By Woody Tasch
A few weeks back, Tom Friedman wrote an article calling for “patient capital” in Africa. While his observations were targeting developing countries, he inadvertently pointed in the direction of the future of social investment.
His fundamental insight – an important one -is that sustainable development, including what he evoked as the “wild, unregulated, informal, individual brand of capitalism” that is sprouting at the community level in developing countries, can only be supported on a meaningful scale if enabled by a new kind of patient capital. With all the wealth that now exists, the logic goes, there must be a class of investors who would be willing to make somewhat less in return for producing benefits for the good of all. Right?
Not so fast. Not fast enough.
For the past fifteen years or so, a growing network of investors and entrepreneurs have been pioneering – not overseas, but right here in the U.S. – the patient capital marketplace.
Each year, thousands of “community-based” or “mission-driven” or “sustainability-minded” or “green” or “double-bottom-line” or “triple-bottom-line” or “socially responsible” or “progressive” small enterprises in this country need patient capital that will allow them to develop with care, embedding a code of social and environmental concerns into their corporate DNA, so that if and when they do scale, their mission will not be diluted by the imperatives of public markets. All the adjectives in quotes in the preceding sentence betoken the difficulties faced by even the most promising of these entrepreneurs when it comes to the issue of delivering competitive returns, which, in today’s venture world, puts them up against investors trying to find the next Google.
Angel investors want to be as smart as professional venture capitalists. Social investors want to be competitive, so that more capital can be attracted to social investing. Foundations want to make as much as possible, so there will be more to give away. Fiduciaries – mutual fund managers and pensions fund trustees – understand their professional responsibility as specifically excluding any ‘exogenous factors’ that might interfere with their mandate to minimize financial risk and maximize financial return. Professional venture capitalists view patient capital, on the few instances that they have heard it explained, as a rather paltry, marginal and misguided business: “What?” you can hear them saying with stunning predictability, “You are going to ask an investor to take an equity risk for a bond return?”
Yep, but it only looks that way to those that look at it through the wrong end of a gilded telescope.
A tectonic shift in investor consciousness is beginning, and Friedman has felt the tremor. In a shrinking, flattening and warming world, a new breed of economic heroism is emerging. The next generation of social investing will be driven by the new wave of for-profit social entrepreneurs, whose companies are being built around a new value proposition: the creation of shareholder value tied to the creation of enduring relationships between company and community, company and bioregion. The fact that the term patient capital is starting to be used – Allen White of the Tellus Institute has used it, David Korten of BALLE has used it, Investors’ Circle uses it – is a sign that investors are beginning to see more clearly the mismatch between means and ends when it comes to financing many of the enterprises that will be critical to the emergence of a restorative economy.
The tectonic shift is even more profound, more exciting than that, however.
For a while now, venture capitalist John Doerr’s phrase “the largest legal accumulation of wealth in history” has been bandied about, and appropriately so, to describe the venture capital and technology booms. We are now on the cusp of what comes next.
What comes after “the greatest legal accumulation of wealth in history?” The unending accumulation of ever-larger concentrations of wealth? Perhaps. But something else, as well: the greatest redeployment of wealth in history, the greatest creative re-investment of wealth in history, the greatest re-imagining of wealth in history.
A revolutionary flat/round-shaking premise underlies this process, and it is this: new kinds of capital are not just needed ‘out there’ in developing countries. They are needed right here, in the heart of developed economies. Why? Because as Bill McKibben points out in his recent book, Deep Economy, More is no longer synonymous with Better. We can no longer deploy capital safe in the assumption that we can “grow our way out of all our problems.” Our survival, our prosperity and the health of natural systems depend upon our ability to develop new standards of fiscal prudence.
With tens of billions of dollars per annum flowing into a few thousand high tech venture capital deals each year, prudence dictates steering billions of dollars a year of patient capital towards the small businesses that will restore the vitality of Main Streets, produce regionally diversified renewable energy supplies, and encourage small scale organic agriculture that preserves soil fertility and enhances the health of our communities.
Deep down, more and more of us are coming to recognize the need for a new kind of investor intelligence, which will steer capital, and the commerce it supports, in a fundamentally new direction.
Here’s how I imagine some of the Principles that many of us are grappling with, but have not yet found a way for fully articulate.
STATEMENT OF PRINCIPLES
I. “Unlimited growth is the ideology of the cancer cell.”
For prosperity to be enjoyed more broadly and more sustainably in the 21st Century, we must recognize that profits and economic growth run amok threaten the health of the whole.
II. Globalization is not an all or nothing game.
Local economies and local enterprise can and must be supported, as a vital, security-enhancing, quality-of-life enhancing complement to globalization. The global economy would be more sustainable and less violent, communities healthier, and cultures richer if hundreds of thousands of small, independent, locally-rooted companies had greater access to capital and millions of small investors had the ability to invest in them.
III. There is such a thing as a company that is too big.
Beyond a certain scale, companies lose allegiance to any particular place and become beholden not to the needs of people, but to the demands of unfettered capital. “For constructive work, the principal task is always the restoration of some kind of balance. Today, we suffer from an almost universal idolatry of gigantism,” wrote E.F. Schumacher in Small Is Beautiful. “It is therefore necessary to insist on the virtues of smallness. For every activity there is a certain appropriate scale.”
IV. Wealth Now/Philanthropy Later (a.k.a., make as much money as possible, so there will be more to give away) made sense when the world was big and the economy was small; in today’s world of global warming and $300 billion corporations and trillions of dollars of daily capital flows, it is no longer sufficient.
A world of multinational corporate behemoths producing deep cultural wounds and gigantic piles of capital gains, on the one hand, and philanthropies diligently working to apply band-aids, on the other, is a world that will continue to heat up and speed up. New, more immediate, more integral strategies of wealth creation, wealth managem
ent and economic development are needed.
V. What would the world be like if you had to invest 50% of your assets within 50 miles of where you lived?
Main Streets in too many rural American towns have too many empty storefronts. The vitality of too many small farms and villages and local cultures around the world is diminishing. Wall Street and other global financial markets are enjoying phenomenal profits. These outcomes are neither unrelated nor inevitable.
VI. The China Syndrome is not just a 1970s Jane Fonda movie.
There is a new kind of China Syndrome: over-heated economic growth China-style. The exporting of U.S.-style consumerism, through which 5% of the world’s people consume 25% or more of the world’s natural resources, is not an unmitigated good. The world will not automatically become a better place with a Starbucks on every corner of New Delhi, two cars in every Brazilian garage, and scores of McDonalds in each of the 160 Chinese cities with populations of over one million.
VII. The primary purpose of business must shift from the generation of profits to the creation of . . .enduring value?. . .no, we must go beyond that. . .all the way to non-violent capital.
The most important enduring value that is diminished by extractive, growth-oriented economics, and, perhaps, one of the root values of all that is enduring in human affairs, is the value of non-violence (akin to what Wendell Berry refers to as reverence when he asks “how a human economy might be conducted with reverence,” akin to what many others refer to as “the precautionary principle,” and, of course, synonymous with the Gandhian principle of ahimsa, or doing no harm).
The term non-violent capital points to the primacy of the challenge to reduce the violence that is done to relationships in the name of wealth creation and economic growth. Amidst increasing ecological instability and social turmoil, the term enduring value is far too vague; it even seems reminiscent of the kind of euphemistic moniker given to U.S. military campaigns in Iraq, such as “Operation Enduring Freedom.” No, let us be far more direct than that.
Unconscionable levels of violence, implicit and explicit, are embedded in the global consumer economy. It is no accident that the nation with greatest legal accumulation of wealth in history – the nation that is the standard bearer of free market capitalism and the progenitor of fast food, fast cars and fast computers – also has the largest stockpile of nuclear weapons in history and a military budget with regard to which the phrase “the largest in history” is woefully inadequate. [1]
VIII. Shareholders are the tail, not the dog.
Even the best-intentioned shareholder is still an absentee owner. In the absence of new corporate structures and a broader vision, absentee ownership inexorably slides down the slippery slope towards speculative, one-dimensional, transaction-based thinking and acting.
IX. “There are noble fortunes to be made in the transition to sustainability.”
There is wisdom in these words of Ray Anderson, the founder and steward of a billion-dollar manufacturing company. But there is also wisdom in Einstein’s admonition: “Imagination is more important than knowledge.” Wendell Berry echoes the sentiment: “Imagination ‘completes the picture’. . .I have had to imagine more than I have known.”
We must have the courage to imagine that notions of sustainability are only the beginning -pointing the way to something more ennobling, something far more nuanced than “doing well while doing good,” something greater than commerce defined in terms of financial incentives, something that questions our very understanding of the difference between wealth and what John Ruskin called, more than a century ago,”illth”.
X. Sustainable development is a means to an end, part of something larger – the Restorative Economy.
Imagination will enable us to reassert the primacy of ends over means and to hold this primacy in our hearts and minds, while at the same time defining new principles of fiduciary responsibility and guidelines of fiscal prudence. Imagination will lead us from sustainable development (which is too often like driving a car with one foot on the accelerator and one foot on the brakes) to restorative economics (which envisions a fundamentally new kind of vehicle headed towards a new destination).
XI. The Restorative Economy is part of something larger still.
Look back millennia, and you may see what Hazel Henderson sees: an “evolutionary leap in our expanding consciousness, imagination and empathy. . .from the economics of our reptilian brains to an economics of our forebrain and heart.” Look a little closer to home, and you may see something Carlo Petrini has referred to as a kind of second Renaissance – the rebirth of a humanistic vision of commerce that is capable of directing capital in service of communities and bioregions.
XII. In our shrinking, warming world, this process of cultural and commercial evolution can only occur quickly enough to matter if supported by a new asset class called Patient Capital.
Patient capital seeks positive financial returns while maximizing social and environmental benefits. Financial benchmarks and social and environmental metrics will emerge over time, but at the outset financial returns in the range of 3-10% are suggested, with funds expected to fall at various points in this range depending on their sector, risk profile and other characteristics. (For broadly illustrative purposes, we might expect renewable energy technology and medical technology investments to fall at the upper end of the range, organic food and fibers, sustainable timber, health care and education in the middle of the range, and community development investing at the low end of the range.)
We may be well served as we embark on this process to compare and contrast venture capital and patient capital.
Venture capital is about speed. Patient capital is about care.
Venture capital is about how much. Patient capital is about how.
Venture capital is about growth and exit strategy. Patient capital is about development and legacy.
Venture capital prioritizes IRR. Patient capital prioritizes ERR. [2]
Venture capital is about making a killing. Patient capital is about making a living, and then some, but doing so in a way that minimizes harm.
Venture capital, like its twin, philanthropy, is about managing the run-off of a broken wealth creation system. Patient capital, like its twin, engaged citizenship, is about attempting to fix the system.
XIII. To IRR is human, to ERR divine.
Patience, urgency, new understandings of the purposes and uses of capital: the tectonic shift we are beginning to feel signals not only the end of t
he era of unlimited accumulation and the Age of the Shareholder, but also the beginning of an economic force of preservation and restoration the likes of which the world has never seen.
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Woody Tasch is Chairman and CEO of Investors’ Circle, a non-profit network dedicated to “Patient Capital for a Sustainable Future.” Contact him: wtasch@investorscircle.net
Founding Investors’ Circle members are creating an action plan for the Sustainability & Prosperity 1000.
ARTICLE NOTES:
[1] The United States military budget of $441.6 billion, excluding expenditures for the Wars in Iraq and Afganistan, is larger than the military budgets of the next twenty largest spenders combined, and six times larger than China’s, which places second.
[2] Internal Rate of Return, or IRR, is the standard calculation of financial return used by fiduciaries. ERR stands for External Rate of Return, representing the long-term social and environmental costs that are typically externalized by corporations seeking to maximize growth and the creation of shareholder value.
FROM the 15th Anniversary Issue of the GreenMoney Journal, a SustainableBusiness.com Content Partner.
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