The two social businesses I’ve profiled this week, World Centric and Better World Books, have taken different approaches to funding, self funding and organic growth through sales and an SBA loan then venture funding, respectively.  Both Aseem Das and David Murphy talk about how they made these decisions in our interviews.

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Foundations
If your for-profit venture is a Low-profit Limited Liability Company (L3C), you can apply to foundations for program-related investing funds (PRIs). As an L3C, you can ask for a loan at little or no interest and structure more convenient payback terms than a bank would allow.

Angels and Venture Capitalists
There’s a growing crop of investors looking for social as well as financial returns. Many of these investors expect market-rate returns on their investment. The financial viability of your enterprise is just as important as it would be to the most socially misanthropic funder, but social venture capitalists might be willing to wait longer for a return on their investment.  An intended secondary benefit to working with an angel or VC is the guidance and support they give your business. Good Capital’s Kevin Jones’ close involvement helping shape Better World Books’ model is terrific example.

Banks
Community development banks make loans to companies with community development or social missions through earmarked federally backed funds.  ShoreBank supports environmental and mission driven ventures with loans, lines of credit and other services.  Billing itself as planet-smart banking, The New Resource Bank has services geared to sustainable and environmental businesses.

The Small Business Administration (SBA) is a federal government agency that supports small businesses. It doesn’t directly make loans but acts as a guarantor on the bank loan. David Murphy used an SBA loan to grow Better World Books’ operations and prove its model before taking venture funding.

Self Funding, Friends and Family
The personal pressure of accepting funding from family and friends is high. An upside, however, is that you’ll likely be extremely disciplined with how you spend it.

Additional resources:

15 Social Venture Capital Firms You Should Know About
10 More Social Venture Capital Firms You Told Me About
The Best Kept Secret to Social Venture Funding?

Image credit: blog.entrepreneur.com

I invited Paul to Cause Capitalism to talk about how investors can use the HIP methodology to guide their investment decisions, as well as how entrepreneurs can apply it to create businesses that seek to deliver human impact and profit for shareholders.

Click the player to listen to my conversation with Paul or right-click and save for the MP3.

Paul’s new book,  The HIP Investor: Make Bigger Profits by Building a Better World, shares how to perform a quantitative assessment of your company’s HIP potential, analyzes the products, metrics and decision-making practices of the most and least HIP companies in the S&P 500 and provides questions and tools to help you build a solid HIP portfolio across all asset types.

The HIP methodology uses 30 indicators to gauge a company’s output in the categories of health, wealth, earth, equality and trust (inspired by Maslow’s hierarchy of needs) and to measure how each can drive financial value.  This approach prioritizes measurable results over policies and philosophies.

In the beginning of the interview I confessed to Paul that I thought socially responsible investing (SRI) did outperform traditional investing.  The short answer is that SRI tends to lag behind traditional investing in up markets but can provide better cushion in down markets.  Paul explained why this is:

“The SRI approach focuses on negative screening, which means that companies that are perceived as negative or have products with perceived negative impact are kicked out of your investment universe.  This increases the risk of your portfolio and has tended to depress the return.  The second thing that happens with socially responsible investing is that those who do it focus on policy evaluations and operating practices.  But these factors don’t actually correlate with better financial performance.  [The HIP methodology] focuses on quantifiable results–what are the true outcomes in the categories of health, wealth, earth, equality and trust?  And how do these outcomes drive financial value?  When you do this, you find that sustainability factors, the metrics of results, actually can drive financial performance in a way that can beat traditional investment.”

About R. Paul Herman
Paul created the HIP methodology and founded HIP Investor Inc., an investment advisor, to help investors realize higher Human Impact + Profit.  He advises investors and manages portfolios (including the HIP 100 Index) using the HIP Scorecard featured in Fast Company magazine and in The HIP Investor book (John Wiley & Sons 2010).

Paul was part of the team that designed the sustainability scorecard for Walmart, which is now part of the Sustainability Consortium.  He has worked with social enterprises Ashoka and Omidyar Network, and consulted with McKinsey & Co.  He is a member of Investors’ Circle and an advisor to Net Impact.  Paul earned a degree from the Wharton School.  Paul has been quoted in the Wall Street Journal, Fortune, Forbes, BusinessWeek, and on CNN and CNBC.  Grameen Bank founder Muhammad Yunus called the HIP Scorecard “a new yardstick for business” in his book, Creating a World without Poverty: Social Business and the Future of Capitalism.

Like this interview?  You can thank Paul on Twitter like this and follow him at @HIPInvestor.

Click the player to listen to my conversation with Mike or right-click and save for the MP3.

After two decades working in capital markets on Wall Street, Mike began thinking about how he could apply his background to social capital markets. “I wanted people to consider valuing social and environmental characteristics as much as they do the financial aspects of their investments, while also giving them market-rate returns.”   The product of his financial experience, exposure to poverty and desire for people to invest with a broader set of goals is Mission Markets.  

Mission Markets is the first U.S. electronic platforms geared toward social and environmental companies and investors, as well as people buying and selling environmental credits (carbon, water or fishery licenses).  It’s divided into two platforms.  The Capital Marketplace is for accredited investors, social enterprises seeking capital, foundations offering PRIs and third-party service providers.  The second platform, Mission Markets Earth, is “an environmental markets trading board,” to support market based mechanisms for environmental conservation.

“Mission-related investments aren’t anonymous. They’re about engagement with companies, organizations and people.”  Mike sees Mission Markets as an information delivery system that supports localized and collaborative interaction and encourages investors and companies to talk to each other and develop strategic relationships with nonprofit organizations.  ”The transaction part [of the platform] is incidental. It’s only 25-30% of what we offer.”

For-profit social and environmental companies looking for funding can apply online by filling out a profile and taking B Corporation’s survey, which is Mission Markets’ current metric for assessing sustainability.

The Capital Marketplace will launch later this month and Mission Markets Earth will launch in mid-June. Mike demoed the site for me and it’s an incredible resource for individuals and companies interested in impact investing.

About Mike Van Patten

Mike is CEO and founder of Mission Markets, Inc.  He has more than 20 years experience in capital markets, including serving as a vice president at Bear Stearns and co-founding NYPPEX.  He’s also an avid outdoorsman and has completed more than 50 triathlons.

Kevin Jones founded Good Capital with Tim Freundlich to provide expansion funding for social entrepreneurs who are ready to scale up.  To qualify for expansion funding, your company must have real revenues, a leadership team beyond the founder and no business model or technology risk, at a minimum. (If you need to seed funding, I’ve listed some other social venture sources here).  Click the player below to listen to Kevin articulate his vision and talk about some of the social enterprises he’s working with. Or right-click and save for the MP3.

Good Capital is the response to a question Kevin’s daughter asked him: What’s your life about? after he sold his last company and was looking around at what to start next.  ”I’d done ‘good things’ in one part of my life and ‘business’ in another part, doing as much as I could to join them, but only enough as the market would bear,” says Kevin.  ”I had made enough money and proven that I could do business internationally, so I started looking for ways that I could do more good.”

After several excursions into the nonprofit sector (he joined a couple of nonprofit boards as a way to give back, but realized the slow consensus process wasn’t for him) and a direct service stint leading a malaria program in Swaziland and Mozambique, Kevin circled back to his core area of entrepreneurship and launched a firm that gave entrepreneurs the tools they needed to affect social change.

“I wanted to do this odd thing of helping them mix their mision with the bottom line. I was seeing a lot of social enterprises that were real business and that could accelerate their impact if they could get the fuel they needed–capital and some other help we could provide.”

Despite initial skepticism and scoffs from other investors who felt that factoring in social metrics was a fool way of doing business, Kevin and Tim have built Good Capital into a profitable business.  One of its portfolio companies, Better World Books, has grown three times since the firm invested 23 months ago and is now being studied by Yale Law School for the way it bought ‘insurance’ for its social mission by transferring portions of its founders’ stock to its nonprofit partners.

About Kevin Jones: Kevin is the co-founder of Good Capital and convener of SOCAP. Five out of six of his previous businesses achieved market dominance before he left or sold them. He’s written for Forbes and Business 2.0 magazines. You should tell him what you think of the interview on Twitter at @kevindoylejones.com.

I’m interviewing other social venture funds for Cause Capitalism. Based on what Kevin spoke about in the interview, what should I ask upcoming social venture capitalists? What do you need to know to maximize your vision for social change? Share it in the comments or email me, olivia(at)causecapitalism.com.

Portfolio 21 Investments, a mutual fund that invests in ecologically sustainable companies, was founded by a man who received two shares of Mattel Toys as a boy and explored the world at large as a young man. Pairing his interests in finance and social good, Carsten Henningsen founded Portfolio 21 in 1982.

The firm is stringent about which companies it invests in, refusing mass-market sustainability players like Groupe Danone (which owns Stonyfield Farm) and GE (widely applauded for its Ecomagination program). Portfolio 21 investments have outperformed the S&P 500 and MSCI World Equity Index since the firm’s inception, barring the 4th Quarter in 2009.  The company works with individuals, employers, brokerage firms and investment managers.

From his sustainable office in Portland, Oregon, Carsten answered my questions about socially responsible investments, how a lack of market research helped launch the firm and how he withstood the skepticism from his financial peers.
Click the player to listen.

Key points from our conversation:

• The business of responsible mutual funds was nearly anathema when Carsten founded Portfolio 21. If Carsten had gauged public interest through focus groups, he probably wouldn’t have launched the firm.
• Today, socially responsible investing is the fastest growing sector in the financial services industry, even in this financially conservative time.
• Carsten hypothesized that Portfolio 21′s investments outperform traditional ventures because its investment companies are screened through an environmental lens in addition to a financial one.
• Environmental considerations are closely tied to a company’s bottom line. If a company is wasteful and a polluter they will loose market share, spend more on resources and waste and potentially incur fines or sanctions.
• Criteria for evaluating companies are borrowed from Swedish non-profit The Natural Step. Considerations are not just ecological; Groupe Danone was refused because some products contained genetically-modified ingredients.
• It takes 40-60 hours for a company to be fully evaluated.
• Transparency is the firm’s bread and butter. The website lists all companies who were refused or divested and the specific reasons why.  E.g. Sustainability darling Interface was divested not because of environmental malfeasance but because i outgrew WPortfolio 21′s financial needs.
• Unlimited growth is unsustainable.  Investing today goes beyond the expertise needed to manage only financial risks.
• To be able to fully recover and deal with national deficit, we need to apply a broader level of thinking that includes challenge the popular mandate for unlimited growth.
• It’s critical that we learn how to weave together economical and ecological limits to confront today’s challenges.

What do you think? Do you have socially responsible investments as an individual or employer?