Ep. 8: Trying on our “Hold Co” Investment Thesis
By Maddie Vann
Episode 8 in Network for Good’s “mini-podcast” where we are sharing key learnings for how to bring durable capital to sustainable outcomes
TL;DR / Highlight: Network for Good will incorporate a parent organization / holding company that will begin operating in 2024. Through buying and holding, building, and investing, the holding company will bring durable capital to support the critical infrastructure American communities need to be resilient in the face of the climate crisis.
This week, I talked with Network for Good’s CEO, Abby Ross, to discuss the new “holding company” we’ll set up in 2024. Through this new entity, we’ll be able to take big swings to bring durable capital to support critical infrastructure that will help communities respond to the climate crisis. In this episode, we discuss our emerging investment thesis for the holding company, key themes we heard at this year’s SOCAP conference in San Francisco, and how we’re thinking about blended investment models, catalytic capital, and participatory investing as trends that may inform our future plans.
Here is the transcript from our conversation:
Maddie: We just spent the last three days at SOCAP, which is one of the premier conferences for impact investing, and Abby, I’d love to hear from your perspective: what was it that you hoped to get out of SOCAP this year?
Abby: So this conference is a group of social impact entrepreneurs, folks with funds, investors, and anybody who is exploring how we grow the field of impact investing and move capital towards more social and just causes. We were ultimately attending because the programming of the sessions was really great for getting us thinking about how to use the entire capital stack for social impact.
There was an entire theme on climate, and a theme on community alignment and how to bring capital into communities. So it was very harmonious with some of the buzzwords that we’ve been talking about. It was also a great networking opportunity to meet with the folks that are allocating capital to these causes and I was hoping to immerse us in some of the trends in the landscape and how general investors are thinking about the areas that we’ve developed an interest in.
Maddie: You mentioned buzzwords. I think one of the things that I found made sessions most interesting at SOCAP the last few days, or most compelling, was when folks gave really specific examples to anchor their stories and points of view and really defined what it was they were talking about rather than relying on buzzwords–which is obviously something on which we still have work to do. But I think part of the goal of our conversation today is to clarify, at least a little bit, some of what we’ve been thinking about when we talk about durable capital and sustainable outcomes. So I’m curious, Abby, what were some of your key takeaways from the conference?
Abby: So much of the past 18 months, for me, has been about understanding the DAF and how that’s used as a vehicle and a philanthropic asset class. I’m now also starting to understand what PRIs and MRIs are–program related investments and mission related investments–and how those can be used by philanthropy and impact investors as ways to invest with a financial return. I’m also learning a little bit about participatory grantmaking and participatory investing as strategies for how you can direct and allocate capital.
A couple of things that I thought were most applicable to what we’ve been thinking about came from an organization called Vibrant Data Labs. They presented a data matrix ecosystem of where various types of capital are and aren’t going related to climate. So I pulled out a lot of really interesting themes and some of the intersectionality between climate, justice, and equity. And so that was really helpful to see where there are trends and interests and also what isn’t getting funded–some of the gaps which can lead to opportunities.
The other thing that I think was key takeaway from my conversations with folks was that the definition of impact investing shouldn’t be concessionary. It doesn’t have to be. You can beat the market by doing impact investing. But there was this acknowledgement that there are various types of capital. And I’d say the collective call to action from the conference was that the various types of capital and products need to be available for retail investors for impact, not to be a niche 5% of the capital market, but to really be something that is incorporated into institutional investing.
Maddie: There was a lot of commentary at the conference around the importance of blended capital, like you started talking about, across the capital stack. I was particularly struck by how many speakers emphasized the importance of finding the right type of capital for the right type of outcome. I was in a justice tech panel that talked about the spectrum of financing and we saw some interesting models reflected there. There was one organization that spoke on that justice tech panel that was incorporated as both a for-profit and had a non-profit and the two entities worked together. I attended another panel that talked about perpetual purpose trusts, and that’s an interesting vehicle I’m just beginning to understand the very basics of. Holdfast Collective, and the whole Patagonia structuring, is another example. All of these were interesting and emphasize that there’s becoming perhaps less of a binary between philanthropy and investments and I’d love to hear your thoughts on that.
Abby: I think the most interesting and applicable forms of blended capital were about finding the right vehicle for the right outcome. For example, the concept of catalytic capital, which again, just doubling down on the buzzwords here, but they define catalytic capital as money that can de-risk innovation, can create inclusion where the mass market might not find opportunities, and can ultimately prove opportunities to institutional investors. And so there was a lot of discussion around the role of philanthropy and catalytic capital and the notion of subsidizing–when then institutional investors can come in and make money and make things scale. And I think I’m still forming a perspective on the role of catalytic capital and how philanthropy can play a part in that, knowing that when you look at the capital stack, philanthropy is still small–but there might be a new interesting role as we think about what the next 10–20 years requires in terms of financing sustainable outcomes. Another phrase was “first loss capital”–capital that is willing to take on that first loss of an innovation to demonstrate a market, to demonstrate a business model. So it’s riskier. And then the other really interesting trend in the conference, around different types of capital, was revenue-based financing. For social impact organizations, or dare I even say non-profits that we want to push towards building a sustainable model, thinking about how revenue based financing can provide that opportunity to test mechanics and get to a point of profitability or break-even. It’s a sustainable model in a way that’s really safe and non-predatory, versus what loans can be in early stage companies. So those were the types of vehicles that stood out as interesting things to think about when we think about diversity in the term “durable capital” and how that can take different forms depending on the outcome.
Maddie: At the conference, it was a heavy fund manager and investor audience. I’m curious, what did you find to be some of the trends that investors were talking about?
Abby: So climate was a huge focus of investors and folks raising funds. And I found there’s two ways that folks define climate solutions. One was nature-based solutions, learning that there is a tremendous impact opportunity in nature based solutions, but investors perceive it as heavy risk. There’s one example of how 200 beavers can reduce carbon at the same rate as converting a power plant–I learned more about beavers at this conference than I expected. And then there’s more tech and product based solutions, which is where my bias is around thinking about climate investing. That was a theme, if you are either raising money or allocating capital in climate, that’s a place where people see opportunity to have impact and market returns.
The other thing in terms of macro trends, and one of the relatively heartbreaking things, is that explicit investments or funds regarding racial justice are in trouble right now. Racial justice is a big focus area for impact investing, but the legislation out of the Supreme court with the Harvard decision could really impact the flow of capital to those critical programs. Things like affordable housing that is specifically dedicated to communities of color. But that legislation means that funds are worried about being deemed “noncharitable,” so the flow of philanthropic capital could really be impacted by that decision. The other macro trend, for anybody fundraising at this event, was that it’s a really challenging time to raise a fund.
Maddie: At SOCAP, Abby, we both got to try on our new “network for good holding company” hat. While networking with other people, we weren’t necessarily representing Network for Good, but rather this holding company / parent organization that we’re spinning out. How did you describe who you were to other people at SOCAP?
Abby: I used this conference as a chance to road test our investment thesis and socialize the concept of a holding company. When I introduced myself, I wasn’t Abby Ross, the CEO of the Network for Good donor advised fund that has been operating as a nonprofit for 20 years. I played the role of a CEO of a holding company and I led with our strategic vision of durable capital for sustainable outcomes (recognizing that this was a buzzword friendly space) and everybody nodded their head like, “oh sure.”
Maddie: Okay, so give us that holding company pitch!
Abby: We’re a holding company that builds and buys infrastructure that is helping our country adapt as a result of the climate crisis. Businesses that we believe need to exist for the next hundred plus years and are critical to accelerating what a more resilient and equitable society looks like. This could be boring infrastructure businesses like workforce training for industrial green HVAC conversion, drone based tech for prescribed fire treatment, what an enduring insurance model for communities after a disaster might look like, or maybe even the tech for management of clean groundwater production.
We do this through our studio, that incubates big bet new companies to build, and then through a fund for both investing, but also buying and holding profitable businesses. We believe this is a new asset class that can provide durable, repeatable returns over a very long time horizon because we’ve zeroed in on businesses that are critical and can, will, and should exist for the next hundred years. And so that’s our definition of durable capital and an asset class we’ll explore.
Maddie: And what was the reaction? What kind of response did you get from folks?
Abby: So, it was amazingly positive. Everything from: “That’s really exciting” to “this needs to exist,” and folks saying, “yeah, this is a gap.” And what I found the magic moment was, of where things clicked for people, was presenting that point of view that, by buying and holding companies in this critical infrastructure in the climate space, it’s about liquidity. That it isn’t just venture or IPO, even though so much money is going into the space. And a lot of these companies can and should exist, but the returns of venture aren’t there. So this kind of new off ramp is a way to, again, beat the market, and I think a lot of folks appreciated the long view of durability and enduring with the buy and hold model. And when I was able to chat with a variety of folks, and I’d say this, people seemed to think this can resonate with retail investors, can resonate with impact investors, and frankly also with philanthropy.
I also would get a series of follow up questions from the pitch. Some folks kept trying to put us in a narrow box of “climate” but I found that I’m able to make the case that the definition of critical infrastructure is the anchor point and the climate crisis is ultimately the reason why these businesses drive new opportunity. But this is an inevitable change, and all of our infrastructure is going to have to turn over as a result, adapting to this chaos of climate change. So that’s the moment and these businesses need to exist. So, that was the first follow-up question: “Are you a climate fund holding company?”
Then, another question was, “are you raising a fund?” and “where did your money come from?” And I actually loved that question because I was able to give the Network for Good backstory, and then use the DAF as an example of critical infrastructure that needs to exist. After 9/11, there needed to be a way to safely and securely donate money to charity online. And this needs to exist. So that really helped folks understand that it’s a public utility and the critical infrastructure component. And then I would get a series of questions around, whether there is a private equity role at play, looking for efficiency or synergy in our portfolio. And I found myself giving the “Berkshire Hathaway for durable, critical infrastructure businesses in the face of the climate crisis” as an anchor point. And people were like, “oh, that’s the big game you’re playing here.” And if I was able to work that in after a follow up question, I think that’s really when people were like, “oh yeah, this is big.”
Maddie: You mentioned earlier that one of the themes you heard was that it’s a tough time to raise capital right now, and differentiate yourself, especially if people are trying to put this holding company into the climate fund box. Can you speak to that?
Abby: Yeah, so both a theme at the conference and what I’m realizing as well, is climate is a multi trillion dollar problem. So I think at this conference, there’s just a sense of excitement for folks on the investment side that now there can be an off ramp for investments that they’re making. That isn’t just massive IPO or massive success of durable businesses. So there’s an extent, a sense of excitement and collaboration from other folks in climate investments, which is why I think the concept resonated. But I think for us, climate driven disasters as an accelerant for why infrastructure will change and why critical infrastructure is the investment, was really helpful. Also just giving examples of how broad critical infrastructure could be. We’re talking insurance, we’re talking real estate, we’re talking concrete, we’re talking water. We’re not just talking about the physical reduction of carbon that a lot of people go directly to when they think of climate, but no, what is the infrastructure that changes amidst climate impacts? So that broadening really helps people, I think, understand where we sit compared to other funds or climate plans in general.
Maddie: And given the positive response you got back as you talked about that with folks, what’s next for the investment thesis?
Abby: So we need to continue to road-test and validate this. We were just in a space that is narrow, it’s just impact capital. So I think that’s folks that are primed to hear this so we need to road test this with a more hardcore investment market. And frankly, I wholeheartedly believe that this thesis is diverse enough where we can present as impact, but these aren’t just impact businesses. These are critical infrastructure businesses that will have an impact on communities.
And then tactically I think we’re moving into the “doing” now so that we can validate the investment thesis with real examples and move towards growing assets under management. And so that ranges from getting this holding company set up, to getting some inputs for what we think a market shifting practice might look like it at holding company. Where and what can we research and invest in that gives us a perspective on what needs to be built or bought. One exciting thing that we’re doing is a landscape analysis of opportunities that meet this investment thesis that we can start building a model and looking at deals for. And we’re starting with a mood board that offers a broad definition of critical infrastructure and then I believe that will lead us into a more specific deep-dive into using the full cycle of communities recovering from climate driven disasters–and that ranges from preparedness to relief and response to recovery into resilience, mitigation, and adaptation. And so that long definition will give us the lens of what critical infrastructure means in dealing with the climate crisis. And that ties into both our definition of sustainable outcomes and the role that maintaining critical infrastructure will play in the durable capital piece.
Maddie: You’ve talked about how blended capital has been a big theme, but I think something that we’ve also been talking a lot about, and that we hope will differentiate us going forward, is the idea of what community alignment in all of this means. I heard, brought up in a few of the sessions I attended, about the challenge of looking around and seeing who is and isn’t in the room at SOCAP, and there being an underrepresentation of a lot of the folks who will be impacted by these investment decisions. And that’s something that you and I have talked about that I just want to flag is a piece that we know we have a lot of work to do around. The folks who are part of our team right now–thinking about durable capital and thinking about sustainable outcomes–do not have the experience to say what community alignment is. And I’m excited about the folks we’re bringing in as partners in that, and I think “community” and “community alignment” are terms here that we have a lot of work to do to define over the course of the next year, so that community perspective is really infused into our DNA and we can get crisp about what not just “durable capital for sustainable outcomes” means, but “durable capital for sustainable outcomes that are community aligned.”
Abby: It’s also really about operationalizing that. I think there’s a lot of people at Socap that had a similar point of view on this being about different types of capital to sustainable outcomes and impact. And the theme of how to make sure that sustainable outcomes are defined by the community for where your capital is going, has to be infused into how we operate. And we have no good answers to that yet, but definitely ambition to crack the code.
Maddie: Crack the code of not just what “community alignment” is, but defining what we even mean when we say “community” to begin with. And we have a lot of work to do, but I’m excited to see where things go in 2024.
Abby: Yeah, let’s do it!
