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Social Business Fund Exploration

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We engaged Next Street to help us explore how best to support the capital needs of local social purpose businesses.

Next Street conducted interviews with local stakeholders and explored a variety of national and local models that provide capital and other support to social purpose businesses. This slide deck shares their extensive findings, which will help inform our strategy to support the capital needs of local social purpose businesses.

Published in: Government & Nonprofit
  • My sentiments exactly Terri! This information will serve our community well in so many ways. We are so grateful to Bush for their leadership in creating a place where a Purpose Driven Economy can thrive!
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  • This is a fantastic summary of social entrepreneurship ecosystem needs as well as a good reminder of the same for traditional entrepreneurs. Thank you Bush Foundation for commisioning this report and sharing it.
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Social Business Fund Exploration

  1. 1. Next Street Financial LLC © Copyright 2017 1 SOCIAL BUSINESS FUND EXPLORATION: PHASE I FINDINGS FEBRUARY 15, 2017
  2. 2. Next Street Financial LLC © Copyright 2017 2 TABLE OF CONTENTS Project Overview Building a Successful Ecosystem Supporting Social Business Exploring a Fund Appendix
  3. 3. Next Street Financial LLC © Copyright 2017 3 BIG PICTURE PROJECT OBJECTIVES Project Objectives 1. Research and share some of the best, most interesting Fund models 2. Identify questions to answer and decisions to make in order to establish the Fund 3. Help us understand “what it would take” to operationalize the initiative 4. Help us decide whether and how to proceed Covered in this presentation
  4. 4. Next Street Financial LLC © Copyright 2017 4 SOCIAL BUSINESS FUND EXPLORATION: PROGRESS UPDATE During Phase 1, Next Street completed 40+ local interviews and 20+ national best practice interviews, including social businesses, capital providers, and business support organizations Phase IIIPhase IIPhase 1 > Internal interviews & working sessions: Understand the scope, activities, & goals of the broader social business ventures initiative; Align on how the fund would fit into the efforts of the overall initiative > Assessing the social business ecosystem: Evaluate & identify gaps in the social business ventures ecosystem, including demand for capital from social businesses > Social business support model best practices scan: Research and share interesting place-based fund models both in & outside of the Twin Cities region > Options development: Explanation of what it would take to operationalize the fund under a few high-potential scenarios > Options assessment: Create a framework for evaluating trade- offs of different place-based impact investing fund models > Narrow options: Facilitate working sessions to refine collective thinking & narrow in on the group’s preference > Explore different methodologies for fundraising, deployment, portfolio management and impact measurement / reporting > Facilitate decision-making process around pursuing the appropriate structure of the fund as well as a go / no-go decision around whether to pursue > Develop an implementation roadmap and timeline for ‘standing up’ the fund Alignment & Fact Finding Options Exploratory Recommendations Complete
  5. 5. Next Street Financial LLC © Copyright 2017 5 TABLE OF CONTENTS Project Overview Building a Successful Ecosystem Supporting Social Business Exploring a Fund Appendix
  6. 6. Next Street Financial LLC © Copyright 2017 6 BUSH SOCIAL BUSINESS VENTURES INITIATIVE HELP PEOPLE DO GOOD THROUGH BUSINESS The guiding goal of our social business ventures initiative is to make our region the best place in the country to launch and grow a social purpose business. Support the growth of businesses that address a social issue Encourage more investors to consider investing in social business ventures REMINDER
  7. 7. Next Street Financial LLC © Copyright 2017 7 INTRODUCTION > The goal of the Social Business Initiative broadly is to make the Twin Cities region one of the best places to start and grow a social business; this requires a thriving ecosystem that has the necessary supports in place to foster start-up and scale-up activity > While this project is intended to explore a fund, it is important that we remember that capital is only one component of an ecosystem – and the success of a fund will, to a large extent, depend upon the success of the ecosystem writ large > So we started our thinking with two questions: 1. What defines a successful traditional entrepreneurial ecosystem and how is this the same or different for social businesses? 2. What are the strengths and weaknesses of the Twin Cities entrepreneurial ecosystem (traditional & social) today?
  8. 8. Next Street Financial LLC © Copyright 2017 8 SUMMARY: COMPONENTS OF A SUCCESSFUL ECOSYSTEM? > Across the board, through interviews and research, we learned that successful entrepreneurship across any vertical requires a supportive ecosystem – It is also clear that scholars of entrepreneurial ecosystems see entrepreneurs as critical drivers of economic growth and employment > A supportive ecosystem is comprised of a number of elements – funding, human capital, market receptivity, regulation and culture – and the success of the ecosystem ultimately depends upon the complex interactions of the many sub-factors that comprise these categories – The specific sub-factors include things like: venture capital, debt, skilled labor, mentors, early adopters / customers, networks, success stories, regulatory frameworks / incentives, etc. > While the fundamental ingredients for a successful social entrepreneurial ecosystem are the same as for a traditional entrepreneurial ecosystem, the additional lens of social impact adds a layer of complexity, particularly around funding / capital deployment > One factor that stood out as uniquely critical, for both social and traditional ecosystems, is the need for successful entrepreneurs to re-invest both knowledge and capital into the ecosystem “Entrepreneurship is not the solo endeavor it’s often billed to be. The most visionary founders still need helping hands to bring their dreams to life. They still need communities to support them, challenge them and help them grow.”
  9. 9. Next Street Financial LLC © Copyright 2017 9 WHY DOES ENTREPRENEURSHIP THRIVE IN SOME PLACES, NOT IN OTHERS? This is the question The Kauffman Foundation sought to answer through their ‘Index of Entrepreneurship’ series, which measures entrepreneurship across national, state and metro levels. Source: http://www.kauffman.org/~/media/kauffman_org/microsites/kauffman_index/startup_activity_2016/kauffman_index_startup_activity_metro_trends_201 6.pdf “The answer matters because entrepreneurship has affected the well-being of every human on this tiny planet. Thus, entrepreneurship should not be a privilege of the few. Indeed, one of the most powerful things about entrepreneurship is its universality. All communities, cities, and states can become “ecosystems” of entrepreneurial innovation to generate new businesses and jobs. They can all connect ingredients to create environments that spawn businesses in new, impactful ways. Our hypothesis is this. The key to building successful ecosystems is a culture that connects people and enables them to share unique experiences, skills, and insights in collaborative ways. That’s why trust is so important. Trust girds the invisible infrastructure of a community. That’s why diversity is so vital. Diversity leads to the serendipitous interactions that invigorate ecosystems. And that’s why immigrants, and other “boundary crossers,” are so essential. Immigrants have played prominent roles in the development of so many high-growth companies in our nation. That beautiful mixing of backgrounds, knowledge, and perspectives—it’s what feeds the dynamism of entrepreneurial communities everywhere.”
  10. 10. Next Street Financial LLC © Copyright 2017 10 WEF: ENTREPRENEURIAL ECOSYSTEMS AROUND THE GLOBE The World Economic Forum, in collaboration with Stanford University, E&Y and Endeavor, surveyed over 1,000 entrepreneurs from around the globe with the goal of better understanding how successful entrepreneurial companies accelerate access to new markets and become scalable, high-growth businesses – they found 8 pillars of an entrepreneurial ecosystem: Source: http://www3.weforum.org/docs/WEF_EntrepreneurialEcosystems_Report_2013.pdf Entrepreneurs see Accessible Markets, Human Capital / Workforce, and Funding & Finance as the most critical pillars
  11. 11. Next Street Financial LLC © Copyright 2017 11 BABSON DOMAINS OF THE ENTREPRENEURSHIP ECOSYSTEM Source: http://blogs-images.forbes.com/danisenberg/files/2011/05/EES-Domains-and-Pillars-only1.jpg Nature or Nurture? “I am frequently asked if entrepreneurs are born or made. The same question can be applied to entrepreneurship ecosystems: Do they evolve naturally, or can we intelligently design them? I think a proper understanding of the nature of the entrepreneurship ecosystem gives us a clue: they are usually the result of intelligent evolution, a process that blends the invisible hand of markets and deliberate helping hand of public leadership that is enlightened enough to know when and how to lead as well as let go the grip in order to cultivate and ensure (relative) self-sustainability.” Policy Supports Culture Finance Human Capital Markets Entrepreneurship “The big step changes in entrepreneurship that we witness from time to time are the results of what statisticians call “high order interactions,” that is, many variables working together. In fact, a handful of individual people, sometimes one or two, can be the catalysts without which the step change would not have occurred.” Indicates that it is possible to intentionally spark an ecosystem development; however, it is important to remember that a catalyst relies on a complex series of reactions to follow – and those are more difficult to control
  12. 12. Next Street Financial LLC © Copyright 2017 12 • This includes seed funding, grants, and venture capital (representing both public and private sources) • Funding is reported as the #1 challenge facing social entrepreneurs – True for nonprofit & for-profit ventures, and represented 45% of the challenges reported – There is a funding gap for women and entrepreneurs of color • Everything from cost of living to the “energy” of a city and social spaces determines an entrepreneur’s experience • Cities with a generally high quality of life tend to attract people who go on to found social ventures – 47% of social entrepreneurs surveyed chose their city because they already lived there 1. Funding 2. Quality of Life • Finding great people – as mentors, team members, employees, and advisors – is the engine of any venture • Mentors and universities are critical parts of the ecosystem • 72% of men and 65% of women agreed that mentors were available in their ecosystem • Regulations, market receptivity, and even perception and attitudes towards a social enterprise can create an environment that either nurtures or stifles social enterprise • 42% (SF) - 78% (Boston) agree their local gov’t is supportive of social enterprise 3. Human Capital 4. Regulation & Receptivity THE “FOUR PILLARS” While the four pillars are particularly key for social entrepreneurs, focusing on ecosystems will also create healthy business environments for all entrepreneurs and business owners “Diversifying the profile of funders and finders – more women, people of color, people who have lived experience with the entrenched social issues these innovators are trying to solve – could dramatically tip more capital into this space.” “The higher the quality of life, the more likely a social entrepreneur is to recommend the city to other entrepreneurs. This, in turn, makes communities richer and ecosystems better as cities reach a critical mass of entrepreneurs and resources.” “Human capital is more than a search for effective employees. The interconnected web of mentors, advisors, thought leaders, and investors contributes to a rich talent base that supports social enterprise.” “Regulation and receptivity set the tone. A combo of the regulatory environment and general market feelings about social impact can help social enterprises flourish within an ecosystem…local gov’t can play an enormous role in shaping the conversation, through policy and convening.”
  13. 13. Next Street Financial LLC © Copyright 2017 13 SOCIAL ENTERPRISE ECOSYSTEM SURVEY Survey Overview Survey Outcome Halcyon just launched their 2nd survey, expanding from 9 cities to a target of 23; we are working with Halcyon to administer the survey in the Twin Cities. We will get preliminary response data by mid-March and the report will be published mid-2017. In the fall of 2015, the Halcyon Incubator conducted a survey of ~400 social entrepreneurs across the country in order to identify the four pillars of a successful social enterprise ecosystem and subsequently rank the cities with the highest response rate The Starting Line: Survey Responses: Over three months, Halcyon surveyed 388 leaders of for- and non-profits who identify as social entrepreneurs, with respondents hailing from all across the country Small Groups: Halcyon consulted with dozens of experts and thought leaders in the social enterprise space Public Data: From publicly available data, Halcyon learned more about what resources social enterprises currently have in existing ecosystems Framework: From the survey, Halcyon developed the four pillars, which became a lens that the Incubator uses to frame its thinking moving forward Index: Using public data, Halcyon measured the capacity of ecosystems using the four pillars framework Application: Using this quantitative model, Halcyon honed in how this data can lead to action in different cities Methodology: City Composite Fundin g Quality of Life Human Capital Regulation & Receptivity Washington, D.C. 71.7 11.1 18.8 18.3 23.5 San Francisco, CA 65.2 15.3 11.5 18.9 19.5 Austin, TX 63.6 11.6 20.2 12.8 19.0 Boston, MA 61.6 18.1 14.4 15.1 14.0 Seattle, WA 59.0 13.9 18.3 13.4 13.5 New York, NY 57.8 20.4 11.1 15.4 11.0 Chicago, IL 54.4 13.0 12.5 15.4 13.5 Los Angeles, CA 48.6 18.5 5.8 9.3 15.0 Miami, FL 43.3 3.2 15.4 8.7 16.0 [Max 100] [Max 25] [Max 25] [Max 25] [Max 25]
  14. 14. Next Street Financial LLC © Copyright 2017 14 Description New entrepreneurs seek to build scalable companies in a specific geographic location. Entrepreneurs are able to grow their companies and reach scale. Successful entrepreneurs and companies stay in the local area and engage with new companies. Successful entrepreneurs reinvest in the next generation. Critical Success Factors > Geographic location’s quality of life > Entrepreneur’s desire to grow and scale > Access to • Customers • Financing • Talent • Entrepreneurial ability > Geographic location’s quality of life > Entrepreneur’s desire to reinvest in local ecosystem > Existence of/access to: • VCs and angel investors • Inspiration • Mentorship • Spinoff businesses Examplesof Catalyzers > Organizations, programs, and amenities that make a location a great place to live for early-stage founders > Public-private partnerships that attract outside investors > Limited regulation that makes customer acquisition challenging > Identify and incentivize successful founders to mentor new startups > Local area amenities that lead to a high quality of life for both seasoned and new entrepreneurs > Create avenues that connect successful entrepreneurs with high-potential founders > Promote seasoned founders as mentors and local role models HOW DID SILICON VALLEY BECOME SILICON VALLEY? Great new companies, and thriving ecosystems for entrepreneurship, can develop through an initial influx o committed entrepreneurs who are invested in seeing other startups thrive in a local area 4. REINVESTMENT3. COMMITMENT2. GROWTH1. AMBITION This is a cyclical process that relies on the continual influx and creation of ambitious entrepreneurs to grow scalable companies in a specific location.
  15. 15. Next Street Financial LLC © Copyright 2017 15 “THE MULTIPLIER EFFECT”: BUENOS AIRES Founded in 1998, Endeavor Argentina was an early pioneer of Endeavor’s model. Despite being recognized as “one of the toughest places business climates on Earth,” the Buenos Aires tech sector has thrived, due to powerful connections between entrepreneurs facilitated by Endeavor. In 1999, Buenos Aires tech sector looked like this. Practically a desert. Endeavor Insight research and network maps illustrate the “power of the few” in catalyzing a multiplier effect Entrepreneur-led ecosystem development works best. A small number of high-impact entrepreneurs turn out to be especially critical It takes more than just start-ups. Scaleups drive most wealth and job creation. Entrepreneurs who have successful exits should be encouraged to become active angel investors and/or VCs. Endeavor Lessons
  16. 16. Next Street Financial LLC © Copyright 2017 16 SUMMARY: TWIN CITIES ENTREPRENEURIAL ECOSYSTEM So, where are the Twin Cities today? > The Twin Cities region has not been a particularly favorable environment for start-ups in recent history, particularly for start-ups operating outside of the MedTech or Food Systems space; this is attributed to a variety of factors, including: – Pervasive ‘risk-aversion’ due to high density of Fortune 500s that provide stable, low-risk jobs, – Thin capital landscape that forces entrepreneurs to look, and ultimately relocate, outside the region for funding – Lack of active, visible leaders with demonstrated success who are re-investing in the ecosystem > That said, according to research by the Kauffman Foundation, while the Twin Cities are lagging other major metros on start-up activity, the region is actually a relatively strong place to maintain or scale a small business > Additionally, the traditional entrepreneurial ecosystem is starting to see signs of momentum, through an influx of accelerators / co-working spaces and some early success stories; this increase in momentum has been driven in large part by enhanced interest / efforts from the Fortune 500 community (e.g., Target & Tech Stars) > However, this momentum has not yet translated to the social entrepreneurship ecosystem, which is held back by lack of coordination, lack of clarity in terms of what’s ‘in the tent’ and an entrenched ‘nonprofit’ attitude towards socially minded activities
  17. 17. Next Street Financial LLC © Copyright 2017 17 INDEX OF ENTREPRENEURSHIP Compared to the 40 cities analyzed by the Kauffman Foundation, the Twin Cities measured up well on Main Street Entrepreneurship and Growth Entrepreneurship – indicating that the region provides a healthy ecosystem for small businesses to thrive and grow – but is lagging in Start-up Activity metrics. Source: http://www.kauffman.org/~/media/kauffman_org/microsites/kauffman_index/startup_activity_2016/kauffman_index_startup_activity_metro_trends_2016.pdf This is an early indicator of the beginnings of entrepreneurship, focusing on: new business creation, market opportunity and startup density Startup Activity Measures business ownership and density of established, local small businesses, focusing on businesses more than 5 years old with less than 50 employees Main Street Entrepreneurship Growth Entrepreneurship Focuses on the growth of entrepreneurial businesses, as measured by growth in both revenue and employment 3Indexes 1 2 3 1 40 38 6 17
  18. 18. Next Street Financial LLC © Copyright 2017 18 LOCAL LANDSCAPE: STABILITY IS BETTER THAN DISRUPTION Select QuotesKey Findings The culture of entrepreneurship that led to the region’s unparalleled density of Fortune 500 companies has given way to a sense of risk-aversion, driven partly by a new generation of corporate leadership… > The current corporate leaders of major Twin Cities mainstays (e.g., 3M, General Mills) are largely transplants with less of a stake in the innovation ecosystem of the region than the entrepreneurial individuals of the founding generation; could do much more to leverage their vast supply chains as a catalyzing opportunity for startups and innovators > This has lead to a departure from the ‘incredible individual’ theory of change, and the Twin Cities is struggling to retain and attract individual innovators who will help to catalyze and sustain a new ecosystem of innovation; professional success is often seen as acquiring a steady career job, rather than pursuing riskier, less traditional paths …as well as a lack of policy support & risk capital > The political / regulatory priorities seem to center around bringing in other large corporates (e.g., Amazon) and keeping large HQs happy instead of removing barriers to entry and incentivizing entrepreneurship > For entrepreneurs without the availability of seed money from friends and family, few early stage funding options exist within the local landscape > In addition, the early-stage investors that do exist are still too risk-averse to meet the actual needs of many early-stage, first-time entrepreneurs – especially those in industries beyond Med-Tech and other Twin Cities mainstays > This often leads to the businesses being “pulled” out of market by investors as they’re forced to look elsewhere for early-stage funding, causing a “brain-drain” of entrepreneurial talent that is critical to catalyzing an ecosystem These same themes echo throughout the social sector, which is dominated by an abundance of long- standing nonprofits operating on models that can feel somewhat tired > The ‘Land of 10,000 Lakes’ is also known as the ‘Land of 10,000 Nonprofits’ – while the commitment to philanthropy is admirable, an over-reliance on traditional approaches to social change has hampered the creative problem-solving capacity of the region “The corporate class now is conservative and risk-averse. It’s all walled gardens now with the Fortune 500s as they protect what’s in their wall versus fostering growth and expansion” “The Twin Cities should be a great place to start a company, there are so many Fortune 500s here with supply chains we could tap into. Instead we find that it’s impossible to even get in the door” Home to more Fortune 500 companies per capita than any other city in the U.S., the Twin Cities has historically projected more of a stable vibe than a disruptive one; this is similarly evidenced by the abundance of nonprofits, many of which have been around for decades. “Nonprofits should exist to not exist at some point in time, but I don’t think many in the Twin Cities have that attitude” “The problem in this town is that there is no option for equity unless its sweat equity or you’re able to tap into family and friends” “If you’re getting funded in the Twin Cities today, you’re probably not very innovative” “We need a real success story who can be a figurehead and put skin in the game…like Peter Thiel”
  19. 19. Next Street Financial LLC © Copyright 2017 19 NAVIGATING RELATIONSHIPS WITH LARGE COMPANIES Large companies can play many important roles in accelerating the growth of early-stage companies. But, early-stage companies need to adopt an “eyes wide open” perspective both in negotiating with large companies and in executing on partnerships. 7 Areas where productive relationships are possible… Challenges are often reported in the following 7 areas… Source: http://www3.weforum.org/docs/WEF_EntrepreneurialEcosystems_Report_2013.pdf 1. Customer engagement – early customers to accelerate growth 2. Credibility enhancement – lighthouse / tentpole customers, brand display, references 3. Strategic investors and financing partners – increasing financial resource capacity 4. Mentorship & advice – insight into new markets and industry structure 5. Go-to-market partners – distributors and resellers, access to outlets, logistics 6. Operating capability enhancement – manufacturing, software, technology, know-how 7. Licensing leverage – licensing start-up technology to enter a new market 1. Attracting attention – attracting attention from large companies 2. Productively working together – coordination and commitment from the large company 3. Value appropriation – challenges associated with value creation and value capture 4. Maintaining focus – defocused start-up companies having their attention and skills diverted 5. Imposed, not-so-hidden costs – imposing direct opportunity costs on start-ups 6. Predatory contracting and litigation – lawyers / lawsuits undermine the progress of start-ups 7. Regulatory capture by large companies – creating a non-level playing field
  20. 20. Next Street Financial LLC © Copyright 2017 20 LOCAL LANDSCAPE: A RE-EMERGING CULTURE OF ENTREPRENEURSHIP Select QuotesKey Findings The good news is that the Twin Cities region has a strong pool of human capital, driven largely by the university system and a high quality of life – both important factors for encouraging entrepreneurial activity > Anchored by the University of Minnesota, the Twin Cities boasts a strong pipeline of talent coming out of its eight private liberal arts colleges, nine private colleges and universities, and 11 state colleges & universities > While attraction to the region can be a challenge, many interviewees cited the ‘stickiness’ of the region given the low cost of living and high quality of life, particularly for raising a family (validated by Greater MSP report, which lists MSP as #1 of 25 metros in retaining professional talent but #19 in attracting it) > This ‘stickiness,’ however, is less effective at retaining leaders and innovators from minority communities – particularly in technology and entrepreneurship (both traditional and social) And the region is gaining traction as general entrepreneurial activity has recently picked up in the form of co-working spaces and reinvestment in the community by a handful of successful entrepreneurs > Entrepreneurs in the Twin Cities now have solid options in terms of co-working spaces (e.g., CoCo, Impact Hub) to launch and grow their businesses, and there is also a growing landscape of idea-stage accelerators (e.g., MN Cup, Techstars) helping entrepreneurs at the earliest stages of concept development But better coordination and entrepreneur / investor education is needed as many stakeholders note that the local ecosystem is silo-ed and remains fragmented, with suboptimal collaboration impeding a move to the next level > While the conversation surrounding social enterprise and impact investing in the Twin Cities is robust, some stakeholders share the sentiment that not enough tangible action – besides co-working spaces – has resulted thus far from this dialogue as there is still a clear need, in particular, for increased “Venture capital bets on people, but entrepreneurship, and even social entrepreneurship, is often viewed as a privileged path and doesn’t resonate for most communities of color” “We have an incredible pipeline of talent and a brilliant workforce, but many people are creating things and then still leaving. We’re also #14 versus #1 in terms of retaining people of color” Shifting away from this somewhat ‘risk-averse’ philanthropic focus and mainstay corporate mindset will take time and effort, but the region is showing encouraging signs of entrepreneurial momentum. However, the overarching entrepreneurial ecosystem, and the social enterprise ecosystem in particular, will require increased coordination, education, and innovation in order to leap to the next level and truly compete with ecosystems in comparable metropolitan areas like Denver or Seattle “There is no 1871 here like in Chicago. Without a one-stop- shop next step that’s tailored to this market, we’re going to continue to lose the social enterprise potential that we’re fostering” “We have a gut of co-working spaces right now….we don’t need more”
  21. 21. Next Street Financial LLC © Copyright 2017 21 LOCAL LANDSCAPE: SOCIAL ENTREPRENEURSHIP FINDING ITS FOOTING Select QuotesKey Findings The social entrepreneurship ecosystem development in the Twin Cities struggles with a lack of definitional clarity, fragmentation and poor integration with other resources… > There is a lack of consensus around what qualifies as a ‘social business’ – ecosystem players from entrepreneurs to funders conflate social business with nonprofit, and there are no centralized resources for all stakeholders > Many of the fundamental challenges facing entrepreneurs are similar for traditional and social entrepreneurs, yet the social space segments themselves, missing out on the energy and resources at places like CoCo > There is not a strong connection between the corporate community & social enterprise community right now; integration & support from this group would be helpful > Social business potential is not being captured from existing pipeline sources (e.g., Minnesota Cup, Bush Fellows) due to gaps in the social enterprise ecosystem that result in a void of catalytic opportunities …it is also hindered by a system that has developed lots of support for nonprofits, but less social businesses > Creating an economically viable business model to address a social challenge is uniquely challenging; entrepreneurs need training, mentoring, coaching, technical assistance – all before and in addition to capital > There are solid supports and funding for nonprofits generally, with some specific support for them to think about social enterprise strategies (e.g., NAF’s Financial Resiliency through Social Enterprise program) Human capital is not being effectively harnessed, which leads to a dearth of pioneers to point to > There is a widely acknowledged need for visible leaders & committed mentors, which, going back to building an ecosystem, was widely cited as a vital ingredient The PBC initiative got a lot of hype … but without more substantial action behind it, it will fail to achieve full potential – missed opportunity to enact real policy incentives > Without formal incentive structures (e.g., ability to take grants, or tax breaks on returns) the PBC designation is just a label with no real ability to support entrepreneurs in their quest to grow & scale – if anything, it’s Comparatively, the social entrepreneurship momentum is lagging largely due to fragmentation of early efforts and lack of clarity around what ‘fits’. The energy is building but there is a long way to go towards creating a self-sustaining and robust social business ecosystem. “The problem is deal flow, not capital” “Social business is way too nebulous… We need to parse this down a bit – is it intent? Is it specific impact? Does it matter how the impact is realized” "Our market needs a definition that defines the intentional and measurable financial return goal because right now entrepreneurs don't see the value in identifying themselves as both doing well and doing good” "People always ask me - shouldn't you be a nonprofit?"
  22. 22. Next Street Financial LLC © Copyright 2017 22 LOCAL LANDSCAPE: FUNDING FOR SOCIAL ENTERPRISES Select QuotesKey Findings The lack of start-up risk capital is particularly acute for social entrepreneurs… > Social entrepreneurs in the Twin Cities face two challenges that “traditional” entrepreneurs do not: 1. Investors often conflate social business & social service: the venture capital space does not understand or is skeptical of the financial return on social businesses, particularly given volume of nonprofits in the Twin Cities, and the ‘muddiness’ of the social business perception (ranging from for- profit enterprises to nonprofits with earned revenue) 2. Social businesses require more flexible funding: even scalable, for-profit social businesses require more patient, flexible capital as they work to build more innovative solutions to significant social challenges > An influx of patient, equity capital is needed locally to give social businesses the financial runway to build minimally viable products and impact reporting infrastructure needed to prepare for market-rate opportunities down the road > Significant opportunity exists for foundations to help fill the void in the local capital landscape for social businesses …and women and minority social entrepreneurs in particular > While there is a robust ecosystem of CDFIs and other alternative lenders in the Twin Cities – particularly as compared to other metropolitan areas of similar size and demographics – women and minority entrepreneurs still face greater social and financial barriers to accessing early-stage capital – These CDFIs / alternative lenders (e.g., MEDA, Sunrise Banks) could serve as interesting partners if Bush were interested in exploring new product development as a solution to filling some of these funding gaps > The social business ventures ecosystem is more diverse than other verticals locally, but the pipeline of social entrepreneurs still skews towards white males with the financial and social capital needed to launch a for- profit business > There needs to be a focus on promoting and supporting social entrepreneurship as a viable career path for young people from high poverty neighborhoods A robust landscape of capital sources is a critical component to a thriving entrepreneurial ecosystem. While capital is needed across all stages of a business life cycle, we focused our discovery questions around early-stage capital – the piece that is most important for sparking entrepreneurial activity. We heard a resounding need for more risk- tolerant, early-stage funding for entrepreneurs generally, but particularly for social entrepreneurs in the Twin Cities region. “We need capital that helps people get started, not necessarily flourish” “There is certainly a lack of capital in the local social enterprise space” “I don’t like how you have to contort yourself to have a non- profit tilt in order to get money from a foundation here” “Foundations could play a huge role in addressing the structural inequities in capitalism and even within social enterprise” “There's a lot of nepotism in the Twin Cities around money flows - it all goes to the same nonprofits"
  23. 23. Next Street Financial LLC © Copyright 2017 23 Twin Cities capital availability for Social Business LOCAL FUNDING LANDSCAPE: SPARSE FOR SOCIAL BUSINESS NEEDS > The Twin Cities region ranks 56 out of 132 in venture capital deals per capita among major MSAs > With an average deal size of $13.1M & only 28 deals in 2015, the region’s VCs’ target larger deals and are focused on high-growth technology and life sciences companies > Two of the main angel investor networks, Gopher Angels and Twin Cities Angels, are focused on high-growth firms and invest primarily in med-tech companies 28293129 36 27 201 0 201 5 201 4 201 1 201 3 201 2 201 4 201 5 369 201 3 267269 201 2 361 201 1 273 201 0 149 VC in Minneapolis-St. Paul-Bloomington, MN-WI Amount Invested ($M) # of deals > Overall, the Twin Cities funding landscape is sparse for Social Business, with an extremely limited volume of equity funding earmarked for Social Business > While there is a robust alternative lender landscape (mostly CDFIs) in the Twin Cities offering below-market debt, many are population focused and do not target business with an intentional focus on social impact > Debt is readily available for mature businesses with fixed assets, 680+ owner FICO scores, and a track record of positive cash flow GeneralLackofEquity BroaderGapsfor SocialBusiness BusinessRevenues/Profit($) $5M $10M $1M $500k -$500k Revenue Profit Startup Early-Stage Growth Mature Twin Cities Capital Spectrum ILLUSTRATIVE
  24. 24. Next Street Financial LLC © Copyright 2017 24 LOCAL LANDSCAPE: GENERAL FEEDBACK FOR BUSH Select QuotesKey Findings There is a clear opportunity for an organization like Bush to build upon existing activity and strategically channel the robust but disjointed energy of the Twin Cities’ social business venture ecosystem into a unique competitive advantage for the region > With no designated capital source or resource center for social business ventures in the Twin Cities, there is an imminent need for tactical support in the form of a ‘one-stop-shop’ for financial resources in particular. Equally critical is the need for the championing of the success of existing social business ventures in order to validate the mainstream viability and spur investment interest from traditional financial providers in the region & beyond > If Bush is to enter the ecosystem to provide financial resources, however, that capital must commit to a high degree of risk and long-term objectives. The Twin Cities Social Business ecosystem is at an inflection point – true ecosystem building will only occur if real catalytic capital is provided that can both incentivize new entrepreneurs to make the leap and simultaneously take existing success stories to the next level Bush needs to be clear on their commitment to diversity & inclusion – and be intentional about their approach if they want to be successful on this front > The Twin Cities’ high standard of living is a juxtaposition to the spatial and structural isolation of the region’s minority community; there needs to be a focus on promoting and supporting social entrepreneurship as a viable career path for young people from high poverty neighborhoods; if Bush is not intentional about diversity / inclusion, this effort will fall short To avoid the potential pitfalls of broad, splashy initiatives, any entry into the Social Business ecosystem by Bush must involve conscious commitment to a strategic and long-term approach, regardless of the eventual vehicle > There is some hesitance amongst local Social Business stakeholders that a broad-sweeping initiative by Bush might be well-intentioned but misguidedly trying to ‘hit a homerun before getting a single;’ in particular, some for-profit stakeholders feel that foundations, in the past, have been a part of the problem and create resistance for true innovators > There is a real desire, echoed throughout the ecosystem, for foundations not to ‘jump into anything’ and instead commit to exploring strategic partnerships and dedicating the appropriate resources (e.g., an experienced fund manager) The vibrant but emerging social business venture ecosystem in the Twin Cities is ripe for the catalyzing, unifying power of a major regional stakeholder like Bush. While the undercurrents of an emerging ecosystem are driving a flux of exciting activity, the void of centralized, designated resources has created the need for a ‘champion’ to elevate social business ventures as a scalable, sustainable business vehicle capable of increasing both the problem-solving capacity and economic success of the Twin Cities region. “We need Bush to really spearhead the validity of Social Business and provide the fire power of existing efforts in the community” “Historically, the foundations have tried to run before they could walk” “Bush is in the business of investing in entrepreneurs, not businesses. There is a real need that Bush could fill as the Echoing Green of the Twin Cities, building a pipeline and capacity of the entrepreneurs” “We don’t need more coworking space. If Bush doesn’t want to be stale and is serious about moving the needle, they need to provide the early-stage capital” “VC bets on people, but entrepreneurship, and especially social entrepreneurship, is often viewed as a privileged path and doesn’t resonate as a viable career pathway for most communities of color” “We need somebody who believes in Social Business so much that they’re willing to throw real money at us until a few really make it”
  25. 25. Next Street Financial LLC © Copyright 2017 25 A FUND MUST BE INTEGRATED WITHIN THE BROADER SOCIAL BUSINESS INITIATIVE STRATEGY If we believe that a functioning ecosystem is truly multi-dimensional, then success for the overall initiative requires success on a number of different fronts – not merely a fund – all of which are heavily mutually dependent The things we do… activities, focus areas, roles Mission / Big Picture ‘Chicken and Egg’ Conundrum How do we create a thriving ecosystem for starting/growing social businesses How do we attract the right talent? How do we invest in this pipeline of businesses? How do we support strong ideas / businesses? How do we incentivize reinvestment? How do we elevate success stories? Question: Where do you start? How do you build an integrated strategy / plan that advances all elements at once?
  26. 26. Next Street Financial LLC © Copyright 2017 26 TABLE OF CONTENTS Project Overview Building a Successful Ecosystem Supporting Social Business Exploring a Fund Appendix
  27. 27. Next Street Financial LLC © Copyright 2017 27 BEST PRACTICE MODELS: SUMMARY OF TAKEAWAYS (1 OF 3) > The dynamics of culture, definition and structure are evolving towards an increasing focus on for-profit social enterprises & target “impact verticals” – As entrepreneur interest grows and regulations shift, the nonprofit / for-profit mix is shifting towards for-profit within the broader social enterprise community (e.g., Ashoka, DRK, Echoing Green); this is driven by a range of factors, including: • Millennials’ “both and” mentality – the idea that they can simultaneously do well and do good; • A focus on scale / sustainability through technology-enabled platforms; • Organizations’ direct experience with the benefits of ‘solution first, structure second’; and • The increasing interest of impact investors looking to deploy "market rate" capital – A stigma persists that social entrepreneurs necessarily sacrifice financial return in service of social mission; several blue-chip, first-mover social enterprise investors (e.g., Village Capital, Endeavour, City Light Capital) have abandoned the social enterprise label and are focusing instead on specific impact goals or impactful verticals > There is a widely-acknowledged tension between scope of geographic focus and financial risk/return and fund size – Nearly all “market-rate” capital providers cited geographic foci as too restrictive to generate sufficient deal flow – However, capital providers tend to specialize in industry or impact verticals given the competitive advantage of domain expertise, knowledge required to underwrite, and deal sourcing focus
  28. 28. Next Street Financial LLC © Copyright 2017 28 > Not surprisingly, business support organizations and hybrid organizations tend to be impact first, while capital providers tend to be financial first > Foundations are common catalysts and funders of incubators and accelerators (e.g., Robin Hood, Kapor, S&R), though some provide capital – Foundation-catalyzed models often focus on specific impact goals or target populations – They also enjoy high degrees of autonomy to leverage innovative social enterprise support strategies (typically for- and nonprofit) as one tool in the toolkit to achieve their mission goals (e.g., Blue Ridge Labs and Robin Hood) BEST PRACTICE MODELS: SUMMARY OF TAKEAWAYS (2 OF 3) “Infrastructure initiatives such as incubators, accelerators, large companies, investment funds and service suppliers are complementary. They will not create a network on their own, but they will provide the mechanisms for these high-impact entrepreneurs to realize their importance, activate the ecosystem and multiply their impact. They should be encouraged to become investors, mentors and board members to leverage the human capital that they have accumulated through their experience and their network.” -- World Economic Forum Report on Entrepreneurial Ecosystems
  29. 29. Next Street Financial LLC © Copyright 2017 29 > The talent spearheading initiatives across the national social enterprise ecosystem is increasing as well as diversifying both in terms of demographics and professional experience – Capital providers at the head of the pack (e.g., City Light Capital, Collaborative Fund) have found managers with extensive experience in traditional capital markets and are ushering in a new wave of investment strategy that focuses on impact as a company’s competitive advantage – Talent spearheading incubators and accelerators – although typically without the financial acumen – are increasingly required to have significant knowledge of and experience with social enterprise and is tasked with incorporating technology into their models in order to compete > Players across the national ecosystem also continually point to the lack of early- stage capital and are increasingly taking matters into their own hands by evolving into hybrid models with seed funds targeted to meet the needs of the very types of social enterprises they incubate – Incubators and accelerators are now developing their own early-stage venture funds due to lingering stigma and lack of understanding in the traditional funding landscape; existing successful impact-oriented venture capital funds also cite the need for new entrants in the early-stage funding space in order to attract critical follow-on capital and more viable exit opportunities BEST PRACTICE MODELS: SUMMARY OF TAKEAWAYS (3 OF 3)
  30. 30. Next Street Financial LLC © Copyright 2017 30 SOCIAL ENTERPRISE SUPPORT BEST PRACTICES SCAN > To identify important trends and best practices, we identified and assessed established and/or innovative models currently supporting social enterprises across the country > We leveraged the learnings and insights of a wide range of social enterprise ecosystem stakeholders, with a conscious deep-dive on capital providers and complementary focus on other particularly relevant support services and hybrid modelsModel Type Description Examples Innovative Capital Providers Traditional and non-traditional investors that primarily lend to/invest in social enterprises- with investment theses and portfolio strategies across the financial/social return spectrum Business Acceleration & Support Organizations Organizations that foster business creation and/or growth through direct support to social enterprises – e.g., technical assistance, real estate, networks, mentorship; includes accelerators, incubators, fellowships, and associations/networks Hybrid Organizations Organizations that both lend to/invest primarily in and provide direct, non-financial support to social enterprises; includes accelerators, incubators, fellowships, and associations/network models that include a financial support component,
  31. 31. Next Street Financial LLC © Copyright 2017 31 The best practice models identified span the spectrum of pure business support to capital provision and also exhibit rules-based or organic biases by social enterprise type/legal structure SOCIAL BUSINESS BEST PRACTICE MODEL INVENTORY Business Acceleration / Support Capital ProvidersHybrid For-ProfitHybridNon-Profit SocialEnterpriseLegalStructureFocus Best Practice Model Type
  32. 32. Next Street Financial LLC © Copyright 2017 32 TABLE OF CONTENTS Project Overview Building a Successful Ecosystem Supporting Social Business Exploring a Fund Appendix
  33. 33. Next Street Financial LLC © Copyright 2017 33 EXPLORING A FUND > Now that we have established and aligned on a robust fact base, we want to begin to lay out the decision points and necessary ingredients for a fund to support social businesses > Over the next few months, we will work collaboratively with you to define a range of opportunities and then assess each based on Bush’s preferences and constraints (e.g., fit with the Social Business initiative, potential impact, and resources required) > Select key decision points: – Clear definition of social business – Size and stage focus area(s) – Type of capital (debt vs. equity) – Financial risk and return expectations, including MRI/PRI – Geographic focus area(s) – Impact focus area(s) > Necessary ingredients: – Internal: capital, strategy, talent – External: pipeline (i.e., healthy ecosystem)
  34. 34. Next Street Financial LLC © Copyright 2017 34 “Social entrepreneurship is an appealing construct precisely because it holds such high promise. If that promise is not fulfilled because too many “nonentrepreneurial” efforts are included in the definition, then social entrepreneurship will fall into disrepute, and the kernel of true social entrepreneurship will be lost. Because of this danger, we believe that we need a much sharper definition of social entrepreneurship, one that enables us to determine the extent to which an activity is and is not “in the tent.” Our goal is not to make an invidious comparison between the contributions made by traditional social service organizations and the results of social entrepreneurship, but simply to highlight what differentiates them.” – Roger L. Martin & Sally Osberg, Stanford Social Innovation Review DEFINING SOCIAL BUSINESS VENTURES Source: https://ssir.org/articles/entry/social_entrepreneurship_the_case_for_definition > Based on our experience, local perspectives, and research review, it is critical to solidly define what we mean by “social business venture” and therefore clarify what will / will not be ‘in the tent’ of the Social Business initiative > As this quote mentions, the goal is not to make a judgment about the value of other activities, but simply to clarify where your focus begins and ends > This is particularly important within the context of a fund for a few reasons: – Thought leadership and influence – the fund will send a message in the market and also incentivize certain structures and activity – Capital deployment – pipeline development, risk/return expectations, and investment structuring vary considerably based on what’s in and what’s out
  35. 35. Next Street Financial LLC © Copyright 2017 35 WHAT DOES ‘SOCIAL BUSINESS’ MEAN TO YOU? When asked to define a social business, unsurprisingly, answers ranged from a nonprofit building out an earned revenue model, to a for-profit intentionally leveraging business to solve a social challenge, to a traditional for-profit business operating in a socially relevant industry Legal Structure 501(c)3 LLC, PBC, L3C, C Corp, S Corp LLC, C Corp, S Corp Intentionalit y Scalability Best Practice Model Example Social Enterprise Traditional EnterpriseNonprofit Social Business Nonprofit with Earned Revenue Model For-profit Working to Solve a Social Challenge through Business Traditional For-Profit Operating in an Impactful Vertical  
  36. 36. Next Street Financial LLC © Copyright 2017 36 SOCIAL ENTERPRISE DEFINITION A social enterprise leverages a business approach to address a social mission. Social enterprises can provide many different products and services, depending on the social mission and target population in question, but two characteristics always distinguish a social enterprise from other types of businesses and nonprofits: 1. Its primary purpose is addressing a social problem and serving the common good, either through its products and services or employing and training people with significant barriers to employment 2. Its commercial activity is a strong revenue driver, whether a significant earned income stream within a nonprofit’s mixed revenue portfolio or a for-profit enterprise What does “Achieving Scale” mean? Expanding Business and Program Operations Replicating to New Sites Transferring Knowledge Program expansion can mean expanding business operations, creating a new line of business, or strengthening work supports Successful social enterprises can be replicated in new communities either by the parent organization or through technical assistance efforts that enable partners in new communities to implement a similar model. For social enterprises with a more place-based approach, replication may not make sense since aspects of the model are so unique to the community. Instead, sharing a framework of principles and implementation lessons can help a new community adapt the approach to their local circumstances.
  37. 37. Next Street Financial LLC © Copyright 2017 37 SOCIAL ENTERPRISE DEFINITION Traditional Nonprofit Traditional Business Social Enterprise Source: Social Enterprise Alliance Twin Cities.
  38. 38. Next Street Financial LLC © Copyright 2017 38 DEFINING A SOCIAL BUSINESS: BREAKING IT DOWN The “What”: the nature of the products or services it provides The “How”: how the produce or service is produced (e.g., employment practices) The “Who”: serving the needs of specific communities or owned by a member of a specific population The “Where”: locating in a specific place The “Share”: sharing profits with charity Intentionality: focusing explicitly on social impact Measurement: measuring intentional social impact FOR DISCUSSION Social Business What makes an entity “social”? What makes an entity a “business”? Legal status: for-profit legal status Earned income: generating a certain portion of income from commercial activity Scalability: potential for model to scale and/or be replicated Stage: idea, start-up, growth, operating – does an enterprise at any stage of the lifestyle qualify or are we targeting a certain segment (i.e., start-up / idea stage ‘ventures’ only)? Many of these definitional elements don’t have to be binary, and most inherently require values-based judgments; however, establishing non-negotiable elements and relative weighting will be important down the line The business component of the definition is particularly important as we begin to consider investment strategy and structure and as we begin to target roundtable participants, craft early messaging and engage with local Social Business
  39. 39. Next Street Financial LLC © Copyright 2017 39 THE LIFECYCLE OF A SOCIAL BUSINESS Understanding the lifecycle of Social Business and relevant ecosystem resources is important, particularly when considering investment, because early stage businesses (the typical profile of an Social Business) need equity (or equity-like debt) because they can’t support traditional debt Resource Sourcing (Designers, Developers, Ideas, etc.) Ideation Product Concept Pilot Testing Validation & Broad Market Testing Efficiency Scale Continuous Improvement Expansion through Innovation Mobilization & Ideation (3-6 months) Business Incubation & Creation (6-8 months) Venture Growth (1-3 years) Stabilization Innovation or Decline Venture Lifecycle Stage Business Maturity Stage Friends & Family Seed Series A Series B, C, etc. Mezzanine / senior debt, IPO, strategic acquisition Funding Stage Growth(Revenues,Users,etc.) Time Discovery Evaluation Execution & Iteration Innovation Process Step
  40. 40. Next Street Financial LLC © Copyright 2017 40 TABLE OF CONTENTS Project Overview Building a Successful Ecosystem Supporting Social Business Exploring a Fund Appendix
  41. 41. Next Street Financial LLC © Copyright 2017 41 Appendix > Overview of Best Practice Model Scan > Deep-Dive Best Practice Model Case Studies > Inventory of Additional Models Reviewed Appendix: Reference Packet
  42. 42. Next Street Financial LLC © Copyright 2017 42 SOCIAL ENTERPRISE SUPPORT BEST PRACTICES SCAN > To identify important trends and best practices, we identified and assessed established and/or innovative models currently supporting social enterprises across the country > We leveraged the learnings and insights of a wide range of social enterprise ecosystem stakeholders, with a conscious deep-dive on capital providers and complementary focus on other particularly relevant support services and hybrid modelsModel Type Description Examples Innovative Capital Providers Traditional and non-traditional investors that primarily lend to/invest in social enterprises- with investment theses and portfolio strategies across the financial/social return spectrum Business Acceleration & Support Organizations Organizations that foster business creation and/or growth through direct support to social enterprises – e.g., technical assistance, real estate, networks, mentorship; includes accelerators, incubators, fellowships, and associations/networks Hybrid Organizations Organizations that both lend to/invest primarily in and provide direct, non-financial support to social enterprises; includes accelerators, incubators, fellowships, and associations/network models that include a financial support component
  43. 43. Next Street Financial LLC © Copyright 2017 43 The best practice models identified span the spectrum of pure business support to capital provision and also exhibit rules-based or organic biases by social enterprise type/legal structure SOCIAL BUSINESS BEST PRACTICE MODEL INVENTORY Business Acceleration / Support Capital ProvidersHybrid For-ProfitHybridNon-Profit SocialEnterpriseLegalStructure Focus Best Practice Model Type
  44. 44. Next Street Financial LLC © Copyright 2017 44 MODELS REVIEWED IN-DEPTH The following models were short-listed for detailed review: *Indicates in-depth case study developed 21. *Kapor Capital (Oakland, CA) 22. MacArthur Foundation Benefit Chicago (Chicago, IL) 23. MassChallenge (Cambridge, MA) 24. NEO Fund for our Economic Future (Cleveland, OH) 25. *Omidyar Network (Palo Alto, CA) 26. RSF Social Finance (San Francisco, CA) 27. REDF (San Francisco, CA) 28. Seed Spot (Phoenix, AZ) 29. *Skoll Foundation (Palo Alto, CA) 30. Social Enterprise Alliance (Nashville, TN) 31. Social Enterprise Greenhouse (Providence, RI) 32. Social Enterprise Fund (Edmonton, Canada) 33. Start-up Chile (Santiago, Chile) 34. *Tumml (San Francisco, CA) 35. *The Builders Fund (San Francisco, CA) 36. Urban.us (Miami, FL) 37. *Venn Initiative (Minneapolis, MN) 38. Venture for America (New York, NY) 39. *Village Capital (Washington, D.C.) 1. 1776 (Washington, D.C.) 2. A Philanthropic Partnership for Black Communities ( New York, NY) 3. Ashoka (Arlington, VA) 4. Bain Capital Double Impact Fund (Boston, MA) 5. B Lab (Philadelphia, PA) 6. *Blue Ridge Labs (Brooklyn, NY) 7. Calvert Foundation Ours to Own (Bethesda, MD) 8. *City Light Capital (New York, NY) 9. DBL Partners (San Francisco, CA) 10. *Draper Richards Kaplan Foundation (Menlo Park, CA) 11. Echoing Green (New York, NY) 12. Financial Solutions Lab (Chicago, IL) 13. Global Good Fund (Washington, DC) 14. Good Company Ventures (Philadelphia, PA) 15. *Halcyon Incubator (S&R Foundation) 16. ICA Fund Good Jobs (Oakland, CA) 17. Idea Village (New Orleans, LA) 18. *Impact Engine (Chicago, IL) 19. Investor’s Circle (Durham, NC) 20. JumpStart, Inc. (Cleveland, OH)
  45. 45. Next Street Financial LLC © Copyright 2017 45 Appendix: Reference PacketAppendix > Overview of Best Practice Model Scan > Deep-Dive Best Practice Model Case Studies > Inventory of Additional Models Reviewed
  46. 46. Next Street Financial LLC © Copyright 2017 46 BLUE RIDGE LABS: SUMMARY (1 OF 2) Overview Blue Ridge Labs operates a Brooklyn-based social impact incubator that helps for-profit or non-profit social innovators build technology-enabled products and services aimed at solving the challenges faced by low-income New Yorkers and Americans > Launched from inside the Blue Ridge Foundation NY to build upon its legacy of ‘transforming ideas into organizations;’ became part of Robin Hood in 2015 to expand reach and impact > Focuses on helping young social ventures navigate the challenges of their early years, when teams need to quickly demonstrate that the product works and has the potential to deliver significant impact while simultaneously figuring out how to set up and run a sustainable, effective organization Model Blue Ridge helps to ‘build ventures that improve the lives of low-income New Yorkers’ through three programs: 1. Design Insight Group: group of ~500 LMI New Yorkers paid $25 / hour for participation in ‘user testing sessions’ intended to help social entrepreneurs build technology that ‘matters and makes sense’ 2. Fellowship: 5-month fellowship focused on yearly challenge (e.g., Closing the ‘Justice Gap’) broken into two steps: i. 2-months of human-centered design research phase, and ii. 3-month build-out of minimally viable product 3. Catalyst: 6-month full-time program designed to support teams that currently deliver a product or service for LMI New Yorkers; Catalyst provides the following financial and non-financial supports: 1.PRODUCT: resourceful entrepreneurs who tackle big problems 2.DESIGN: imaginative UX/UI experts who can visualize and delight 3.ENGINEERING: thoughtful full-stack builders who code and test with care 4.EXPERT: knowledgeable advocates who can unravel and explain Social Entrepreneurs FUNDING $50,000 in cash stipend, plus healthcare and a dedicated research budget COACHING Coaching and support to build your product and organization through human-centric design HUMAN CAPITAL Connections to talent, advisors, and potential users and partners OPERATIONS Free office space and a host of discounted and in-kind services “If you’re a foundation and your goal is to create and sustain a problem-solving ecosystem, you’ve got to have wildly successful entrepreneurs. That means betting on ‘winners’ who aren’t bought or imported and have the financial success to establish the ‘sistericity’ needed to create a sustainable ecosystem’ Source: Blue Ridge Labs Website. NXST interview with Bill Cromie, Blue Ridge Labs Director of Emergent Technology.
  47. 47. Next Street Financial LLC © Copyright 2017 47 BLUE RIDGE LABS: PORTFOLIO (2 OF 2) > Blue Ridge Labs is a strong example of a strategy that a large, place-focused foundation can employ to further its reach and impact by supporting social ventures that are intentionally focused on solving problems facing the Robin Hood Foundation’s target demographic – Blue Ridge’s human-centric design insight groups allow entrepreneurs the time and resources to focus on building a minimally viable product instead of impact validation or proof of market traction for investors; this differentiating, value-add is made possible by the unique asset of an umbrella organization with programs that directly touch low-income New Yorkers > Blue Ridge is structure-agnostic, seeking to fill a gap in the impact investing marketplace for social enterprises (for-profit or nonprofit) that do not yet have proven impact but that have developed a model with impact intertwined in their strategic advantage; their investment thesis is anchored in: 1) Immediacy – does the venture provide an immediate intervention for an LMI consumer’s long-term earning trajectory? 2) Differentiation – is the impact differential between low-income and high-income populations significant and intentional? > Blue Ridge also believes that foundations have the capacity to take on business and/or impact risk that traditional impact investors do not Source: Blue Ridge Labs Website. NXST interview with Bill Cromie, Blue Ridge Labs Director of Emergent Technology. 22% 11% 28% 33% Sector 18 6% Food & Health Transportation Financial Services Environment Education & Workforce Culture & Community Go-To- Market Approach 18 100% All consumers LMI consumers 100% Geographic Reach 18 0% Non-Place-Based Place-Based Portfolio Examples Georges, Dan, and Ashley met in Blue Ridge’s 2015 Catalyst class where they built JustFix.nyc, a non-profit tech platform that helps renters get things fixed in their apartment. As tenants complete customized to-do’s, the tool builds out a case history that they can take to Housing Court – where 90% of renters are self-represented. In Fall 2015, JustFix.nyc won the 2015 NYC BigApps housing category they were recently awarded a grant to assist in the organizing of tenant associations in the south Bronx. Rescuing Leftover Cuisine was founded in 2013 to combine people power with cutting edge technology in order to crowd source food rescue teams that pick up excess food from local restaurants and deliver it to food pantries. Catalyst helped the RLC team establish their tech volunteer process, expand and systematize earned revenue streams and build a successful board strategy. In 2016, RLC rescued over 1 million pounds of food. Key Implications / Learnings Based on active portfolio companies listed on website as 2/7/17
  48. 48. Next Street Financial LLC © Copyright 2017 48 CITY LIGHT CAPITAL: SUMMARY (1 OF 2) Overview Technology-Focused Social EntrepreneursCity Light Capital is a domestic-focused, early-stage venture capital firm dedicated to generating both strong financial returns and measurable social impact. > Founded in response to the events of 9/11 with the tagline, “Enact social change at the speed of business,” the firm is rooted in a desire to accelerate the pace of important social change > The firm focuses it’s investments primarily in three impact sectors in the US, with a market-equivalent return profile, as well as in-house incubated impact models – Education: committed to ensuring that the right technology is leveraged to deliver the best possible education to learners everywhere – Environment: companies that focus on resource conservation and energy efficiency – Safety: ensure that the best safety and security platforms reach the market – Impact models: will also found new companies when they see unique opportunities that build off of existing technologies and resources 1.Orgs and models for change that leverage TECHNOLOGY to strengthen urban ecosystems 1.EARLY-STAGE (<$1M) US- based companies with a clear plan and HIGH-POTENTIAL TEAMS 1.Invest only in opportunities that will generate MARKET RATE RETURNS City Light’s ‘Invest Forward’ model seeks to use the power and resources of capitalism as a new force in the social arena and has successfully completed 3 funds: > Impact Ventures ‘Experiment’ (’04 – ’08’): in response to 9/11, founding partners co-invested in ShotSpotter, a start-up focused on reducing gun-related crime > Impact Ventures II (’08 – present): $25M fund backed by individuals / family offices; returned all invested capital to investors in 2014 through 2U portfolio company IPO > Impact Ventures III (’15 – present): $75 - 100M fund, $50M raised, 6 investments The Model TEAM: Experienced leaders with relevant networks IMPACT AT SCALE: Companies that combine technology and business model for impact at scale FEEDBACK LOOPS: Direct relationships between impact and revenue, with a clear plan & ability to measure impact VALUATION & TRACTION: >$1M in revenue and <$25M in pre- money valuation VALUE ADD: City Light’s ability to leverage existing network to create connections ALIGNMENT: Mission-aligned entrepreneurs who aim to solve big problems in our cities “If you don’t have a robust venture community and entrepreneurial ecosystem, then you’re not going to be able to attract the right people who can create the products and services that fit your community like a glove” Source: City Light Capital website. City Light Capital Impact Ventures III fund prospectus. NXST interview with Josh Cohen, City Light Capital Managing Partner & Cofounder.
  49. 49. Next Street Financial LLC © Copyright 2017 49 CITY LIGHT CAPITAL: PORTFOLIO (2 OF 2) > While City Light started impact investing ‘before it was a catchphrase,’ the fund is hyper-focused on traditional venture capital returns and thus has a model (e.g., management fee etc.) that requires a larger fund size to compete against traditional investors – In City’s Light’s experience, investments that present and opportunity for a foundation to co-invest are deals where other traditional investors have passed which can lead to foundations creating a lower quality pool of deals unintentionally – Foundations that choose to invest directly will also need a larger in-house staff (15 – 20 FTEs) than often expected since City Light has found that deals ripe for foundation co-investment are typically mid-sized deals that require economies of scale to build a successful fund – Running a fund in-house presents additional challenges for foundations in terms of the actual fund manager, as in its own experience, City Light has found that a manager who understands real assets is unlikely to be the same manager who understands venture as well as impact > City Light’s model is not place-based and unlikely to be replicable in the Twin Cities; they suggested the option of <$10M is to create 3 pools of capital 1) partnership with a local fixed income firm 2) partnership with a local equity firm and 3) a direct seed fund Portfolio Examples Tinkergarten provides high quality early childhood learning in the outdoors for purposes of developing core life skills in children. Tinkergarten provides a skills-based curriculum and uses a technology platform to train leaders in deploying local programming in their community. Presently, Tinkergarten operates in 40 states and has educated over 29,728 kids. City Light invested for market returns and supporting the mission of early childhood education in the outdoors HeroX is the world’s problem-solving company and an investment that City Light helped to create in conjunction with the XPRIZE Foundation. As a platform for running competitions to solve local problems, with a vision to scale globally, City Light decided to invest in herox‘s scalable platform that leverages crowdsourcing, an ability to track and measure impact, and an opportunity to make charitable giving customizable and transparent Key Implications / Learnings 0% 46% 31% 0% 13 Sector 0% Transportation Food & Health Financial Services Environment Education & Workforce Culture & Community 15% Go-To- Market Approach 13 LMI consumers All consumers 13 100% Geographic Reach Place-Based Non-Place-Based Based on active portfolio companies listed on website as 2/7/17 Source: City Light Capital website. City Light Capital Impact Ventures III fund prospectus. NXST interview with Josh Cohen, City Light Capital Managing Partner & Cofounder.
  50. 50. Next Street Financial LLC © Copyright 2017 50 1.LOCATION-AGNOSTIC in choosing the organizations they invest in 1.INNOVATIVE, SCALABLE concepts that will significantly disrupt and drive change in their sectors 1.EARLY STAGE, HIGH IMPACT social enterprises (primarily nonprofits); often the first institutional investor DRK FOUNDATION: SUMMARY (1 OF 2) Overview A global venture philanthropy firm that finds, funds and supports early stage, high impact social enterprises that are tackling some of the world's most complex problems. > Founded in 2002 by a team with deep backgrounds in venture capital, DRK invests to scale early-stage organizations. > Over the past ~15 years, DRK has invested in 100 social entrepreneurs. Current portfolio includes organizations working both domestically and internationally, helping to provide critical access to healthcare, education, food security, social justice, water and sanitation, transparency and accountability, and shelter. > DRK Foundation is currently deploying its third fund of $65M – the first fund that will support for-profit social enterprises The Model > FIND: Conduct due diligence on potential portfolio opportunities, including working in close contact with networks and institutions across the public, private and non-profit sectors, to select a group of exceptional leaders and organizations to support > FUND: Provide $100,000/yr in unrestricted funding over 3 years on the belief that: 1) Unrestricted capital is the most valuable capital that social entrepreneurs need to build their organizations; and 2) Multi-year funding, as opposed to a one-time grant, is a critical success factor in helping great organizations achieve scale. > SUPPORT: Active board service, entrepreneur networks, leadership training & development – basically wraparound services to fill last mile needs “We try and seek a relationship in which we can really be partners. If it is a multi-year funding model, the conversation is really different. $100,000 at the end of year three isn’t as important as it is in the end of year one. [Multi-year funding] is a big part of the value of the network we create, and it creates a level playing field amongst the network of entrepreneurs.” Global Social Enterprises Unrestricted, multi-year funding Active board service Capacity building Leadership training Fundraising strategy/support Entrepreneur network Support services Multi-Dimensional Support Model Source: Draper Richards Kaplan Foundation website. NXST interview with Stephanie Dodson, DRK Foundation Managing Director.
  51. 51. Next Street Financial LLC © Copyright 2017 51 DRK FOUNDATION: PORTFOLIO (2 OF 2) > DRK is a model with many implications for Bush due to its positioning within a larger organization and focus on innovation in addition to impact – DRK’s investment thesis is legal structure, industry vertical, and geography-agnostic but has traditionally positioned itself in the middle of the continuum between pure philanthropic organizations and scalable, sustainable social enterprise – DRK has found that restricting where your pipeline of companies are domiciled greatly and arbitrarily constricts your pipeline > Although legal structure-agnostic, DRK has increasingly been moving into for-profit investments because it wants to capture the strong leadership and ideas coming from millennial entrepreneurs building social enterprises that are economically viable in traditional markets – DRK believes in building a high-touch relationship with the entrepreneur so that the entrepreneur can focus on ‘the problem they want to solve’ instead of the right legal structure or go-to-market strategy to do so > DRK provides its investees with $300K of unrestricted grant funding and has found this amount to be the most impactful for entrepreneurs getting off the ground who are truly focused on impact first and financial return second Portfolio Examples City Health Works hires and professionally trains “Local Health Coaches” to serve in their own community as a bridge to clinics and the formal health system. At a neighborhood level, City Health Works creates meaningful local jobs and partners peers to help people manage the complicated healthcare system. Domestically based in the Northeast, City Health is a non-profit that operates on the support of foundations such as DRK; current communities of work include Harlem, NY. An alumni of the DRK portfolio, One Acre Fund is a non- profit that supplies smallholder farmers in East Africa with asset-based financing and agriculture training services to reduce hunger and poverty. They seek to supply a business solution to smallholder farmers, and provide end-to-end services for farmers that start with financing and training and culminate in market facilitation/connection to maximize harvest sales. Key Implications / Learnings Includes active portfolio members only; based on data from website a/o 2/7/17 30% 70% Go-To- Market Approach 47 All consumers LMI consumers 85% 15% Geographic Reach 47 Non-Place-Based Place-Based 28% 21% 36% Sector 47 0% 6% Transportation Food & Health Financial Services Environment Education & Workforce Culture & Community Source: Draper Richards Kaplan Foundation website. NXST interview with Stephanie Dodson, DRK Foundation Managing Director.
  52. 52. Next Street Financial LLC © Copyright 2017 52 ENDEAVOR: SUMMARY (1 OF 3) Overview ‘Endeavor is an organization that was created by, and for, high-impact entrepreneurs’ > Endeavor believes that entrepreneurs are the real drivers of entrepreneurial ecosystems, job creation and sustainable economic growth > However, there is limited support tailored for entrepreneurs and companies as they move beyond idea stage. Startups alone don’t have the positive impact on economies that growing a company does > Endeavor looks for markets that have a critical mass of innovative entrepreneurs who need a “jump start” to catalyze an environment favorable to new venture creation and the formation of mature capital markets The Model Endeavor searches for, selects and supports high-impact entrepreneurs. As they scale, Endeavor entrepreneurs multiply their impact by inspiring, mentoring and investing in entrepreneurs that follow them: > Endeavor is “pulled into” new geographies by local business leaders and sponsors > Endeavor rigorously screens candidates to find those with high-impact potential > Endeavor designs services for entrepreneurs to achieve maximum scale-up success > Endeavor “Endeavorizes” entrepreneurs to pay it forward and multiply their impact 1. POSSESS the biggest, most innovative ideas and the capacity to realize them 2. SCALE their businesses, creating significantly more wealth and high-quality jobs; and 3. REINVEST their knowledge, credibility and financial gains in the next generation of entrepreneurs, thus multiplying their influence “No matter what social issues you care about, a healthy economy is the basis for progress, and high-growth, high-impact entrepreneurs are the building blocks for a healthy economy” High-Impact Entrepreneurs LAUNCH Leaders urge Endeavor to launch in their communities SELECT Rigorous, multi-step selection process concludes with International Selection Panels where business leaders select next class of Entrepreneurs SCALE-UP Entrepreneurs get access to talent, mentorship, and capital through a series of customized local and global services; may be eligible for capital as well MULTIPLY Successful entrepreneurs reinvest in their communities and networks, multiplying their impact; 90% of Endeavor entrepreneurs go on to serve as angel investors / mentors REINVEST By reinvesting and paying-it- forward in different ways, Endeavor Entrepreneurs expand the impact of the network Source: Endeavor Global and Endeavor Catalyst websites. Endeavor Catalyst II fund prospectus. NXST interview with J,ackie Carmel, Endeavor Catalyst Managing Director.
  53. 53. Next Street Financial LLC © Copyright 2017 53 ENDEAVOR: CATALYST FUNDS (2 OF 3) Overview Endeavor’s Innovative Impact Investing Vehicle > Endeavor Catalyst is the rules-based, co-investment fund of Endeavor, set up to invest exclusively in Endeavor Entrepreneur-led companies and to sustain Endeavor’s long-term operations in a mission-aligned way > Proceeds from Endeavor Catalyst are distributed to LPs and fund the development of critical infrastructure to support Endeavor’s operations worldwide > Endeavor Catalyst I ($35M) was launched in mid-2013 and has made 46 investments across 17 countries thus far > Endeavor Catalyst II ($100M) is currently being raised and will hold a final close in April 2017 ($50M in commitments at first close in mid-2016) 1. Endeavor Entrepreneurs in good standing with their local office 2. Endeavor Entrepreneurs raising a minimum of $5 million of equity capital in a single round of financing 3. Fundraising rounds being led by a qualified, institutional investor 4. If all criteria are met, Endeavor Catalyst will invest up to 10% of the round, capped at $1M Catalyst Funds Invest In… Fund Size Investment Sectors Investment Stage Min Invest. in Fund Mgmt Fee Return Structure Capital Drawdown Fund Term Target Final Close $100 MM Multi-Sector Growth Capital $250,000 0%* 50% of profits to Investors; 50% of profits to Endeavor Global 25% per year over 4 years 10 years April 2017 Key Terms *The GP will not receive any management fee from the Fund or the LPs. However, the GP is authorized to incur and pay in the name and on behalf of the Fund all expenses that it deems reasonable, necessary, and/or advisable as described in the operating agreements of the fund. **For investors affiliated with an Endeavor country, proceeds will be split with their local office (25% to Endeavor Global and 25% to the Local Office). Source: Endeavor Global and Endeavor Catalyst websites. Endeavor Catalyst II fund prospectus. NXST interview with J,ackie Carmel, Endeavor Catalyst Managing Director.
  54. 54. Next Street Financial LLC © Copyright 2017 54 ENDEAVOR CATALYST FUNDS: PORTFOLIO (3 OF 3) > Endeavor, both Global and Catalyst, is particularly interesting for Bush to consider as both a best practice model and / or potential partnership – ‘Incredible individual’ theory of change is complementary to Bush’s mission to increase the problem-solving capacity of the Twin Cities region and could provide an interesting next step pathway for Bush fellows (e.g., build a potential pool of Endeavor entrepreneurs) – Endeavor Global operates like a franchise model in which Bush could be the local partner needed to open a local office, like in Detroit or Atlanta, in the Twin Cities (local sponsor commits to building a board with members that each commit $100K for 3 years for startup costs) > As a potential partner, Endeavor Global is attractive it is based on a ‘pull model’ that intentionally avoids recreating the wheel and could automatically enter local Twin Cities entrepreneurs that become Endeavor Entrepreneurs into the Endeavor Catalyst pipeline > Endeavor Global and Catalyst share a mission similar to Bush’s Social Business Ventures Initiative which is to ‘make Silicon Valleys all around the world’ and could potentially be an attractive partner for Bush to leverage its investments in outstanding individuals (e.g., Bush Fellows) that, with the right support, could build companies that could further catalyze the entire Twin Cities entrepreneurial Entrepreneur Examples Ruma, based in Indonesia, focuses on creating mobile technology access to bottom of the pyramid, underserved communities. It has built a network of local agents (30,000+) who buy and sell prepaid minutes for mobile phones. This network is also tapped to distribute information from and collect payments for companies. Key Implications / Learnings 53% 17% 20% Sector 30 3% 7% Other (Tech or CP) Culture & Community Education & Workforce Financial Services Food & Health 90% 10% Go-To- Market Approach 30 All consumers LMI consumers 93% Geographic Reach 30 Non-Place-Based Place-Based As of Q1 2016 data provided in 2016 Endeavor Catalyst Annual Report Endeavor Catalyst’s current portfolio is primarily based in emerging markets; business focus does not need to be on social outcomes, but should create jobs Procesa Chiapas is a Mexico-based company that seeks to catalyze on Mexico’s abundant tuna supply. The company sells yellow-fin tuna in a flexible, innovative pouch that has significantly higher margins than its competitors. It has created more than 450 jobs, a key impact metric that Endeavor Catalyst tracks. Source: Endeavor Global and Endeavor Catalyst websites. Endeavor Catalyst II fund prospectus. NXST interview with J,ackie Carmel, Endeavor Catalyst Managing Director.
  55. 55. Next Street Financial LLC © Copyright 2017 55 HALCYON INCUBATOR: SUMMARY (1 OF 2) Overview “Halcyon supports creative, talented people who want to make the world a better place” > The Halcyon Incubator is a program under the S&R Foundation– a Washington D.C.- based foundation that supports talented individuals with great potential and high aspirations in the arts, sciences, and social entrepreneurship– founded to ensure that all social entrepreneurs, regardless of economic background, have the chance to succeed > The Incubator was launched in an effort to improve the social enterprise ecosystem in D.C. but is now committed to identifying the pillars of successful social enterprise ecosystems across the country through research and replication of the model in cities with an emerging critical mass of social entrepreneurs > The Halcyon Incubator is committed to solving 21st century challenges by helping to incubate and accelerate social ventures with the capacity for measurable social change built by social entrepreneurs with audacious ideas Model Halcyon is now supporting its sixth cohort of social entrepreneurs through an 18-month, 3-stage residency: 1. First Stage – Residency (5 months): Fellows live and work at the Incubator, receive a living stipend, and participate in core programming including skills series and weekly pitch sessions before culminating in a Demo Day 2. Second Stage – Post-Residency (7 months): Fellows continue to work for free at the Incubator, with access to all resources to further build their networks, secure funding, and grow their ventures 3. Third Stage – Incentivized Phase (6 months): Fellows remain connected to the Incubator’s network and are eligible to transition to a reduced-rent workspace PROBLEM / SOLUTION: a real and pressing problem and a viable, commercial strategy solution SUSTAINABILITY: innovative social ventures that sell a core product or service to achieve impact INNOVATION: audacious ideas that disrupt the status quo and move the needle on 21st century challenges IMPACT: impact both in terms of the impact of the core product / service and the scalability of the impact model TALENT: vision, intelligence, resilience, follow-through EXECUTION: big vision with attention to detail Social Entrepreneurs VENTURE RESOURCES 1,000+ aggregate hours of strategic, legal, tech, and communications support ADVISORS / MENTORS Each venture is paired with field-specific mentor for weekly guidance and support FINANCIAL SUPPORT 5 months of free housing, 18 months of free workspace, $10K stipend per venture CRITICAL AUDIENCE Access to other entrepreneurs, key community figures, and investors, funders, and partners “You don’t have to limit by structure if you’re explicit in the criteria for which you screen. It forces weird contortions if a foundation is focused only on non-profits for tax reasons versus just caring about the impact and not caring about the vehicle for getting there” Source: Halcyon Incubator website. NXST interview with Ryan Ross, Halcyon Incubator Program Director.
  56. 56. Next Street Financial LLC © Copyright 2017 56 HALCYON INCUBATOR: PORTFOLIO (2 OF 2) > Halcyon was founded specifically to foster the social enterprise ecosystem in Washington D.C. by filling a particular gap – financial support for residency, business, and living expenses that can often inhibit social entrepreneurs from taking the leap to launch a venture > Through its on-the-ground efforts in the D.C. ecosystem, Halcyon has also identified the significant dearth of information and data on creating a symbiotic environment for social enterprise innovation; as a result, Halcyon has committed to leading research efforts across the country to help innovators, funders, and policymakers more intentionally develop sustainable ecosystems – Halcyon gathered data from 9 cities to publish its ‘From the Ground Up: Defining Social Enterprise Ecosystems in the U.S.’ in the Fall of 2016 and is looking to expand its data set to additional cities with critical masses of social entrepreneurs > Halcyon is structure-agnostic but has found that its portfolio of fellows is increasingly skewing for-profit, due largely to the incompatibility of tech-focused business models with non-profit funding models; Halcyon encourages its for-profit entrepreneurs to view impact as the horizontal that cuts across their vertical sector focus in order to be best positioned for both impact and traditional venture funding 26% 9% 26% 17% Sector 46 4% Transportation Food & Health Financial Services Environment Education & Workforce Culture & Community 52% 48% Go-To- Market Approach 46 All consumers LMI consumers 91% 9% 46 Geographic Reach Non-Place-Based Place-Based Portfolio Examples Foodhini is a for-profit social enterprise focused on creating sustainable generation opportunities for marginalized immigrant communities through food commerce. Foodhini provides a commercial kitchen for independent immigrant home chefs as well as a digital platform that allows the chefs to sell their meals directly to customers. Foodhini was launched in 2016 by a Hmong-American native of Minneapolis, University of Minnesota alum, and previous employee of 3M Company. New Community Labs is a non-profit organization empowering communities of color to identify and solve their own challenges using big data and community engagement tools. NMCL recruits and trains residents to gather community data, share it with neighbors, and launch community-derived and funded solutions to civic challenges. NMCL launched in Washington D.C. in 2015 with seed funding from the Sheila C. Johnson Foundation. Key Implications / Learnings Source: Halcyon Incubator website. NXST interview with Ryan Ross, Halcyon Incubator Program Director. Based on analysis of active portfolio listed on website as of 2/7/17
  57. 57. Next Street Financial LLC © Copyright 2017 57 KAPOR CAPITAL: SUMMARY (1 OF 2) Overview Oakland-based venture capital fund that invests in technology-driven startups in seed stage that have a social focus on closing gaps of access, particularly for low income communities and/or communities of color in the United States > Originated as a general opportunistic fund in 2009 and evolved into a social impact focused fund in 2012; sector-agnostic but with a strong presence in education, finance, and health > Currently a $15-20B per year fund that to-date has been funded through a sole LP; average investment is $150,000 with over 130 companies in its portfolio > Affiliated with the Kapor Center for Social Impact which is focused on non- profit, grant-focused work that has a place-based lens in the Oakland ecosystem (Kapor Capital is not geography focused); run separately with points of collaboration Model Kapor Capital seeks to identify, invest in, and support technology solutions that close social gaps and create jobs: > FIND INVESTMENTS: Kapor Capital finds companies through both its network and through applications on its website (for purposes of increasing access). Each undergoes rigorous due diligence > INVEST & ALIGN: Configure investment with aims for top quartile returns; align entrepreneur to the Founders’ Commitment and reinvestment is only considered if Founder’s Commitment is central to mission as the company continues to grow • Funding often happens alongside co-investments; Kapor Capital does not typically take board seats or lead rounds > PORTFOLIO SERVICES: To address the needs of its portfolio, particularly around capital raising, leadership, and business development, Kapor Capital utilizes a Portfolio Services team member to serve as the liaison for each of the portfolio companies to make sure that they are getting adequate support Social Entrepreneurs “We are the only VC that requires a ‘Founders’ Commitment’ from each of the companies we invest in. This commitment requires an intentionality on behalf of the entrepreneur to create an inclusive culture, value diversity, and create good jobs. An entrepreneur’s orientation to this is something we consider when holistically looking at a company for investment.” Companies with a deep commitment to diversity and making access for marginalized populations Early stage companies that are seeking anywhere from $0.75 to $2.5M Technology solutions that close social gaps (e.g. access to college) and create good jobs (e.g. living wage, benefits) The Founder’s Commitment Four Actions 1. Establish diversity and inclusion goals that are appropriate for the company’s size/stage 2. Invest in tools, training programs, and/or resources that assist with mitigating bias in operations 3. Organize volunteer opportunities for employees to engage with underrepresented communities 4. Participate in diversity and inclusion sessions to learn about what works and what doesn’t Summarized/Abbreviated Excerpt Source: Kapor Capital website. NXST interview with Brian Dixon, Kapor Capital Partner.
  58. 58. Next Street Financial LLC © Copyright 2017 58 KAPOR CAPITAL: PORTFOLIO (2 OF 2) > Kapor offers applicable learnings for Bush particularly in utilizing intentionality as a key screening criteria, leveraging the fund as a vehicle to increase the diversity of the entrepreneurial pipeline, and fostering effective cross-entity collaboration between investment and program arms – The cross-pollination of Kapor Capital and Kapor Center for Social Impact offers an example model with several corollaries for how a potential ‘fund’ could interact with Bush’s program initiatives and complement the Fellows program in particular > Kapor is the only venture capital firm in the country with a ‘founders commitment’ that ensures founders’ dedication to using their own hiring and cultural practices to further Kapor’s mission to increase the diversity of the technology industry – This founders commitment is also used as a proxy for intentionality and is Kapor’s main criteria for impact; while intentionality in hiring and diversity is Kapor’s focus, the fund does screen for impact as quality job creation (e.g., Uber would be investable under this criteria) > Over time, Kapor has evolved its managing team to include individuals with expertise in specific industries so that the fund can focus on specific verticals (e.g., finance, health, education, justice); Kapor believes that building a fund bottoms-up without sector-alignment would be difficult 23% 15% 10% 38% 10% Sector 141 1% 3% Go-To- Market Approach 141 68% 32% All consumers LMI consumers Geographic Reach 141 100% Place-Based Non-Place-Based Portfolio Examples LendUp is a financial solution that offers a safe borrowing alternative to consumers that are typically ineligible for loans from standard banks and credit unions. Products include microloans of $500 targeting pay day gaps and credit cards, among others. It doubles as a conduit to learning good financial behavior and building credit through gamification and other education platforms Pigeonly seeks to serve incarcerated populations and their families, the majority of whom are minorities. Its solution is to provide inmate locator, phone call, and mail services at an affordable price by utilizing a powerful API and VOIP. It also provides virtual engagement platforms for families and girlfriends of incarcerated individuals to connect with a network of empathetic supporters Key Implications / Learnings Financial Services Environment Education & Workforce Transportation Food & Health Other (Tech) Culture & Community Note: Previously, Kapor Capital was a standard, return-focused fund; some of the existing portfolio may not appear to be mission-aligned due to legacy investments Based on analysis of all portfolio profiles on website as of 2/7/17 Source: Kapor Capital website. NXST interview with Brian Dixon, Kapor Capital Partner.
  59. 59. Next Street Financial LLC © Copyright 2017 59 OMIDYAR NETWORK: SUMMARY Overview Philanthropic investment firm that gives everyone equal access to information, opportunity, and the tools to pursue their goals by investing in entrepreneurs who share its commitment to advancing social good at the pace and scale the world needs today > Starting from the premise that ‘people are basically good,’ Omidyar has committed, since its founding in 2004 by the founder of eBay, over $1B; the firm has made $478M in for-profit investments through its LLC arm and $525M in non-profit grants through its 501(c)(3) entity > Focused on five areas that it believes are the key building blocks for prosperous, stable, and open societies: education, emerging tech, financial inclusion, governance & citizen engagement, and property rights; each of these initiatives is united by the principles of individual access, connection, and ownership > Omidyar utilizes a hybrid approach of both for-profit investments and grants – with the defining criteria being an enterprise’s potential to impact at least 100,000 peopleModel Over the last two years (2014 – 2016), Omidyar analyzed its impact investments since 2004 far do develop a “framework for investors across the returns continuum:” the framework produced includes three investment categories: 1. Category A – companies that promise risk and high returns, the typical ‘hot startup’ that both impact investors and VCs agree has the potential to scale fast and make a lot of money; a related sub-category covers ventures that Omidyar figures will provide regular commercial returns, but traditional investors don’t 2. Category B – companies with modest or minimal returns, but high impact – enterprises many investors would avoid; these enterprises, while not highly profitable themselves, have the catalyzing potential to pioneer a new market etc. 3. Category C – nonprofits, some of which have the potential to become self-sustaining ALIGNMENT: non-profits and for-profits that use innovative, market-based approaches IMPACT: organizations that demonstrate the power of business to create social and financial returns and inspire further entrepreneurial activity in their field POTENTIAL FOR SCALE: organizations with significant growth potential, with the ability to scale operations and develop new markets LEADERSHIP: management teams with a proven track record in their field of operation INNOVATION: organizations disrupt the status quo, establish a new business paradigm, or pioneer services for untapped markets Social Entrepreneurs “A hybrid entity like ours provides the flexibility to do whatever fits the bill. We call it the ‘problem first, tool second’ approach. We are ultimately focused on the betterment of humankind. That’s why we focus on impact investing and grants” Source: Omidyar Network website. Forbes. Omidyar Network Pairs Grants with Investments to Solve Problems. January 2015. $1,000M $0M $500M 200 8 201 6 200 7 201 3 200 9 201 5 201 4 201 2 201 0 201 1 For-profit Commitments Nonprofit Commitments

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