Why Good Capital Series: Kevin Jones

The Good Capital Project will convene for the first time this June in New York City. This new SOCAP initiative will bring together a cross-sector collection of experts, practitioners, industry leaders and other stakeholders to drive greater collaboration and accelerate capital flows into purpose driven investments. In the months leading up that event we will be interviewing key pioneers and leaders in the impact space who have partnered with SOCAP to help make the Good Capital Project a success.

Kevin Jones is co-founder and convener of Social Capital Markets and co-creator of The Good Capital Project. He is also a a serial entrepreneur who has repeatedly built information businesses in emerging technology or finance markets, from aquaculture to b2b internet commerce to social enterprise. Kevin is co-founder of Good Capital, a venture capital firm that invests in social enterprises. He has been a successful impact venture capitalist and founded and co-owns four Impact Hubs in the U.S. He is now deeply involved with Neighborhood Economics and Poverty Stoplight.org, working on the friends and family capital gap for marginalized communities, creating community wealth through entrepreneurship.

What led you to the creation of The Good Capital Project? What are you most excited about?

The Good Capital Project is a natural evolution of SOCAP. It is a way to put the connections that you make at SOCAP with potential partners from all over the world or from your neighborhood or the next city into a coherent taxonomy; an order. Because it is time for this market to evolve to the third phase. Markets have three phases. One is discovery–you’re figuring out who is doing what. Everyone is isolated. So you are just trying to figure out who is out there and if there are any connections. The second phase is cooperation–where you’ve figured out particular partnerships. One-off cooperations. Kind of like how you drive through a different neighborhood from your own. They have different protocols. You want to see how long did people stop. Did they do rolling stops? All those kind of one offs. And the third phase is coordination. That is where the signals are set. The train tracks exist and we know they are the same gauge and if you send a red signal somebody stops. Financial exchanges exist there. Stop start. Everything becomes automated in that phase. Things can go faster here.

That is what we are looking to do with the Good Capital Project–move this market to the phase of coordination. It’s been slow because there have been so many competing theories of change that people hold with almost religious fervor. People want to die in ditches over battles about definitions. The GCP doesn’t demand that everybody speak the same language–we want to be a Rosetta Stone. Capital comes in different cultures and flavors. We want everyone to be able to speak their own language, but we need to know how to coordinate to accelerate the capital flow to good.

What do you see as the unique opportunity for the Good Capital Project?

I think the Good Capital Project will probably be helped by all the failed summits that have gone before. Because nobody is happy with the current level of coordination. Most of those summits wanted everybody to speak in the same language and be on the same page and agree on definitions. We are trying to translate what it means to you and what it means to me. To make sense of it so that more things can happen.

I think it is a sign of maturity, this realization that it is a multicultural market. The barbarian and the byzantine have to learn to do business together. SOCAP has been doing that for a long time by having the right people in the room–valuable strangers who become unlikely allies that they wouldn’t have known before. I think GCP is going to put a level of order around that and a lot of it will be in one-off partnerships between sectors, to begin with. Partnerships that would not have happened without the Good Capital Project.

For instance, were approached this week by the National Venture Capital Association. They said, all of our limited partners (the actual investors who put money into venture capital funds) want impact. There is huge demand. We need to know how to deliver. And what the heck is it? They don’t know what it is sometimes. And so we have to let them know that even the best performing impact investment venture capital funds, including DBL Partners and Core VC, all started with subsidies and grants to get to market rate. They have to understand the protocols for playing together.

International Development Organizations, including the UN, USAID, Sovereign Funds, the World Bank, they all want to come into impact. They realize there is not enough money in either the public sector or the philanthropic sector to meet the challenges of climate change or the Sustainable Development Goals the SDG’s. But they have to learn how to play with other forms of capital in new ways; how to syndicate for the greater good. Development Organizations have to learn when not to use subsidies and when to use them. So there is a level of coordination and asyndication, as we learn to just do a hand off to make solutions real and scalable. We’ve been doing a lot of one offs, like firemen bucket brigades. Now it is time to really make that into performing so you don’t have to figure out how to do the handoff each time. So many different sectors are saying, we want impact. The big banks on Wall street. The biggest fund managers are all saying my people are demanding impact. They want more than just financial return. They want to know that they are investing for good. So the reason that it matters now is that everybody wants it.

Why is collaboration in this industry so important?

Collaboration is an important thing in this industry if you do it where you actually listen to the other partner and realize how you need to bend and how they need to bend. A lot of the efforts before were an attempt to galvanize a summit according to a common definition with the person in charge, in charge. You can’t do that. This is much more multicultural. This is listening to people who are different. It is a market that values diversity. Because faith based money comes in as faith based money. You have to speak to it that way. And then it becomes reliable; it knows how to fit into the capital stack; the money needed to get things done, at each layer of risk and return.

One of the most reliable asset classes, in any of this impact investment, domestically or internationally, is something called “nun money.” It is the pension funds of the female religious orders. They will be more patient than anybody. They will take less return than anybody. But they have to have the money come back because it keeps the nuns alive when they are old. But if you can say, this will create justice and it might take 25 years to pay back–they are the first to sign up and they are one of the few that sign up. The most patient money is nun money.

The most innovative money actually is Mennonite money. They are responsible for more innovations than any group on the planet. They invented microfinance ten years before Muhammad Yunus. They did fair trade and the first fund to funds. That is just the way they see the world. They go out and build something and it becomes a replicable thing that is globally scalable. So if you want to look at global innovation you can look at what the Mennonites are up to now. You have to figure out all these different flavors and cultures of capital. So it is not one language it is a chorus of voices. You can’t make them harmonize. You have to figure out each voice that can work, a series of individual voices in a harmony if you will.

What are the biggest challenges facing the space? And what are the biggest opportunities?

The biggest challenge is the false claim by some that all impact investing will be at market rate. It is just not true. Some will be. And some should be. But the first question should be what do you want to do in the world? and then what tool will do it? Then you ask what financial return that produces.

Sometimes market rate return, or no discount to financial return to get impact works. I’m involved with Off Grid Solar, a great company that raised $140M working in Tanzania. It does great things. It takes kerosene out of rural huts in Africa, which kills about a million people a year. And it cuts the energy bill, the cost of that kerosene, by up to 40% by producing clean electricity from solar. And then they also sell radios, TVs and other things that people want. It is growing incredibly fast. It is well past venture finance, up to project finance and public subsidies and that kind of thing. It should qualify because gosh you are saving up to a million lives every year if you really scale this thing. People spend more than a third of their income at the base of the pyramid on fuel. So you are giving another dollar to someone who make four dollars a day. So you are increasing their spending power by 20%. And you are doing something good. It should scale. It should scale as fast as possible. The faster it grows the more people don’t die from indoor air pollution and the more people on four dollars a day have five dollars a day.

There are some sectors where you can achieve top quartile venture capital returns and have high positive social impact; mobile health apps applied to chronic diseases, some parts of financial inclusion, education technology. Places that are high impact and high return exist and are growing. But most of the time, if investment is stepping into the space where philanthropy and public funding have been working for decades, there is a cost to doing good–there is not clean water or another of the embedded costs of years of neglect and poverty. You are not going to make pure market rate. So the destructive myth of some organizations that should know better to say that there is no discount in financial return for generating impact should be stopped. That is a lie that should be stopped. That will cost us if people come in expecting pure market rate; they are going to be very unhappy. Because they don’t know that deals like Off Grid Solar are limited.

Most of the time there is a little bit of subsidy, there is a little bit of grant, there is a little bit of discount of financial return, but that is depending on what you want to do in the world. So the second thing is that we should focus on what we want to do and not what financial return looks like. These people who want to save the world at no discount are not good for the space. There is a subsidy at the launch, to get what are now the two highest performing venture funds in the space off the ground. There are costs to doing good if you want to change the system. And there are deals that are top quartile venture return where the world needs those companies to grow with a hockey stick curve because the market, in some cases, can solve a major societal or environmental problem and it should be done as fast as it can and become as big as it can.

Another challenge is that we have too many people getting into the space to do good who imagine that they are entrepreneurs when they are not. Entrepreneurs are disruptive. Entrepreneurs cause trouble. If you haven’t been compelled to tell your bosses that they are wrong and that you know better, you probably aren’t an entrepreneur. Which is a great thing!

We don’t need everybody to be an entrepreneur. Every business needs a disruptor or two and then everybody else who makes things work with everybody else. So the myth of the entrepreneur is probably the third big challenge. It is a value, but it is not the only value. The number two in the business keeps the entrepreneur, the visionary, on track. They can tell the visionary “that is really brilliant but you are really full of it,” “you don’t remember what you started to build; this new idea hurts that” or “that will take time.” Those people are harder to find than entrepreneurs.

There are opportunities for a corps of people who will tell the entrepreneurs when they are full of it, when they should wait, and when they are a genius–entrepreneur interpreters.

Another opportunity would be to hook up to the basic kinds of things right here in the United States where there is return available investing in community development financing. That is investing in affordable housing and job creation and health care and small business creation for marginalized communities. There is a lot you can do domestically. More impact investment dollars go to Africa than to African Americans. More money goes to India than to Hispanic entrepreneurs in the US. It is time to look at problems at home. There are so many things you can do that are not equity that are different kinds of ways you can support community development.

Another opportunity is to invest to close the wealth gap in our marginalized communities in the U.S. We are looking into that a lot with our Neighborhood Economics work. We are finding a whole suite of tools that we are calling a Community Wealth Kit that if you deploy these things in these ways you get good results. It’s just emerging as a coherent set of tools and actions, and infrastructure, but it looks really promising. There is a lot of innovation going on, working with existing players like Community Development Finance Institutions, CDFI’s. You have poor communities who not only need jobs but they need businesses that create jobs that are owned by people in those communities. You have empty storefronts being filled with retail in cities where this is starting.

The wealth gap between African Americans and whites in the US is 13 times. That shrinks by 75% for African American families that own a business. So working to invest in African American business creation is the greatest way to solve the racial wealth gap.

What would you most like to see come out of The Good Capital Project ?

I’d love to see a series of discrete partnerships between sectors come out of the Good Capital Project. The development agencies want to move into impact, but they have to learn how to moderate subsidies and learn when to use them and when not to. Venture capital folks to learn if you want a healthy return you need to give a grant or subsidy up front to establish a market that has that potential...etc.

And so each one needs a little different set of protocols to integrate. The metaphor I like to use for integration is that it is like a series of discrete hydraulic systems. Money flows over here in development agencies, money flows over here in venture capital, and money flows in impact. To connect the pipes up you need to moderate the flow and connect this flow with that flow, turn off subsidies sometimes, put valves on or put subsidies in before you can get any flow. So it is a series of questions about what money to apply and when that everybody needs to know, like knowing when to turn which valve under which conditions to accelerate the flow of capital to good.

Why is now such a critical time to start this project?

There are two reasons why this is critical now. The first is investor demand. Wall Street is saying that their customers want it. Venture capital funds are saying that their customers want it. And the second is the deep realization by folks in the public sector, government agencies working internationally and in the US, that there is not enough money in the public sector or philanthropy to solve the problems. If you just look at the two problems of climate change and the wealth gap that leaves society at risk. They have realized that they don’t have enough money. They need to integrate with money that makes money and money that gives away. So it is the realization by philanthropy and the public sector that they don’t have enough money to solve the problems. And the problems are getting bigger and coming in much faster.

Is there anything you are working on that you are particularly proud or excited about?

I think the innovations to solve the racial wealth gap we’ve been working on in a handful of communities is really promising and new. We work with accelerators working in marginalized communities where the entrepreneurs don’t have college degrees and they don’t have business plans, but we are finding ways to invest in them, bridging neighborhoods within cities that don’t usually have close relationships, through investment, to create bridges of empathy. They are changing the racial narrative one Sunday School at a time as these entrepreneurs visit. We are finding enough people doing it across the spectrum that we think there really could be an emerging kit. I haven’t found anybody with a complete solution, but I have found a lot of people with partial solutions that seem to fit together. So I am talking to people at Duke and Emory about how to codify these things into something we are calling a Community Wealth Kit.