Give Money, Get Impact, Save Taxes – the Power of Social Entrepreneurs for Your Portfolio

25th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

Can charitable dollars be recycled? In the words of famed venture capitalist John Doerr of Kleiner Perkins, can you “write one $10 million check and have that capital sustain itself?”

To realize that goal takes “earned income,” charging for services that also create high human, social and environmental impact. Many nonprofits do this already, from hospitals to schools to senior homes. The higher the rate of income to expenses, the fewer dollars the charity needs. When revenue exceeds expenses, you can have a “profitable” nonprofit, as well as delivering positive human impact.

One very HIP example is microfinance institutions. Like a bank, they lend money to low-income clients, who use them to invest in a budding small business and then pay back the loans. Grameen Bank’s founder Muhammad Yunus won a Nobel Prize for this high-impact approach , which has spurred dozens of new innovative models – like a homeless bank and wide franchising of renting mobile phones, as well as a foundation in the United States to expand the model to low-income citizens.

A recent cover story in the “capitalist tool” Forbes -- “Can Venture Capital Save the World” – profiled Acumen Fund, a non-profit private equity fund that funds entrepreneurial solutions to global poverty. Since Acumen Fund has collected $73 million in donations, the focus is on impact and job creation (55,000 jobs created in 10 years). Investment returns are reinvested as new loans or equity in high-impact entrepreneurs – so this tax-deductible charity creates human impact and sustainable development.

Another microfinance organization Kiva.org has catalyzed ordinary people to build extraordinary results. With the simplicity of combining the Internet to spur online donations that reach around the world using a bank card, word of mouth spread fast. More than 776,916 entrepreneurs globally, more than 80 percent of them women, have borrowed $309 million since Kiva’s launch. These loans have been made by more than 760,683 everyday lenders around the world. This person-to-person approach to banking has resulted in payback rates of more than 98 percent, from borrowers loaning in groups of as little as $25 to lenders seeking average loans of about $350. On average, everyday citizens act as their own bank at Kiva to participate in about five loans. Kiva’s founders have been recognized in Bill Clinton’s book, Giving, and on Oprah.

Beneficiaries of Charitable Giving

In the United States, tax deductible charitable contributions represent about 1 percent of overall investor dollars that are professionally managed. This $290 billion annually in 2010 totals more than 2 percent of national output (GDP). About three of four dollars of this giving is done by individuals like you. Foundations grant about 14 percent of the total, charitable bequests total about 8 percent, and corporate giving represents an estimated 5 percent.

In addition to microfinance, non-profit entrepreneurs create high human impact. In education, the SEED schools, Aspire Public Schools and KIPP Academy all provide a high-quality education that creates the opportunity for teens of all backgrounds and incomes, who apply themselves, to get to college. As JB Schramm of College Summit says, “the first kid in a low-income family who goes to college breaks the cycle of poverty in that family forever.” Also, in the United States, a college graduate exceeds a high-school graduate by earning $1 million more in their lifetime, and saving the government $250,000 in welfare payments.

Is your charitable giving supporting ongoing economic self-sufficiency of the recipient institution? Is that organization generating income consistently (not just collecting donations) and delivering a “return on your charitable donation”? Our problems are so big these days, the challenge is to get higher impact per dollar to solve them more efficiently.

A market based model is not suitable for fixing some social maladies. It is tough for issues like child labor or human rights to be propped up by the free market, so some organizations have made it their goal to address these social problems dead on.

Organizations that find, fund, and support these forward thinking entrepreneurs solving social problems, mainly non-profit and some for-profit, include Ashoka, Echoing Green and the Draper Richards Foundation. They each support the concept of entrepreneurial leaders creating high human impact in a systems changing and strategic approach.

Some nonprofits achieve this higher level of impact by partnering with corporations. Since 2008, the Environmental Defense Fund has teamed with Kohlberg Kravis Roberts, which owns a portfolio of over 40 firms that can benefit both ecologically and economically. Several non-profits have offices in Bentonville, Arkansas, including EDF, NRDC and Conservation International, as Walmart is open to engaging their expertise in becoming more eco-efficient.

Finding an Effective Charity

When looking to have the most positive impact with your donations, there are several rating systems that will help you understand the efficiency and effectiveness of a non-profit organization. Charity Navigator gives one to four stars to non-profits, ranking evaluating the financial health, accountability, and transparency of the world’s largest charities. They currently use figures like percentage of donations that go to administrative purposes and fundraising efficiency – soon to include metrics on reporting social impact.

Great Non-Profits.org is an excellent site for peers to share reviews of their experiences with all types of non-profit organizations – findable by issue, zip code or state. Users can also meet fellow volunteers, donors and charitably focused people to meet and share experiences in an online conversation. GreatNonProfits.org writes no reviews themselves and is the largest database of first-person stories about non profit experiences.

Innovative Financings in the Charitable World

Innovative grant makers, like the Lemelson Foundation, are realizing higher impact by implementing program-related investments (PRIs) of loans or equity, which advance the organizational mission. The Lemelson Foundation, whose eponymous founder has created more than 600 patented inventions, “celebrates and supports inventors and entrepreneurs to strengthen social and economic life”. PRIs increase the multiplier effect of social impact for the same tax-advantaged grant money.

Lemelson has applied PRIs in its grant making since 2003. According to former Senior Program Officer Patrick Maloney, the foundation has used them for about 20 percent of recent grant making, but expects that rate to drift to half of its grants over time. “That split will be driven by where we find the highest impact for our funding,” Maloney says. This translates into new risk-taking capital for ventures like Emergence BioEnergy, founded by Dr. Iqbal Quadir, who also started Grameenphone. The firm has already provided two pilots of heat and power solutions for Bangladesh villages, in a country where 70 percent of which are unconnected to the electricity grid. Root Capital is also an investee of this type, which has provided funding for small farmers needing to finance working capital for their water-efficient coffee plantation.

Lemelson invested in these ventures, given its high impact and innovation. But unlike traditional investors, Lemelson has been willing and able, as a foundation, to be more patient in waiting for payback. “We can be more flexible in waiting for exits, or can structure revenue share as the venture scales,” Maloney says. This type of tax-deductible investing, where the returns go back to the foundation for re-granting, is acceptable to the IRS if documented as to its ultimate impact and connection to the foundation’s mission. Maloney said that means meticulous documentation is required in pursuing this innovative investment approach.

Because PRIs encourage financial accountability through repayment, the culture of management teams of nonprofits is important. “It feels different than a grant,” Maloney says. It’s also critical to know your co-investors. For Lemelson, these have included Gray Matters Capital, RSF Social Finance, and Calvert. “You need to understand why everyone is in the deal, talk through the conditions under which you would sell your position, and ensure everyone has similar expectations,” Maloney advised.

A HIP investor seeks high human impact in every investment, including tax-deductible charitable contributions. Measuring “return on investment” is possible for nonprofits too – a list of 30 leading high-impact social entrepreneurs is published by Forbes. The HIP framework enables you to select a range of human impacts to realize—Health, Wealth, Earth, Equality, Trust—and apply your donations and overall investing to those that are most meaningful to you—or those of you who work through a donor advised fund or foundation.

Planning for a More HIP World

With these past 25 features, you now have an overview and description of the HIP methodology, tools and approach. We have demonstrated how you can evaluate any investment for your portfolio by asking “How HIP is It?” The three detailed questions focus on an investment’s products and revenue, how it measures human impact and links it to profit, and embeds HIP management practices for ongoing value. You now have the tools and approach at your command.

You can start anytime with your portfolio—easygoing with cash at a more HIP bank, or taking the time to build your own HIP index. You may want to engage an investment adviser to help (or even get them a copy of The HIP Investor book).

Our next and final book excerpt feature will describe a more HIP world, and how companies can evolve, investors can manage their portfolios, and each discipline can tackle tough issues together. A more profitable portfolio and a better world are near.

To navigate this series, please use this table of contents.

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HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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