How I Became an Impact Billionaire

“Organizationally, it’s tempting to join the boosterism bandwagon, but I have reservations about the utility (and incentive structure) of rewarding raw concepts and noble intentions.”

Taking stock over the holidays, I came to realization that I have become a billionaire. That is to say, GoodCompany Ventures the nonprofit which I and many others have nurtured over the past five years has created over $1,000,000 in social impact. Here’s how we discovered the leverage model to get it done.

Origins

In 2009, after careers in international development law and technology venture capital, I joined a group of like-minded folks to dream up new forms of social enterprise. The “Cross-Over Business Group” had great ideas for social impact businesses, but no one to run with the idea. It dawned on us that the limiting resource for the growth of social enterprise was not business and financial acumen or even capital, but quality entrepreneurs. Most of the “social entrepreneurs” that we saw pitching for funding had the passion, resourcefulness and domain knowledge that are essential for entrepreneurial success, but were relying primarily on sentiment to attract the meager amounts of ‘impact investment” available in those days. We concluded that the best use of our skills would be to take that entrepreneurial raw material and arm them with business models that would scale and capital strategies that would be investable.

This group, who would become the co-founders of GoodCompany Ventures, expressed its initial mission in 2009 as ‘training social entrepreneurs to meet the expectations of venture investors”. I thought of it is as a Pygmalion experiment: Could we take a “do-gooder”, give them an intensive twelve-week business makeover, and pass them off to our VC friends as an investable entrepreneur?

To skewer the assumptions and behaviors of the social service and investment sectors, in equal measure, and to break down the gulf between them, attracted me as creative, disruptive and necessary.

Over time, our entrepreneur-centric intensive intervention strategy has proven to be an incredibly high leverage model for developing social impact.

How We Measure Success

When we began GCV, we were eager to work with promising entrepreneurs who had valuable innovations for unmet social needs. Almost by definition, the reason that certain social needs remained unmet was that historically, these problems could not be served profitably by the private sector. Many of the innovations we chose to work with involved the application of new technologies to old problems that changed the costs of serving those needs. The primary challenges, around which we designed our curriculum, were to (i) investigate the “value envelope” created by the innovation, (ii) explore the market space and structure to find a participant in that value envelope to serve as a revenue source, (iii) design a business and operational model to scale that impact, and (iv) develop a financial model and capital strategy to fund the business.

That’s a long way of saying that we were sector agnostic and couldn’t measure the success of our program in terms of the sum of each company’s particular social outputs. The only goal that we had In common for each of our entrepreneurs was to get them designed for scale and funding. That we can measure.

Results

Our measures of success are pretty simple. The results are based on our most recent alumni survey, which did not include results from our most recent cohort. It’s also worth noting that, as these are early stage, high growth companies, the results will continue to increase as our alumni vintages mature.

Output: As of 2015, we have graduated 84 social enterprises from six cohorts of accelerator programs.

Success Rate: A remarkable 48% of our graduates have attracted private capital. That may sound like a losing record, but based on research by the Kauffman Foundation, less than 0.1% of start-ups obtain funding and nearly half of the accelerators they studied failed to produce a single funded company. GCV helps entrepreneurs beat the odds.

Funding: The graduates of our first five cohorts have raised nearly $60mm in capital to tackle social problems. Many have earned funding from top-tier VC firms like Andreessen Horowitz and First Round Capital. This did not seem remotely possible in 2009, but the world has moved strongly in our direction over the past five years — the quality of our entrepreneurs and the openness of investors to social themes continue to increase. We believe we’ve contributed to this momentum.

Impact

To provide an estimate of our social impact, we need to make a few extrapolations from our basic results. This leads to some big numbers, but each step is clear and the assumptions are provided for you to judge.

Revenue: We’ll start with revenue as a measure of the scale of our graduates. Starting with the $60mm in investments, we can safely assume that the projected revenue from this group is at least $600mm. No one has ever raised $1mm in venture capital without a cumulative five-year revenue projection of at least $10mm. If you’re not an early stage investor, you’ll have to take my word for it. If you are, you’ll appreciate that this 10:1 ratio of revenue potential to capital is a low-ball estimate.

Impact: If our graduates are on their way to earning $600mm in revenue, what can we assume about their social impact? As the foundation of GCV’s curriculum, we like to think about the value created by an innovation as fundamental; it pre-exists an either/or distinction of for-profit/nonprofit. Only when we design and apply a business model to this value is the economic value divided between (a) the part you capture and monetize, i.e. “revenue” and (b) the part you don’t (or choose not to) capture, which is produced as a positive social externality, i.e. “social impact”.

It’s a tautology that “impact markets” are those in which it’s hard to envision or implement a viable revenue model, so measuring only revenue grossly understates the value creation. As an economic measure, and as a matter of personal conviction for many social entrepreneurs, revenues are merely the tail wagging the dog.

The systems for measuring social impact are, to be kind, immature. By necessity within the GCV curriculum, as a tool to (i) to design business models that optimize for both revenue and impact (ii) to examine trade-offs between the two and (iii) to engage with entrepreneurs and investors who understand the revenue as the means to an impact end, we developed an internal model for Social Impact Projection.

In 2015, we began external beta testing of our Social Impact Projection model with investment groups, other social accelerators and in workshops at impact conferences. We’re excited about the results and hope to roll it out to the public next year. For purposes of this analysis, one result has been pretty consistent. We have quantified the extent to which impact generated by social enterprises exceeds their revenue; typically by a factor of 6–10x. Applying the mid-point of our findings (8.3x) to the $600mm revenue estimate for GCV’s entrepreneurs would put the projected impact of our graduates at $5bn.

Attribution

We’d be proud to have played any part in the generation of $5bn of social impact. What portion of an entrepreneur’s success is attributable to the intervention of GCV (or any accelerator) is surprisingly difficult to assess. The results are overwhelmingly influenced by selection bias, it’s difficult to create a control group, and the time frames for assessing the success of early stage companies are measured in years.

We’re confident our contribution exceeds that of most accelerators, because we are different in structure and purpose. As a 501(c)3 non-profit, GCV is not an investment driven program (e.g. YCombinator, TechStars etc.) and therefore, we offered equity to attract “ringers”. Very few of our alumni would have found investment in the state they came to us. We are not looking for lay-ups. We pass on entrepreneurs that are already well-funded and we pass on many attractive of LOHAS and CSR plays that get included (appropriately) in the social enterprise category, but are based on well-established business models. We select for entrepreneurs and innovations that have potential for impact at scale, but “need work”. That “work” is what our team comes to the office to do and what drives the peer dynamic of our cohorts. Whether it’s challenging an individual to re-envision themselves from a do-gooder to a business leader, discovering a revenue model to support the scaling of a nonprofit experiment, or designing a financing structure that shifts costs and risks to new payors in public sector markets, we have many examples of alumni whose projected social impact would have been nil without our having had the opportunity and the honor of working with them.

In future cohorts, we expect to use the Social Impact Projection model to measure the before and after states of each entrepreneur’s projected capacity for impact, which will allow us to isolate the effect of GCV’s intervention. For now, the best “attribution” number we have is based on a case study from University of Pennsylvania’s Fels Institute that attributed at least 25% of our graduates’ success to the intervention of GCV’s curriculum.

For the sake of conservatism and round numbers, let’s knock that back to 20%. If 20% of the $5bn in social impact generated by our graduates were attributable to our programming, then GCV has created $1bn in social impact.

Leverage Calculation

GoodCompany started off as small, volunteer-driven experiment led by my co-founders from the “Cross-Over Business Group”. That group has expanded to include countless hours of expertise provided by investors, business leaders, lawyers, designers and MBA students, whose in-kind contributions are motivated by the opportunity we provide to work with inspiring entrepreneurs.

As we grew, we relied on small donations from our regional venture community and as we expanded our reach, we attracted larger grants from the Knight Foundation, Halloran Philanthropies and Bloomberg Philanthropies. We are grateful to our donors.

Altogether, we have relied on less than $500,000 in external donations in our five-year history. You can interpret that as evidence that our ability to attract in-kind support allows us to run an exceptionally lean organization or that we haven’t been very ambitious fundraisers. Both are true.

The reason I share that figure is to allow one final calculation. If $500,000 in donor support has yielded $1bn in social impact, we’ve created a leverage model that returns 2000x in social impact for every $1 of programming spent. That’s a pretty extraordinary claim, which is why I’ve spilled so much ink in trying to be methodical and transparent in arriving at this claim.

Maybe you think I’m off by a factor of 10 somewhere? Maybe you think the ratio of projected revenues to invested capital is 1:1, rather than 10:1? Maybe you think social enterprises capture the majority of the value they create as revenue so the ratio of revenue to social externality is 1:0.8 rather than 1:8? Maybe you think that GCV’s contribution to the success of its graduates is a negligible 2.5% rather than 25%. You’d be wrong, but even if I were off by an order of magnitude, I’d still be pretty proud of a 200x social return we generated for our donors.

The reason our donor ROI is so high is that our impact model benefits from a multi-step multiplier effect: we use our donor funds to (i) selectively source for novel, high-impact innovations (ii) increase our entrepreneurs’ ability to attract private investor funds to (ii) scale a social enterprise that (iii) generates an even larger social externality.

In practice, (i) our donors’ investment of $500k in GCV has enabled (ii) our entrepreneurs to access the $60mm they have raised, (iii) which in turn will fuel social enterprises at a scale of $600mm, (iv) that will cast off $5bn in social impact. As those enterprises continue to grow over the years, ratio of those results to the donations that seeded them will continue to grow.

Reflecting on how we started and how that has worked out, I am most gratified that our founding premise, that an intensive intervention designed to increase capacity for scale in individual social change agents, has proven to be such a high-leverage strategy for impact.

It’s a challenging strategy to support. Fundamentally, it’s difficult to inspire support for generic innovation, when you can’t identify the outputs in advance. More specific to our strategy, as the field of social enterprise has flourished, we’ve seen the emergence of innumerable hack-a-thons, fellowships, prizes and workshops, all of which are lower-cost, higher volume and higher visibility strategies to support social entrepreneurs.

Organizationally, it’s tempting to join the boosterism bandwagon, but I have reservations about the utility (and incentive structure) of rewarding raw concepts and noble intentions. Most start-ups have both in abundance and it’s evident that neither is sufficient to beat the dismal odds of reaching scale. Our experience has deepened my conviction that to transform an entrepreneur’s (actual and self-perceived) capacity for impact at scale — to forego pursuing the next $100k prize or grant and put in the work required to pursue $10mm in investment capital — requires an extended, structured intervention process. This transformation requires a committed personal relationship so that entrepreneur can stop pitching us, let us get “under the hood” to take apart and trust us to reassemble the engine of their most personal hopes and dreams. This can’t happen in a weekend workshop. You can get a flavor of this process, in the entrepreneurs’ own words, in this video.

GCV’s model is a highly personalized, low-volume, high-input strategy, but I am convinced that it is the most richly rewarding. It’s made me an impact billionaire.

If you’re curious how we plan to take this impact model to next level, you can learn more about our work at www.goodcompanygroup.org.