Capital today still searches for the highest return – due to a lack of transparency regarding the non-financial impact of an investment, this means financial return.
Donations: Charitable money will remain necessary for certain areas of action, e.g. catastrophe relief or rather intangible areas far from economic needs, like human rights. This area is growing through investors like Acumen Fund who look for highly innovative approaches in the area of social entrepreneurship – and have the patience to wait for many years before expecting any returns, if at all. To a large extent, money received back from these investments remains with the fund (similar to a donation), only few investors in this area truly expect their money back. An increasing number of funds is currently being established aiming for this sector, though still fairly small. We believe that in the next few years, this area of social investment will grow as social entrepreneurs become more professional and begin developing proven business models. ...able to provide investors with higher returns. When a significant number of social enterprises has matured to this phase, regulated capital markets will become relevant. -> Liquidity vs. market volume!
The social stock exchange in Sao Paolo, although in fact an intelligent, criteria driven listing of non-profits, generated a lot of public awareness. The vision that the dispersed efforts of social business receive a central point of visibility will contribute to the penetration of the idea of the problem solving focus of business. Both private as well as institutional investors will learn to consider other factors than just financial return when making their investment decisions. Similarly, organisations solving social problems in financially sustainable ways will learn to become more professional in communicating their impact – also thinking more in terms of effectiveness. Social Investment requires special market rules. The rules have to focus at least on three areas: behaviour (Practices like short selling seen not to be adaptable to the idea of business solving social problems); Financial return limited by rules? Will investors profit from the increase in value of equity? The &quot;Social Business industry&quot; is in its infancy. Social Entrepreneurs are careful as to who invests in their company – a community of qualified social investors who &quot;really mean it&quot; has to develop open to share experience and learn. Ends DO NOT justify the means. double transparency: the disclosure or figures and facts that make a business a business and transparency according to the social mission: what exactly shall be accomplished, for whom and in which time frame? This is the basis for the next essential element: impact measurement. The &quot;impact” of a traditional business can easily be measured by the financial return. The &quot;social” in social business requires a more difficult bur nevertheless indispensable measurement of the social impact. Social impact measurement is in status nascendi worldwide; start simple (include the prevalent standards evolving in this sector). Partnerships with emerging rating agencies for the social and ecological sector are being negotiated.
Orientation: whether the organization has data management discipline and an outcome (rather than output) focused intent; whether the organization has triple bottom line reporting Strategic: whether the investments projected efforts relate to their projected outcomes and whether they have the potential to adjust approaches if necessary Program value data: whether the investment has set up a plan to collect strategic relevant program impact data together with their beneficiaries/users and whether it has the capacity to deliver its services Financial data: whether the investment has gone through due diligence (business plan) 1. Community Leadership (local purchasing channels, methods of giving back to the community, Fair Trade mechanism) 2. Employment generation (Employment generation, Compensation and benefits, Work environment for local employees) 3. Environmental contribution (Sustainability of business model (reduction of emissions, using waste as raw material, etc.), Increasing biodiversity, Increasing availability of clean, safe drinking water) 4. Consumers / Customers of service (providing goods and services with a triple bottom line (Social Return on Investment), serving customers in need, Methods of production) In the audit, NExT SSE companies are asked to validate and prove each of their answers on a rating system and their compliance with external standards. If the scores falls below the passing grade, a 90 day cure period is provided. If the audit reveals that a company has intentionally misrepresented facts, it is publicly revoked. To avoid self-serving processes, the audit will be conducted without prior notice and encompass 10% of the organizations (by lottery).
begin with round tables for investors and social ventures, establishing a deal-flow and building communities/networks of social investors and social ventures. design an online platform where social ventures can pitch to social investors – the actual transactions to take place offline. We are also cooperating with existing and emerging social venture funds so as to widen the portfolio for investors who wish to or are obliged to spread their risk. When demand begins to stabilize, begin with private placements to sophisticated investors. In parallel to all the above, driving the regulatory processes for establishing a &quot;real&quot; exchange for public offerings. Then launch a pilot with 15-20 organisations to test the system and adapt the exchange to investor and investee needs; probably start with EU-based ventures. By the time the exchange is live, the market of social investments will have matured to the extent that adequate numbers of organizations exist requiring (and deserving) growth capital. As volume increases, institutional investors will enter the market initially dominated by private investors.
The Monitoring & Evaluation system of NExT SSE is designed to help the organizations and projects (investments) listed their in monitoring their contribution to society and to use this understanding to inform their operational and long-term decisions as well as trigger effective conversations with their beneficiaries and stakeholders. At the same time, investors gain transparency on the impact their money is making.
Anne kathrin kuhlemann
New Ethical eXchange and Technologies Social Stock Exchange bringing capital to social ventures at increased transparency for investors
Summary <ul><li>There is a need for increased transparency, so that "social investors" can make educated choices and "social ventures" receive the necessary capital to grow – at less than 40% cost! </li></ul><ul><li>In established industries, stock exchanges create this marketplace for financial transactions. In young areas like social ventures, this is a long-term evolution . </li></ul><ul><li>Critical elements in achieving a social stock exchange are a community-building reputation , low transaction costs and simple but effective methods for impact measurement . </li></ul>
High capital cost for Social Ventures Social Ventures (SV) Social Investors An easier and less costly way to acquire capital Transparency / comparability to make informed choices NEED <ul><li>Grow and expand so that more people can benefit from the SV’s activities </li></ul><ul><li>Efficient allocation of resources </li></ul><ul><li>Attain highest social impact possible with their investment </li></ul><ul><li>Receive a (modest) return </li></ul><ul><li>Funding gap </li></ul><ul><li>High cost of raising capital (~ 20% of the funds raised) </li></ul><ul><li>CEOs spend up to 50% of their time raising funds </li></ul>NEED Goal Problem <ul><li>Lack of transparency, difficult to compare efficiency and effectiveness of different SVs </li></ul><ul><li>High search costs (~ 20% of sum invested) </li></ul>
The Solution: a marketplace for social finance Donations – expected financial return is by definition negative, i.e. "the money is gone". Risk capital – investors receive their money back, either with or without dividend distributed. Philanthropic investments – "a donation with the risk of receiving it back". Average return of -30% might be achieved. Growth capital – capital used to finance social ventures that are already successfully achieving a financial as well as a social return.
Crucial Elements of the Marketplace Visibility . The very notion of a social stock exchange is an attraction in itself. Education . Close gap between investors' business mind-set and Social Ventures' process-orientation Special market rules . Market behaviour. Financial return. Equity. Community ... for peer learning, both on- and offline; Social Ventures, Investors, Exchanges. Transparency . Comparable informa-tion so investors can begin taking responsibility for the (non-financial) impact of their investments. Impact Measurement . Begin with basic form of social impact measure-ment, develop more sophisticated approach over time.
<ul><li>Recognized expert panel checks for: </li></ul><ul><li>Orientation data </li></ul><ul><li>Strategic data </li></ul><ul><li>Program value data </li></ul><ul><li>Financial data </li></ul>Criteria & Metrics First-Level Entry Criteria First-Level Assess-ment of pot. entry Second-Level Audit & Monitoring open & transparent expert review 1. Community Leadership 2. Employment generation 3. Environmental contribution 4. Customers of service -> investment open for entry monitoring cycle (set indicators) & open monitoring proces-ses, e.g. open ratings by SVs & beneficiaries (reporting, self assess-ment + user feedback) & Annual expert reviews Third-level sector-specific impact data (long-term and future oriented) - Agriculture and Artisanal - Energy, Environment and Water - Education - Community Development Finance & Microfinance - Healthcare
Evolution of NExT SSE along with market Seed capital (round tables) Funds Regulated exchange Online showcase Time Volume
Industrialized public offering Impact Metrics and Selection Criteria Community & Reputation Key components to success <ul><li>Extensive legal require-ments and bank fees = high costs for IPO </li></ul><ul><li>Social Ventures searching for six-digit or low seven-digit funding </li></ul><ul><li>-> Industrialized IPO to bring costs down to below 10,000 </li></ul><ul><li>Easy to understand </li></ul><ul><li>Manageable effort to produce </li></ul><ul><li>Purposeful to SVs as well as investors </li></ul><ul><li>Stakeholder focused </li></ul><ul><li>Establish trust with SVs </li></ul><ul><li>Network of investors with true triple bottom line focus </li></ul><ul><li>Develop deal-flow </li></ul><ul><li>Credible Advisory Board </li></ul><ul><li>Community of social investment exchanges </li></ul>
Contact Details Anne-Kathrin Kuhlemann CEO NExT Social Stock Exchange c/o Konvergenta Rungestr. 19 10179 Berlin Germany +49-30-6098810-10 [email_address] http://www.nextsse.com