How to Scale Social Impact Investing Into Solar Energy

Social impact investing is undeniably becoming a major force in finance. It drives capital into triple bottom line projects that make investors' wallets fatter and ordinary people's lives better. It's time to drive more of this capital into alternative energy, particularly the solar power sector. We can do this right here in San Francisco.

The big hurdle in getting the nonprofit sector into the solar sector's pipeline is its inability to use the tax credits that for-profit companies use to buy solar power. Nonprofits trying to buy a solar installation would need a cost of capital close to zero. There are ways to get this done. RE-volv uses crowdfunded donations to purchase solar equipment for non-profits, enabling donors to realize the tax savings that are denied to non-profits. Angaza offers pay-as-you-go financing for solar installers in emerging markets.

I can think of some additional approaches to move adoption along. Any social impact outreach to emerging markets should include mobile payments, particularly mPeza in Africa. The UNFCCC Secretariat recognizes that vertically integrated solar providers using pay-as-you-go financing have an advantage in building off-grid energy systems.

The federal government does its part to help nonprofits afford solar energy. The NREL community solar policy analysis and downloadable scenario tool are useful for communities weighing their financial options. The DOE SunShot initiative now incorporates community and shared solar resources. The EPA's RE-Powering initiative designates repurposed sites a nonprofit can use for generation, and its Green Power Communities are obvious growth markets for solar power. Linking all of these data sources into a coherent business plan should be an imperative for any nonprofit pushing a solar energy installation.

The nonprofit sector is still a largely untapped market for renewable energy. Creative subsidies that push social capital into this sector expand the potential customer base for utilities and others seeking to build out distributed generation. A more resilient power grid is a very desirable goal for policymakers. Impact investing brings that goal closer.

Alfidi Capital at TiEcon 2017

I scored access to several sessions at TiEcon 2017. The TiE people are some seriously accomplished entrepreneurs and are among the most well-connected people in Silicon Valley. I had to go check out the scene, absorb startup wisdom, and maybe score some free coffee. My readers know I'm all about free stuff. I just can't turn down free access, freebies, and free knowledge.

I check out the action at TiEcon 2017.

The govtech track was a good fit for my background. More techies now know about how the US Digital Service is changing the federal government's cultural approach to deploying tech, but not everyone knows that FITARA is changing how the government's CIOs do business. The entire software sector has tried to move from waterfall development to agile development and Uncle Sam is finally following through. I sometimes wonder whether the entire US government lives in a "cone of uncertainty," but that's what the private sector calls a trial stage for govtech projects developed with lean startup methods. I betcha there's an app for Scrum contractors. Federal government contractors are accustomed to long sales cycles with more predictable revenues. I think the US can look to other countries for examples of successful govtech adoption. Governments most likely to adopt agile govtech, automated documents, knowledge management, mobile stuff, and whatnot will have similar factors. Francis Fukuyama's high-trust cultural traits (like in Scandinavia), a high degree of 4G coverage, and widespread mobile adoption are my picks for those success factors. The Digital 5 effects with e-Estonia are the kind of template the US needs.

The social impact track showcased concepts that are all the rage among business people who want to harmonize themselves with the universe, or something like that. Large banks and wealth management firms are developing their own philanthropic programs and encouraging employees to volunteer in the community. I have no idea whether their salespeople are smart enough to leverage those functions into referrals from donor-advised funds and family foundations. Impact investors are following the herd of VCs into agtech and are using the UN's Sustainable Development Goals. Here's the UN Sustainable Development Knowledge Platform if you need to get started. Rich people and corporate big shots can use the SDG Philanthropy Platform to select the SDGs that will most enhance their brand images or social standing. A non-profit executive at TiEcon mentioned that using a "network effect" of social peer pressure validates an impact investment pitch with well-heeled people. Yeah, it's all about elite peer acceptance of the latest cool idea they can brag about at social events.

One social impact expert thinks that four key cycles are out of balance: carbon, nitrogen, hydrogen, and Gini. Whacked-out cycles imply investors will favor environmental projects that will help the poor. I have no reason to think any of that is made up, because it sounds like it's all super-advanced science and smarty-pants stuff. I have every reason to think that microloans for 3D printers, Arduino boards, and other small assets can enable a tidal wave of artisanal tech for disadvantaged people, just like microloans for aquaponics in urban food deserts. Crowdfunding platforms could support microloans for lots of small-scale impact projects. It will be tough to pull these things off without US support for the UN SDGs and Paris Agreement on climate change. It will be even tougher without USAID programs for development abroad and US HUD programs for people at home. Deconstructing the US government in a nationalist fit of rage has an opportunity cost of foregone future development.

The TiEcon youth track had tons of stuff that even a middle-aged guy like yours truly could use. I thought I heard one guy at TiEcon say that some Indian regional government entity sponsored a hackathon with 900 participants. That is way more people than I've ever seen the biggest US tech conferences attract. India and China have huge populations and lots of students studying STEM. Quantity has a quality all its own. The US urgently needs crash STEM programs so lots of people can handle distributed processing in machine learning and analytics, just to catch up with our major strategic competitors. IMHO scalable models like Rethinking Engineering Design and Execution (REDX) would get mid-career non-STEM experts pushing youth into STEM projects that quickly solve real problems.

One VC addressing the youth track said successful entrepreneurs have five superpowers: passion, charisma, speed, focus, and "flight" (i.e., mental agility and constant pursuit of increased competence). He's Joseph Floyd, and you can check out his amazing comic book at Silicon Heroes. I read the book myself and it rings every bell for tech entrepreneurs striving to make their mark.

Athletes speak the entrepreneur's lingo. Former NFL player Anthony Trucks spoke about how he put tremendous work into the game he loved before he even knew he would be successful, a great lesson in hustling for entrepreneurs. Olympic table tennis player Lily Ann Zhang shared her humility and passion, and wanted us to enjoy our journey to success. Wow, I'm so glad I stuck around for the inspiration. It pays to be young at heart.

Anyone into biotech should check out Open Source Pharma Foundation and Nutrition International (formerly the Micronutrient Initiative). The impact investors pushing these concepts help enable simple innovations like universal iodized salt that become UN-led policies. One cool idea I heard from these advocates was for a "social DARPA" enabling giga-scale open innovation for billions of people.

TiEcon 2017 was well worth my time. I scored all the free stuff I could find so I came out ahead once again. The TiE people still haven't invited me to speak at their conference. They are really missing out because I have plenty to say about innovation. I also like Indian food even though I'm not Indian, so I will eat anything they put in front of me when I'm the star attraction at a future TiEcon.

The Informal Economy Needs Elite Guidance During Its Maturation

The informal economy is out there on the fringes of mass consciousness.  It rears its head every so often when the mainstream media ask Burning Man attendees what they do for a living when they're not making art or smoking dope.  Gray market transactions enter the official economy through financial sleight-of-hand when auditors and inspectors are distracted.  There are many ways for underground entrepreneurs to go legit.

Wisdom Hackers seek philosophical explanations relevant to modernity.  The Human Agency takes wisdom a step further, transforming it into brand new things.  Social entrepreneurs outside large organizations can test-market their ideas with an Ashoka fellowship.  The League of Intrapreneurs leverages the guerrilla skills of people already working inside established enterprises, in the spirit of the social capital movement.  Ask Alexa Clay for examples of how an "Amish Futurist" would question technology.

The Anglo-American Establishment has taken note of the informal economy.  Attempts to channel its energy for the benefit of the existing order are underway.  OpenIDEO takes the open innovation concept out of its UC Berkeley birthplace and into the technology sector.  Google Dot Org puts one of the world's most powerful brands behind tech ideas that can change the world.  The Aspen Ideas Festival works like a TED Talk that morphed into a salon conversation with an agenda to make the world better.

Elite guidance is essential if the informal economy's youthful enthusiasm is to produce anything beneficial on a large scale.  The movement's thought leaders have a penchant for multi-disciplinary thinking that risks becoming undisciplined.  Throwing around buzz phrases like "bohemian, sharing economy, sense of place, artisans," etc. tends toward verbal decoration of things that lack practicality.  I listened to one grown-up bohemian (a hot babe, I must say) wax on about how a small town is really an inherent company that resists outsiders and creates horizontal networks that scale across an entire country.  That sounds a lot like neofeudalism to me.  She didn't come out and say it but a member of the elite class will recognize the concept's future value in managing society.

Another buzz term is "pre-competitive collaboration."  It reminds me of the misfit squatters I met when I wandered into their Freespace temporary autonomous zone back in 2013.  Civic hacking needs room to experiment, and some experiments will fail.  Hackers need not be skeptical of MOOCs just because they don't offer the "deeply immersive conversations" (another buzz term!) that educated them in ivory towers.  Thought leaders hung up on wishy-washy thinking about the nature of the self, subjectivity, emotional intelligence, postmodernism, and cross-cultural metanarratives sound immature.

The "idea people" in social capital startups are prone to existentialist angst and alienation.  They need to put down the Albert Camus collection at some point and hand the informal economy over to the Big Data people who can calculate a social enterprise's potential.  The freethinking hippies and hard-core data nerds need each other provided they work with each others' strengths.  Misfits are simply wired differently, with brain chemistry far into the outlier range of what neuroscience measures.  They will not be found in the middle bulge of any normal distribution, and their ideas will thus be incomprehensible to most people.  They also risk being victimized by remaining too long in the informal economy, where the hustlers in pirate subcultures will eventually confiscate their wealth.  Get those open innovations out of the gray market and into the light of the above-ground economy's accelerators, where mass adoption and elite investment await.

We will hear a lot more about the informal economy in the years ahead.  The real economy in developed countries gets more dysfunctional by the day.  Underemployment is now a fact of life for Millennials with student debt.  Their constrained incomes need augmentation from micro-scale entrepreneurial action.  They will find profits in System D enterprises that deserve to be legitimized.

The Haiku of Finance for 05/26/15

Nonprofit startup
Social solutions scale up
Meeting human needs

Social Entrepreneurship at TiECON 2015

I got my first limited exposure to TiECON just this year.  I was lucky enough to score a free pass to the social entrepreneurship track.  Someone told me it would also score admission to the entire conference but the check-in people told me that was not the case.  What a bummer.  I prefer free admission whenever possible.

I did not know that the UNICEF Innovation Center existed until they sent a representative to speak at TiECON.  I would like to see more success stories about how tech breaks the cycle of victimhood in humanitarian aid.  More self-reliant clients means more inefficient relief NGOs can close their doors.  I'll believe UNICEF is serious about Big Data relief solutions when it works its way out of existence.

The social investors panel dropped some gems of wisdom.  If I recall correctly, one expert said innovation, reach, impact, and determination are the preferred social enterprise success factors.  Show me the KPIs for each category so our social entrepreneurs know how to fulfill each factor.  The funders see entrepreneurial potential in Indian high school grads in the academic top 10-15% of their classes who gain admission to engineering and medical school.  I think they should refine their criteria to include personality assessments that select for people with intrinsic motivation and a low need for approval.  The funders are also big believers in personal role models for the high-potential proteges they identify in underprivileged communities.  It sure is nice when someone powerful launches a deus ex machina into a poor region.

I give bonus points for the creativity in naming a talk "Making the Elephant in the Indian Economy Dance."  Just don't dance anywhere near that elephant and you should be okay.  Infrastructure attracts capital and talent; Silicon Valley has long known this and Indians have figured it out.  I thought of Maslow's hierarchy of needs when the speaker dude said making a change in someone's life meant meeting all of their needs.  The point is that it's impossible for an entrepreneur to reach Maslow's self-actualization pinnacle if they worry about what to eat and where to sleep.  Here comes my massive revelation, people.  Short of meeting all human needs, a scalable social entrepreneurial solution lowers the challenges a disadvantaged population faces, so they can meet their own needs with less difficulty.  The solution must of course serve a large target market to be worth scaling, and India definitely has a large population of very poor people.

I had never heard of the Hinduja Group Foundation until this conference.  The controlling family's representative could certainly practice her public speaking skills before addressing TiECON.  Having family wealth grants access to the WEF at Davos but does not guarantee obvious strategic vision.  I agree with the family's advocacy for greater gender parity and maternity benefits in career tracks.  I always want to see women get ahead, especially the ones wiggling shapely behinds as they climb their career ladders.

I still cringe when minimally qualified people get a public platform through the luck of their birth into privilege.  Gall dang it, I would rather have spent time in TiECON's oil and gas track than listen to a dilettante mouth off.  Speaking about social capital means having competence in allocating capital.  Family mouthpieces need to have the most competent parts of their bloodline facing the public.  The weaker people should stay on the sidelines at the polo field.

The final panel shared some best practices for nonprofits' success.  The panelists wasted time talking about everything their nonprofits did, except for how they succeeded!  I kept wondering about a best practice for scoring with hot nonprofit babes.  If donors are the equivalent of VCs for nonprofits, they should make their expectations clear through the various forms of donor-advised giving.  If nonprofits want to avoid being held hostage to donor demands, they should develop market-based revenue streams that will make them financially independent.

TiECON is doing the right thing by branching out into social entrepreneurship.  More care in selecting their noted experts would enhance this track's credibility at future conferences.  TiE should note how SOCAP operates.  The nonprofit sector doesn't generate the returns that TiE's capitalist entrepreneurs are accustomed to seeing in their careers.  I appreciate the hot Indian babes who attended this particular track.  I'm certain I can leverage their assets in some future joint ventures, if you know what I mean.

The Haiku of Finance for 03/09/15

Open source housing
Non-profit capital pool
Adapt urban scale

Open Source Housing Can Adapt ESOPs and REITs

I paid attention at tonight's Commonwealth Club talk on "open source housing."  The concept needs more definition but the movement's drivers are on the right track.  The current state of open source housing is a collection of websites offering simple, low-cost designs for stand-alone single family homes.  Those plans are great for rural areas or exurban infill that can be rebuilt into a denser community.  An urban core like San Francisco needs a different open source template.

Capturing a social capital spirit is great for open source plans that support non-profit organizations.  The limitation on this movement is that non-profits do not drive America's GDP.  Urban housing solutions need a capitalist impulse.  Non-profits are welcome to experiment with starting their own credit unions, sequestering parts of their endowment into residential housing units, or issuing bonds to buy buildings.  Our Commonwealth Club speakers mentioned all three tonight and I noticed that all three are limited by most non-profits' lack of a capital base.  Universities have successfully launched campus-owned residential housing initiatives because they have sufficient financial strength to underwrite large acquisition and construction projects.  Your typical San Francisco neighborhood charity cannot match the strength of our local universities.

The fourth pillar of tonight's talk is some kind of open source creative commons license for local housing solutions as co-working spaces.  This concept has legs if it finds an ecosystem that can make it profitable for large numbers of market participants who are not limited by geography.  Open source systems like Linux and Arduino work because they enable the construction of products that many people will purchase in a free market.  Adapting an open source model from IP to physical residences means creating a legal and financial template that people will find profitable.

Here is the Alfidi Capital contribution to open source housing.  The private sector already has a concept that allows employees to convert their labor into equity; it's called the employee stock ownership plan (ESOP).  Adapting this for a non-profit enables non-profit workers to make tax-free contributions to an equity pool that the organization can use to buy multi-unit residential buildings.  Making this scalable means multiple non-profits can pool their ESOP housing funds into a professionally managed private REIT.  Consolidating the purchased buildings into a private REIT fund gives each employee shares they can exchange for an available residence, similar to a condominium's homeowner association.  The advantage of a REIT structure is that shares may be sold privately between non-profit organizations' employees.  Perhaps they could be tradeable on portals like SecondMarket.  The REIT's liquidity allows flexibility for non-profit workers who may not wish to spend their entire lives committed to one housing arrangement if they decide to move on with their careers.

I look forward to seeing what SOCAP people will do with open source housing.  FINRA notes that private REITs come with many caveats.  Physical designs for housing are less important than an economic framework that is scalable to address a large number of mostly urban non-profits that are too small to move the residential market on their own.  Employers and investors know that ESOPs and REITs already work as capital pools.  The non-profit sector can use them to buy affordable housing.

Listicle of Financial Inclusion Institutions

Financial inclusion is an emerging topic in both the traditional finance sector and the social capital arena.  Here's a rundown of the major institutions facilitating and tracking this phenomenon.

The Center for Financial Inclusion (CFI) has a target date of 2020 for full inclusion.  That's ambitious, so five years from now we can expect to see inclusive programs all over the developed world.  If the subject is ever going to catch fire, it must cover both the developed world and emerging markets.

The G20's Global Partnership for Financial Inclusion (GPFI) is a serious effort to integrate several multilateral initiatives.  It matters if it keeps the developed world's sub-ministerial task forces on track.  The risk is that the G20's recent endorsement of coordinated monetary stimulus will disrupt the capital account flows the developed world needs to meet inclusion targets.

The World Bank's Consultative Group to Assist the Poor (CGAP) develops a policy architecture for implementing inclusive plans.  That's a fancy way of saying the group has sample rules that any country can implement.  Check out their discussions of microcredit.  The World Bank also maintains GPFI's G20 Financial Inclusion Indicators, along with its own Financial Inclusion data and Global Findex.

The Alliance for Financial Inclusion (AFI) is probably the most inclusive policymaking body.  The difference with AFI is the participation of experts from the developing world to ensure the other coordinating bodies aren't making policy in a vacuum.

Billions of formerly marginalized people are crossing the chasm between the non-integrated gap and the functioning core.  Keeping up with the times means knowing how they will all grow wealthy.  Financial inclusiveness is the developed world's welcome mat laid out for the world economy's brand new members.

The Business Case For New Mentoring Tools

I recently visited with the enterprising minds behind MicroMentor, a derivative of Mercy Corps.  I don't participate in their program but they offer a good value proposition to anyone seeking mentoring via social media.  Entrepreneurs pressed for time now have another option besides SCORE.  They can also share knowledge with peers at Startgrid.  The good news for proteges seeking financial inclusiveness just keeps on coming.

The advent of microfinance and microenterprise means mentoring must adapt to changing times.  The Aspen Institute's FIELD program documents the latest data on how microbusiness sectors adapt.  Aspen has tons of other programs too numerous to name here that can help.  Mentors who need ROI trackers for their board service and volunteerism need look no further than True Impact.

A web search of topics covering mentoring reveals a ton of open-source research on personal mentoring for disadvantaged youth.  The research on mentoring within a business context is often behind the paywalls of academic journals or held in the private databases of consultancies.  The best open-source business cases for mentoring are in the Society for Human Resource Management's research and tools.  Searching SHRM's site for variations on the word "mentor" reveals everything a good manager needs to know.

The existing literature on mentoring has some gaps.  Mentoring disadvantaged youth makes sense from a humanitarian standpoint.  Finding a mentor at work has potential payoffs in the time-honored tradition of riding a superstar's coattails.  The HR coursework I recall from my business studies showed that formal mentoring programs often lead to mismatches.  There is room for disruption in mentoring.  Social media enablers like MicroMentor and Startgrid are natural evolutions in business relationships.

Launching the Bay Area Impact Investing Initiative

I attended last week's official launch of the Bay Area Impact Investing Initiative.  I met the movers and shakers behind this project prior to this year's SOCAP conference and my blog article about their ideas sums up their approach.  This isn't just some charity effort to channel giving.  BAIII wants to show fiduciaries how to obtain market-rate ROI from ESG investments.

Lauren Agnew from Seal Cove Financial broke out brief descriptions of real estate, private equity, and infrastructure as separate asset classes.  I think there are plenty of impact investing opportunities within each category.  I've blogged before about how land trusts can configure real estate parcels for long-term investment, so isn't much of a stretch to attach impact investing criteria to them.  Private equity has an obvious role to play in microfinance as angel investors flock to crowdfunding portals.  I see no obstacles to rating infrastructure projects according to environmental impact criteria to make their funding more marketable.  The Global Impact Investing Network created its Impact Reporting and Investment Standards (IRIS) for those of you who need impact evaluation metrics.  The IRIS registry looks like a good connecting tool for institutions looking to either attract or deploy capital.

The panel got going and I discovered that Pacific Community Ventures' PCV InSight research practice has published quite a bit of thought leadership on this subject.  The panelists mentioned that advisors' lack of education on impact investing and the scarcity of available products have been roadblocks to the widespread adoption of impact investing despite obvious demand.  I've read recently that independent advisors are concerned about competition from discount brokers as clients seek more control over their money.  I also think that AI engines like Personal Capital will put a lot of RIAs out of business.  If small-practice advisors are a dying breed, it behooves impact investing practitioners to either configure their products for automatic inclusion in the AIs' engines or focus on marketing products through the big SIFI investment banks.  The panelists mentioned that several wirehouses  are all at various stages of launching their own impact investing initiatives.  Morgan Stanley brands it "Investing with Impact."  UBS has an Impact Investing Private Equity fund.  Goldman Sachs offers a fund and bonds for social impact.  I've had some experience dealing with all of those firms in one way or another and I can't exactly give them ringing endorsements for doing the right things.  They all received bailouts during the 2008 crisis.  I cannot assure my readers that they will not need bailouts again in a renewed crisis.

The panel mentioned that US pension fund trustees are reluctant to second-guess their plans' investment policy statements on value investing, but place-based investing is very consistent with their fiduciary duties.  I did not know that the vast majority of California's private equity investing is confined to a small number of ZIP codes.  I had to look up the source for that concentration in PCV's 2007 report on CalPERS' California Initiative.  If you need more reportage, check out McKinsey's research on social impact bonds.  One panelist mentioned that the Affordable Care Act will offer massive impact investment opportunities as the mandates for community health care clinics creates demand.  I wonder whether sovereign wealth funds do impact investing.

One of the last public comments during this launch event revealed something I should have suspected.  A panelist revealed that many thought leaders and activists in impact investing are unable to select impact investments in their own portfolios . . . because their families control their assets!  Well, that says it all.  Is this whole movement driven by trust fund babies who can afford not to work?  This is merely anecdotal but it jives with my impression of the trust fund kids I've met in this town who never seem to have real jobs.  I suppose somebody has to have time on their hands to make this happen.  Kudos to these folks for doing something productive and not wasting time.  If they ever get tired of working the crowds at investment conferences I'd be happy to take their places.

I look forward to more exciting developments from BAIII.  The movement reminds me of CalPERS' leadership in activist investing back in the 1990s.  Cal-PERS forced underperforming companies to shape up their operations based on traditional metrics.  That movement lost steam when institutions turned away from shareholder activism to alternative investments.  Too many pension plans lost their way when they started copying the Yale University endowment's model and had to watch their portfolios blow up in 2008.  Impact investing is one way to ensure institutional investors keep their eye on important things rather than fads.  

Learning PR at the Impact Hub San Francisco

I got to attend a free public relations workshop last week at the Impact Hub San Francisco.  The space is unique among incubators because it supports non-profit startups and B-corporations.  It's the latest manifestation of the social capital phenomenon.  I'm all about free info and free support so I had to check this out.  I must have looked out of place as the only dude there in a suit and tie but I had just come from a more formal engagement, so that's my story.

The speakers were all PR practitioners and journalists.  The single most important thing I learned in the PR workshop was the importance of building relationships with journalists.  They repeated that lesson over and over again; repetition drives a point home like nothing else.  The social media space is pretty small but it can launch stories into the mainstream media.  They key is to cultivate a targeted list of journalists covering your sector who can give a social media story traction if they trust you as a source.  The story, of course, is your press release that touts something your business is doing.

The ever-awesome Hermione Way was the final speaker.  She is even hotter in person than she looks in photos.  Her "inside baseball" tips on media relationships were invaluable and I'll repeat a few right here.  Never assume anything is off the record.  Don't launch your PR at bad times (like when a big competitor has a major launch) or misunderstand a reporter's lead time for publishing.  Retweeting journalists' articles gets their attention and sometimes high-powered people tweet back.  One TV appearance is worth millions in ad spend.  Drink booze with the press, because that's how journalists relieve stress.  Got it, Hermione (BTW, it's pronounced "her-MY-nee").  Thanks for the tips and for being so incredibly hot.  Now I just need to figure out where the financial press in the San Francisco area goes for drinks after hours so I can ply them with my awesomeness.  I look forward to drinking with hot female media personalities like Hermione Way so they can marvel at my extreme genius while they push out my business PR.

Here come the hot media sites the experts mentioned.  Help A Reporter Out (HARO) enables anyone with authority on some subject to get the attention of reporters.  Muckrack aggregates the daily tweets of topics journalists discuss.  TechCrunch likes entertaining stories.

Hey folks, I don't publish this stuff just for my health.  I'm always looking for the hot angles that will give my business the edge.  You betcha I'm using these strategies myself.  Sharing a few tips with my audience makes me the go-to guy for business insights.  Don't believe me?  Just ask me.  

The Haiku of Finance for 09/04/13

Attend SOCAP show

Notice all the hot women

Must return next year

Angel Investors Peek Into SOCAP13

I don't have time to attend the full SOCAP13 conference this year but I did make time to stop in briefly at one event.  Hub Ventures and Investors' Circle teamed up to host an "Angel Squared" mixer tonight for those of us from the finance sector.  I left early as the room was getting pretty crowded but I met some cool people.

In case you haven't heard, accelerators and incubators for the non-profit sector are proliferating.  They're just as adaptive as their for-profit counterparts and some organizations reach out to both for-profit and non-profit startups.  The social capital ecosystem is growing in size and complexity.  One of the gurus I met at Angel Squared tonight likened social capital to a managed forest where some managers want to clearcut trees for farmland, some would rather harvest timber responsibly, and others would prefer to preserve the forest and clear the undergrowth to grow coffee.  I had previously thought social capital was more like an Amazon rain forest, with tremendous chaos and random diversity.

I arrived early enough to check out the crowds of conference goers streaming out of Fort Mason.  The one most important take-away I gleaned from watching these folks is that the social capital movement is populated by a large number of very attractive-looking women.  I mean, for crying out loud, these chicks had model-quality looks and triathlete-caliber figures.  I am definitely clearing my calendar in 2014 to attend SOCAP if it means I'll be surrounded by hot females all week.  Even the gals I met tonight at Angel Squared were hot, although they may have thought I was a jerk for not being much of a conversation starter.  Hey ladies, it was so loud in that cramped conference center I could hardly hear a word any of you said to me.  I'm much more loquacious during a candlelit dinner in a quiet restaurant, if you know what I mean.  One hot woman did answer my question about whether a for-profit publicly traded company can certify as a B-corporation.  The answer is yes, it can.

Let's recap tonight's important lessons.  Is SOCAP cool?  Yes, it is.  Will I attend next year?  Yes, I will.  Are hot chicks attracted to social capital?  Yes, they are.  Do these women find me intriguing and stunningly handsome?  Of course they do, don't be silly.  Alfidi Capital is going full steam into social capital.

The Haiku of Finance for 09/02/13

Social capital
Sustainable investing
Local benefit

Adapting Portfolio Theory To Social Capital

Today I attended an awesome seminar on the research behind the Bay Area Impact Investing Initiative.  A diverse bunch of finance types gathered at the East Bay Community Foundation to hear the principals behind BAIII discuss work that is very relevant to the social capital movement.  I don't have time this week to attend SOCAP13 at Fort Mason so this seminar will have to tide me over until next time.

R. Paul Herman from HIP Investor elaborated on the five "HIP" factors that he uses to describe previously unquantified drivers of corporate valuation.  Human capital has heretofore been an off-balance sheet intangible asset that financial models have ignored.  Endogenizing this asset into a financial model adds depth to a balanced scorecard managerial approach.  Incorporating environmental, social, and corporate governance (ESG) factors into corporate management is a new approach to mitigating risk.  Asset management firms are now publishing ESG reports and corporate managers are plotting projects and business units on a 2x2 human capital matrix.  We've all seen BCG's growth-share matrix, so just picture one with profit on the y-axis and a human capital scale on the x-axis.  I learned from Mr. Herman that Infosys tracks its human capital according to a formula from a 40-year old Harvard Business Review article.  I'll bet that reference is the Lev and Schwartz model for the present value of future earnings referenced under human resource accounting.

The HIP theory has some surprising implications.  I've noticed that lots of investing styles - growth, GARP, sector rotation - all claim to outperform benchmarks at some point.  Mr. Herman's research reveals that even "vice" portfolios of investments in cigarettes and gambling can outperform market benchmarks, but sustainable ESG portfolios can also outperform with reduced risk.  His findings indicate that more diverse corporate boards of directors are associated with higher ROE and lower volatility, and that unsustainable companies have more volatile share prices.

Lauryn Agnew from Seal Cove Financial discussed her work on attracting institutional assets to social capital investments.  Modern portfolio theory is limited by its emphasis on historical measures of risk, like tracking error and volatility.  She wants to educate investment managers on how ESG criteria mitigate future risk.  Institutions are starting to come around.  The Federal Reserve Bank of San Francisco held its Impact Investing in the Bay Area conference this past May.  Get the conference report and read the working paper.

Ms. Agnew's focus stems from her work with the governance of local non-profit institutions.  These investors want to align their fiduciary duties with the social benefit mission of their endowments.  Institutional trustees have had to live with tradeoffs between impact and investment returns up until now.  Her starting point for identifying locally-based public corporations was the Bloomberg Bay Area Index.  She then matched the ESG scores for portfolio candidate stocks to criteria defined by a given non-profit's mission, and then ranked the stocks for optimal fit.  Several iterations of sample portfolios revealed which combinations of local concentration and ESG score minimized tracking error.

The Bay Area Council's Family of Funds has sought double bottom line impacts for several years.  Enthusiasm for ESG investing is not limited to the Bay Area.  The California Economic Summit's Capital Action Team is pushing triple bottom line results all over the Golden State.  The California Financial Opportunities Roundtable has outlined solutions for growing local businesses.  The Community Reinvestment Act encourages the formation of investment companies that implement its principles.  Community development financial institutions (CDFI) certified by the US Treasury's CDFI Fund can use equity equivalent investments to give non-profits lower capital costs.

Private sector thought leaders in ESG analysis are few and far between.  Changemaker Capital Partners is driving impact private equity investing.  Collaborative Economics is helping to seed the civic ecosystem with "innovation brokers" who can drive multidisciplinary change.  I've done similar work as a knowledge management professional but I had no idea there was a term for an emerging field.  The Stanford Social Innovation Review and Ceres publish leading edge think pieces on sustainability and ESG.  The Global Environmental Management Initiative (GEMI) is taking this subject's tools worldwide.  Now I've got some high-quality sources for future blog articles.

I'll close out this intense, multidisciplinary discussion with my own proposed social capital innovation.  I see a massive disruption opportunity in sustainability for a business development company (BDC) that is chartered to provide capital to small and medium enterprises meeting ESG criteria.  I believe such an entity that is majority owned by investment professionals from traditionally disadvantaged demographics (women, ethnic minorities, disabled military veterans) could register in the Altura Capital Emerging Manager Database and qualify for capital from institutions with a mandate to diversify their sub-managers.   Such a business may also qualify as an SBA-designated Small Business Investment Company (SBIC), giving it additional advantages.  Domiciling this enterprise in a HUBZone would be the crowning glory in a pitch for local investment.  I do not know whether this ESG / BDC / SBIC plan is workable but I am very willing to work with other finance professionals who want to explore it and give it a shot. We won't know until we try.  Maybe some ambitious innovation broker from 85 Broads or the Wall Street Warfighters Foundation is willing to help me make this happen.

Full disclosure:  No positions in any securities, funds, or enterprises mentioned at this time.