I’m wrapping up Social Business Venture week with a look at funding options for the breed of businesses that generate profits but exist primarily to fulfill a social need.  The legal structure of your business should take into account how you plan to operate and earn revenue. Neither of these decisions can be taken lightly and I’ve not tried to cover them, but to present a snapshot of funding options.

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

How does good beget good? And what are you doing to tip the domino?

In his book, The HIP Investor: Make Bigger Profits by Building a Better World, R. Paul Herman lists employee satisfaction as an indicator of strong investment returns.  He points to Wharton finance professor Alex Edmans’ work identifying a “direct positive correlation over the long term between employee satisfaction and stock market returns for the companies they work for.”   Edmans found that companies appearing on Fortune‘s annual list of “The Best Companies to Work For” (1984-2005) gave shareholders 4% more value annually.

Here’s a run down of the reasons why happier employees lead to increased company revenue:

• Satisfied employees remain with a company longer, which means they–
  • build up a collective corporate knowledge;
  • contribute to long-term stability; and
  • reduce costs stemming from recruitment, training and lost productivity.
• Employees who are happy and engaged at work–
• produce more; and
• provide better customer service (a 1% increase in customer service has been found to boost revenues by 2%).

No doubt you’re nodding in obvious agreement; these aren’t  newly realized ideas or something that an eighth grader couldn’t deduce.  But what are you doing to realize them? Potential impact is huge: employees’ daily experiences, company quality and reputation and revenue.

In between profiteering and starry-eyed do-gooding is a place where values can incur value.  This is the place of Human Impact + Profit (HIP), a methodology created by R. Paul Herman that aims to help investors and businesses make money while solving key human needs.  Companies that deliver human impact and profit can gain a magic combination of higher revenue, lower costs, optimal taxes and higher investment demand.

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.

Michael Van Patten used to give out his entire allowance when he lived in Ecuador during high school.  This went against common practice to ignore people with their hands and pretend they weren’t there.  The poverty he saw stuck with him for years but didn’t affect the way he made a living, until recently.

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.

Employee compensation packages are dropping in financial value—but this time, it’s not because of the recession alone. From MBAs to college graduates, potential employees are looking for more than stock options and dental care from their employers. In “Saving the World at Work” Tim Sanders calls this “Social Compensation—the purpose that comes with the paycheck.”

He posits that social compensation will top financial benefits as workplace incentives within the next 18 months. While I think this reversal will take a good bit longer, there is a documented shift in what employees seek from work. Without evoking Maslow or spending time on studies* and numbers substantiating what I feel many readers of this post know to be true, let’s dive into what type of social compensation packages you can use to reel in top talent.

IBM's Corporate Service Corps in Ghana

Employee Volunteer Programs

Employee volunteer programs (EVP) can take several forms: unpaid time-off to volunteer, company-organized service projects and, the most effective in my mind, paid time-off to volunteer. Timberland, ING and Shared Vision are just some of the companies that offer their teams up to 40 hours paid time-off to volunteer every year.  Seventeen years into this initiative, Timberland reports that 90% of job candidates are aware of this program and mention it in interviews, while 95% of employees volunteer at least one day yearly.  Mid-sized New York software firm, Shared Vision, balances the cost of productivity lost during these 40 hours with the opportunity to attract community-minded employees to the company.

IBM’s Corporate Service Corps is more structured.  In its second year, the program sends small teams of top employees from around the world to developing regions for one month. There, they work on projects that connect business, technology and society.

If you’re ready to launch your own EVP or strengthen its fundamentals, two great sources are The Corporation for National and Community Service’s ten steps to designing a meaningful employee volunteer program (and 23 reasons why you should); and PricewaterhouseCoopers’ six essential strengths of an employee volunteer program as shared by Managing Director Shannon Schuyler.

SRI By Pension Funds

Socially responsible investing by pensions funds has been popular in Europe for a dozen years or so, but slower to catch on in the United States (although the Calvert Group has offered its products to 401k plans since 1982). In this case, the investments for 401ks are ethically invested. Moreover, they often yield more stable returns and higher gains.

Energy Performance-Based Bonuses

Burt’s Bees bases bonuses partially on how well the company meets energy conservation goals, which employees and management set together. The offshoot is reduced energy costs, employee engagement and buy-in because they have a hand in setting the energy reduction goal and, of course, a boon to the environment.

There are hundreds of more nuanced programs and interpretations. What did I leave out? Which programs do you think have the greatest impact? And most importantly, what type of social compensation would inspire you to considerably lower your financial compensation expectations?

Donations By Ballot

Office supply company Give Something Back contributes more than half of after-tax profits to community organizations selected by employees and customers. No matter tenure or title, every employee gets an equal vote. Employees can also nominate new nonprofits into the pool of beneficiaries.

Employee Grants (and Matching Gifts)

The auditing and tax firm KPMG awards 16 service-committed employees with a $1,000 donation for their favorite non-profit. Gap, Inc. was recently in the news for a series of grants that support employees’ philanthropic work. California employee Aaryn Pratt received $50,000 to help the non-profit she volunteers with develop new programs. Her reaction was naturally laudatory, “I can’t believe I work for an organization that truly allows and encourages me to be what’s possible.”

Matching gift programs, at least as old as carbon paper, are still an attractive benefit. Employees must be inspired to give to set the act in motion, and the results aren’t scalable or necessarily enduring, but there is still value in a company getting back its employees’ philanthropy and favorite causes.

*97% of nearly 1,000 graduating MBAs from the top-ten schools said they were willing to forgo financial benefits (up to a 14% decrease) to work for an organization with strong corporate social responsibility programs and values. (Stanford Graduate School of Business, David Montgomery and Catherine Ramus).