Loeb Lab 12: New Sources of Capital for Innovative Community Design Efforts

Drew Tulchin (Loeb Affiliate ’15) is expert at leveraging the power of the marketplace for social, community, environmental, and cultural benefit. His roles as managing consultant of UpSpring Social Enterprise Associates, and now senior director of Third Sector Capital Partners, have demanded that he be creative about marshaling the resources that enable mission-driven organizations and public initiatives to be successful and sustainable. He describes some of his tools.

Good community design and helping people to advance values-based initiatives can be harder than just constructing according to “business as usual.” Finding the capital to bring ideas to fruition is an important step in the chain. Enough money usually resolves many project challenges.

Design initiatives can now rely on financing in new ways, just as other mission-driven initiatives have had success doing. Many of us will already be familiar with some forms of alternative capital, such as US New Market Tax Credits, or loans from CDFIs–Community Development Financial Institutions, which include non-bank lenders. This article presents emerging, not-so-common financing instruments that have democratized capital, opening the doors to previously untapped resources. The focus is on leveraging online resources, social networks, and the power of the marketplace to reach new sources of funding for socially motivated projects.

Crowdfunding

Most of us have heard of raising capital over the Internet using crowdfunding – accruing small amounts of capital from a wide range of contributors. Here, an average contribution is typically below $50 a person. Crowdfunding has become a strong tool for charities and start-ups. There are over 190 crowdfunding platforms; more than 500 thousand campaigns have been financed. With a global market of more than $1.5B, sites like Kickstarter and Gofundme provide opportunity for financial support from diverse contributors.

Another new development in the US is recent legislation clarifying the legality of raising debt and equity online. As of early 2015, 22 states now have laws allowing online equity investment. And, the recent SEC adoption of Title IV of the JOBS Act signals that small businesses soon will be able to raise investment nationally via crowdfunding . This is a strong fit for community design initiatives, especially those with an interested population and engaged stakeholders.

Foundation MRIs and PRIs

Philanthropy, in addition to granting, has other mechanisms to support good works. Mission-Related Investments and Program-Related Investments leverage foundation and trust dollars by making socially motivated investments. This falls under the umbrella also known as impact investing.

These instruments require that the capital be returned, so they are not appropriate for all projects. But they are a strong fit for housing and other construction efforts. When foundations lend or invest equity, they can elect to take a below market return in exchange for advancing social, environmental and economic value – the so called "triple bottom line”. MacArthur, Knight, Rockefeller, and many other foundations have used PRIs and MRIs. F.B. Heron is well known for it, and it is becoming better understood in smaller entities and family offices.

Kolu Zigbi’s (LF ’15) organization, the Jesse Smith Noyes Foundation, has used such tools for responsible impact investment that advances social justice. In a conscious strategy, the foundation has set criteria for all of its investments, and on top of its program related investments it specifically invests some of its capital in community investments.

The Contact Fund in New York and Craft3 in the Pacific Northwest, both recipients of the foundation’s community investments, turn the money around in loans that support affordable housing, nonprofit growth, family resilience and equity building, and social innovation, to name a few of their targets. In this way, the goals of the foundation are advanced through use of its “other 95%,” the corpus of the foundation’s assets.

Direct Public Offerings

DPOs are investment offerings made to the public without a third party (e.g. an investment bank). As compared to Initial Public Offerings, DPOs are cheaper; they avoid many regulations required with private placements and more complicated issuances. They allow securities to be sold to unaccredited investors or institutions. An Oakland-based entity called People’s Community Market has raised millions of dollars for a local grocery store in the food desert of West Oakland, as have hundreds of other organizations.

Pay for Success

PFS, sometimes also called “pay for performance” or “Social Impact Bonds,” is an innovative funding model that drives government resources toward social programs that prove effective at providing results to the people who need them most. PFS tracks the effectiveness of programs over time and requires governments to pay for those services only if and when they succeed in measurably improving the lives of people most in need.

PFS enables governments to tap private investments for the upfront costs of programs. If a program is successful in improving the lives of the people it is meant to serve, then government repays those who made the original investment. If, and only if, the program exceeds the pre-determined outcomes, there is a small return on the investment. If the program does not achieve its target results, the government does not fully repay those who made the original investment. This model ensures that taxpayer dollars are being spent only on programs that actually work.

This international model has had the most prevalence to date in the UK. In the US, there have only been eight projects launched as of August, 2015. Firms like Third Sector Capital Partners, Inc. (my new employer) are leading governments, service providers and funders in constructing these projects.

For example, Santa Clara County in California is seeking to move (and keep) chronically homeless people into housing. And Cuyahoga County in Ohio is working with partners, including Enterprise, to reduce the time children are in the foster system and reunite them with their families.

Crowdsourcing

Crowdsourcing is a key instrument in democratizing human capital. It pools the ideas, services, and/or opinions of a large group of people to craft accessible solutions. Initiatives like the X Prize are “many to one” solution generators.

Sites like HeadFunder and HeadTalker specialize in connecting organizations with people experienced in specific fields who can complete a particular task via the Internet. Community development projects require a vast range of expertise, not just architecture and design; they may also benefit from insights in sociology or materials questions.

Crowdsourcing presents a great opportunity to obtain affordable human capital to solve complex, vexing questions. Renaissance Downtowns, for example, is a Connecticut developer that was able to collect public feedback on the type of redevelopment project that should replace a 17-acre site of a former shopping mall. Another success story is Prize2theFuture, an online contest held by the Community Foundation of Greater Birmingham. In 2011, the foundation awarded $72 thousand in prizes to participants for the best creative ideas submitted to redesign a parking lot in the downtown.

Loeb Fellows’ ideas are innovative, challenging the status quo. Financial institutions are often conservative and wary of things that are different. Identifying sources of capital that are more accessible expands the universe of possibility, and tools that go straight to the community or to stakeholders who care about a cause democratizes a design effort. Embrace this emerging wave of capital sources to see more cool things built.

 

Drew Tulchin (Loeb Affiliate ’15) is managing consultant of UpSpring (formerly Social Enterprise Associates), a registered "B Corporation" with the mission of providing market driven solutions that solve real problems. Tulchin’s efforts have led clients to raise more than $100 million for triple bottom line efforts.

In the fall, Tulchin will join Third Sector Capital Partners (www.thirdsectorcap.org) as senior director, driving innovation to a performance driven social sector. He has an MBA from the University of Washington and BA from Washington University.

Reach Drew Tulchin at dtulchin@thirdsectorcap.org.

Written with assistance from Rafael Caballero Chapman, UpSpring

 

Resources

About the Downtown Revitalization Project,” Bristolrising.com, 2011.

"Alabama Power makes $2.9M offer for Prize2theFuture lot," bizjournals.com, December 10, 2012.

Crowdfunding Industry Report: Market Trends, Composition and Crowdfunding Platforms,” Crowdfunding.nl, May 2012.

Impact Investing in Native American Communities,” Drew Tulchin and Rafael Caballero Chapman, Greenmoneyjournal, August 2015.

Jesse Smith Noyes Foundation

The Payoff of Pay-for-Success,” Stanford Social Innovation Review, Fall 2015. (See also the thoughtful commentary by George Overholser of Third Sector Capital Partners and others.)

People’s Community Market

Prize2theFuture Announces 10 Finalists, gets set for May 5,” Community Foundation of Greater Birmingham, April 27, 2011.

Program-Related Investing Skills & Strategies for New PRI Funders,” Grantcraft.org.

SEC Adopts Rules to Facilitate Smaller Companies’ Access to Capital,” US Securities and Exchange Commission, March 25, 2015.

Social Enterprises Raise Money through Direct Public Offerings,” Forbes, August 6, 2014.

Third Sector Capital Partners

 

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