and other economists in defining new commons where abundance rules – rather than tragic scarcity – will be important as the complexities of narrowly measuring a particular intervention’s social or environmental impact run into another social enterprise’s claim.
The thinkers and doers need capital, particularly seed capital. For all the talk in the sector, there are only 5 impact funds of more than 250 that are providing seed capital. The rest of the money comes from the people – people who are spending less through collaborative consumption, sharing more through crowdfunding, and building collective efforts through peer-led diligence and investment. The big dollars aren’t stepping up at the seed-stage so the people are fueling a movement to change the world.
What about government? Government does not rule the commons; it is one of the players, along with neighborhoods and other groups.  Social enterprises can partner with government as they grow – though that relationship is tricky, at least in the U S., because government gives lip service to putting its money into this market more than it gives solid help or capital. Government imposes timelines and rigid processes that make it a challenging partner for the more entrepreneurially-focused portion of the social capital market. That portion is often more innovative and creative than stiff government, they’re prone to not showing up on time, and they can’t say what resources they will deliver when. So relying on government can alter a social enterprise in ways that limit its rapid impact.
While some in the markets are doing work that could bear fruit over time – for example, OPIC is creating low-cost debt for international impact investment funds – if you look back from announcement to reality, it is not reasonable to put much hope or faith in the performance of the American government in becoming an effective partner of this movement. I can’t be sure when they will really show up for anything more than another set of meetings.
And how do we measure the impact we are making? At GoodCap, we measure the good that our investment, as well as our fund, is doing in the world. This is more difficult than it sounds. We can’t make the metric a drag on performance. Rather, we try to use the metric as a management tool; the entrepreneur should report out on the value he or she creates, and what that social or environmental value costs the company. That’s important information for an investor to evaluate.
We also should measure the cost of the social impact delivered to the absolute market return that could be made if you ignored the negative consequences of what it takes to drive your profit margin, the cost to the environment and to the people, to the planet and to us, the people who want our grandchildren to thrive. In other words, is there a trade-off? How much does your mission cost your business, or the business you have invested in, or the total fund’s financial return? We don’t count that at GoodCap, but it’s something on our roadmap for when the time is right.
As we measure financial and social returns, the social capital market is becoming more clear. There are sectors that have been sized and are investable with microfinance moral risk. For instance, you can’t saturate the market for rural, locally-produced sustainable energy in the developing world; you need partners to handle payment, repair and installation, etc.; and it’s the anthropology, not the technology: knowing both what works where, and who to trust where that leads to success. Whereas debt can just build upon itself in a rapacious way.
We’ve created a young, fast-moving market, but it needs to be a grandfather’s market: what kind of market would a grandfather create if he lived around his grandchildren? At its best, the social capital market is a multigenerational market; it has to work for children, for elders, and for those in between. In this market, people don’t become statistics on a balance sheet; to be pushed about as the market dictates, with profit enshrined in investing, the dollar for itself as an abstraction so that distortionate levels of growth are the only thing worth focusing on.
To create a grandfather’s market, we need to stop searching and waiting for the heroes, and begin to put seed capital into the implementors, the executors, the workhorses. We need to stop waiting for the big fish to put in big dollars, and create, grow, and expand structures where people can both power and feed off capital.  What if entrepreneurs could invest in each other? What if consumers could finance the co-ops and fair trade products they buy? What if I could share my workspace and my home with other builders sharing my values? The social capital markets are attacking these questions head-on.

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