Highlights from the GSVC

In response to my post on Charity vs. Business: The Business Case, I just wanted to thank everyone who commented in the blogosphere and everyone who propelled the conversation into the twittersphere (@createquity, @adnanmahmud, @lauratomasko, @nedgington, @cathyhc, @bhalchander, @ithorpe, @paconmiller, and @tactphil). It’s crystal clear to me that there is much more work to be done in articulating the difference between organizational structures (nonprofits, social enterprise, traditional for-profits) and strategies (charity vs. business, value creation vs. value capture vs. value transfer) and that as a sector, we need to present a more balanced perspective that really highlights the comparative strengths and weaknesses of each organizational form and strategy. So thanks again to everyone who contributed to the conversation – and I look forward to its continuance!

To rewind, a little over a month ago, I convinced my company (which has a new website!) to sponsor my attendance at the Global Social Venture Competition to broaden my exposure to the current issues in the social venture space. For the bargain price of $125, I was able to hear keynotes from Tracey Pettengill Turner of MicroPlace and Jonathan Greenblatt of Ethos Water and attended three panel sessions: Financing Your Social Venture, Critical Legal Issues & Strategies for Successful Social Enterprises, and International Opportunities. Here are my highlights from the panel sessions:

Financing Your Social Venture

Panelists:
Dan Crisafulli, Director, Ecosystem Investments and Partnerships, Skoll Foundation
Bill Dewes, Chief Financial Officer, D.light Design
Penelope Douglas, President and Co-Founder, Pacific Community Ventures

Moderator:
Kevin Jones, Principal, Good Capital

All the panelists talked about their work and the growing recognition that there are good opportunities to invest in businesses that have a social impact. However, it’s been my experience that many social ventures find it very difficult to receive critical early stage funding, especially growing from the friends and family round to the next stage of financing ($250K to $1.5M) before a traditional series A round, as this article from the SSIR and my conversations with entrepreneur Peter Frykman suggest. So I asked the panel “Where is the early stage financing? How do you get that next critical phase of funding after the angel round of funding?” Both Kevin and Penelope responded by recognizing that there is a funding gap and that there really isn’t very many good sources for that type of funding and its a conversation this sector needs to have (my follow-up conversation with both of them suggests that the gap in funding is caused by low financial returns from this segment of investing, which I would venture is caused by a market for lemons problem). Bill Dewes from D.light suggested that the solution was to participate in business plan competitions (since that’s what helped d.light get visibility in front of eventual investors like Draper Fisher Jurvetson and Grey Matters Capital), but personally I see that as a niche, bandaid solution (honestly, the funding cycle of business plan competitions is super slow and the amount of capital is trivial to what’s needed – the ROI of time is way lower than what is optimal – and Jonathan Greenblatt, during his keynote, pointed out that his company, Ethos Water, competed in the GSVC but didn’t win despite being one of the most successful companies that has emerged from the competition, suggesting that there may be considerable error in the evaluation of business proposals; Kiva.org placed 5th in the BASES Social Entrepreneurs Challenge and look at where it is now).

Critical Legal Issues & Strategies for Successful Social Enterprises

Panelists:
Lloyd W. Aubry, Of Counsel, Employment and Labor Group, Morrison and Foerster LLP
Susan H. Mac Cormac, Partner, Corporate Group, Morrison & Foerster LLP
Tessa J. Schwartz, Partner, Technology Transactions Group, Morrison and Foerster LLP
Peter J. Yim, Partner, IP/Patent Group, Morrison & Foerster LLP

Moderator:
Ken Taymor, Executive Director, Berkeley Center for Law, Business and the Economy at the University of California, Berkeley, School of Law

Being a legal nerd, I found this session from the folks at Morrison & Foerster exceptionally interesting and informative, since most of the discussion and the literature in social enterprise focuses on business strategy independent of the law. Some of the highlights include:

• 501c3 regulations are complicated, for-profit forms are straightforward
• Hybrid forms are complicated and often setup wrong
• Constituency statutes allow corporations to consider other factors besides shareholder value (for more background reading on the status of corporate constituency statutes in California, this paper presented by Jenny Kassan of Katovich Law Group at the SEA conference is a wonderful read)
• 99% of the time, you should form a corporation over a sole proprietorship or an S-corp
• Debt = promissory notes, Equity = shares in the company
• Convertible debt is a popular financial instrument (mainly used when it’s difficult to put a proper valuation on your company in the early stage)
• Don’t issue preferred stock unless you have to
• Unregistered securities require filings and exemptions
• Business judgment rule – allows corporations a lot of discretion in how they manage their business (but as the Kassan article suggests, the law is unclear what can and can’t be done under the rule)
• Form/structure follows function/strategy
• Selling/converting a nonprofit to a for-profit requires the approval of the State Attorney General’s office (The California Endowment was formed as a result of a nonprofit health provider converting to a for-profit)
• Selling a for-profit to a nonprofit is pretty straightforward; assets can be tax deductible if made as a donation
• IP ownership issues are really important – disagreement later may need to be settled by clear property rights
• Final advice: “You don’t know what you don’t know.” – It’s super important to get legal advice early on.

Social Enterprise in Emerging Markets

Panelists:
Swati Mylavarapu, Consultant, Dalberg Global Development Advisors
Mark Pretorius, Managing Partner, Premanco Ventures
Rose Shuman, Founder, Open Mind and Question Box

Moderator:
Paul Braund, Co-founder and Executive Director, RiOS Institute

Rose Shuman really drove in the point that as a social entrepreneur working in the developing world, you have to let go of your assumptions and live in the country you’re interested in starting your enterprise. Mark Pretorius talked a little bit about the need for social ventures to be exceptionally clear in their financial analysis and to not overstate returns and also argued that investments from foundations into for-profits has become increasingly easier (which I disagree with – there are many other barriers to mission investing, especially at the early stage venture capital level, that makes foundation involvement very difficult – another topic for another day). Swati Mylavarapu, who previously was at Google.org, challenged the audience to think more deeply about the design of their enterprises as “social enterprises” and pointed out that while she and the philanthropic community is excited by organizations like Ushahidi, many traditional for-profit solutions (she mentioned an Indian microfinance orgnaization that’s done extremely well to contrast) have conceivably had a much larger impact on the lives of the poor, suggesting a possible bias of philanthropy towards innovation over impact.

Some of my favorite quotes from the session (ht Amie Vaccaro for the tweets):

Swati Mylavarapu: Establishing a social value proposition is the easiest part. It’s the enterprise model that is much harder.

Rose Shuman: Most of the world does not share our culture of it’s ok to fail. There’s no safety net; you fall and you hit gravel.