We’ve spent the last six weeks identifying compelling social enterprises to consider for our first investment fund.  Through various sources, we identified and reached out to a total of 64 organizations that passed our initial screen – US based, at least two years of operating history, meaningful revenue recognition, compelling growth opportunities and strong management teams.  These 64 social enterprises represent a diverse set of geographies, industries, and social sectors, and over half (58%) are non-profits.  The companies are located throughout the US, but not surprisingly, there is a concentration on the two coasts – particularly in the Bay Area and around Boston.  The top five industries are business services, education, food & beverage, technology and healthcare while the top five social sectors include education reform, Fair Trade, transitional employment, organic food, and conservation.  To gain more insight into these 64 organizations, we sent them an intake form that asked for various data points including a description of their social impact and cost of doing good, current financial information, projections, and capital needs.  This form provides us with a snapshot of an organization and aids in the process of determining if the enterprise would be a good fit within our investment portfolio.

The response to our initial inquiry form has been encouraging.  Of the 64 organizations we contacted, over half have responded and over one third has either filled out the form or sent us relevant information pertaining to the requested items on the form.  Of these organizations, we have identified at least 13 that fit our initial investment profile, are seeking expansion capital, and are having difficulty accessing the conventional capital markets for their funding needs.  We have had preliminary conversations with the majority of these management teams and most have expressed interest and excitement about pursing a relationship with Good Capital.    

The conversations we’ve had throughout this process have confirmed the existence of a funding gap for social enterprises.  Many of the organizations we’ve spoken with have expressed a high level of excitement about our strategy to plug this gap and make expansion capital available to both for-profit and non-profit social enterprises.  Many have expressed a difficulty in accessing conventional capital markets for their growth needs – either because of the inherent cost of doing good (or “CODG” as we at Good Cap like to call it) in their business model, unproven or unconventional nature of their strategy, or because they’re structured as a non-profit.  Even those organizations that aren’t currently seeking funding acknowledged the need for this type of capital and expressed their appreciation of our mission. 

The only push back we’ve received has been from a few non-profit managers who struggle with the concept of “equity-like” capital for their organizations.  Some seemed to balk at the idea of taking on capital with an expected return above a few percentage points.  This push back is understandable given that the non-profit investment structures we’ve discussed (revenue rights, grants with puts, etc.) are unconventional in nature and because some non-profit managers have grown accustomed to grants and soft loans for the growth capital needs.  However, we will continue to educate the non-profit sector on these alternative types of investments because in many cases we may see a good fit where a non-profit manager may not.  While we encourage non-profits to take on grants and soft loans, we acknowledge that these may not be a form of sustainable capital as organizations ramp up and grow in the future.