= A not-for-profit social network of entrepreneurs providing financing for early stage companies through debt guaranteed by a mutual guarantee fund.
URL = http://www.entreco.org/
"Entrepreneur Commons is a platform to support entrepreneurs through self-help groups and loans. The fund is managed by a not-for-profit social network of entrepreneurs - a support platform that can scale, and that also provides a way to screen deals, based on inclusion of every entrepreneur into the process rather than exclusion through a competitive process. It is especially useful to social entrepreneurs, for whom the regular funding processes do not really work. And it simplifies the investment decision for social investors because success can easily be measured - when the beneficiary businesses are social businesses and loans (with rates that can be benchmarked against market returns) are paid off, then the social investor can be satisfied that he has done his part."
Very comprehensive description here at http://www.wiserearth.org/article/ccd583c5f1875f9cf92486ab747bbeac/group/entreco
Update as of January 2012: In 2011, Entrepreneur Commons raised its original Guarantee Fund through donations. The money was raised through Indiegogo - http://www.indiegogo.com/Guarantee-Fund-for-Entrepreneur-Commons-2 with the support of Community Ventures, a non-profit organization based in Oakland, California - http://c-ventures.org/ that provided the tax advantage to donors. The money is deposited in a CD account and will be used as a guarantee for a first loan to an entrepreneur within the network. Candidates for the loan were promoted by their peers from the various chapters, and one entrepreneur was selected to receive the first loan. At the time of this update, paperwork is being processed.
'My experience of Social Capital market is that it is a very skewed market today, which reminds me of feudalism:
- on one side you have foundations, with a few managers in charge money from people who live from their investments and have assigned some of that money to social causes. These managers are the lucky few who can make a living from Social Capital markets, and the investors are people who can afford to do what they do regardless of what revenue it will generate for them because they have other sources of revenue.
- on the other side you have legions of volunteers or underpaid workers who are happy to do what they do because it is for the greater good of humanity, pick your own cause. And they all have this dream that one day they will be making a better leaving because their hard work and motivation will be recognized by these people with the money. I am always amazed to see some of these non-profit workers agree to jobs without medical coverage. They are barely better off than the people they try to help (which is probably good enough for them, even though not a good idea). And the odds are against them, they live in a competitive economy.
So the value generated is already the result of some level of exploitation, even if it is self-imposed. Ideas are free, work is almost free, with the ones at the very top are showing example, they work on these projects for free, except that they can afford it because their revenue comes from somewhere else.
If you add to this the concept of making money while making good, then you allow investors to extract some of the value created for their own benefit from an already exploited ecosystem. Which is not really good, even if they agree to take less than they would in a normal environment. And that's assuming they behave, which is not always the case as we have seen with the issues that emerged in the world of Microfinance.
The people in charge (the guys with the money) have been trained in the world of shrewd capitalism, where they built their own financial independence, and even though they mean well, they reproduce the same behaviors in this new ecosystem as what made them successful in the first place. So yes there is a market today but I do not think it is healthy or sustainable over time as it is today. I have seen several direct examples of this type of dynamics.
Muhammad Yunus promotes the concept of hybrid structures, and I think this is one good way to resolve this issue. The revenue generated by the social enterprise goes back to the community. The for-profit is own by a non-profit, or maybe you create a for-profit with all the tool of the corporation (including lobbyism) but with a clear focus of re-investing all profits into their social purpose.
There have also been models used in the past that have proven to be working very well. I have studied Mutual Guarantee funds (used in Europe, starting 1917) and Ethnic lending and I believe this is the type of system we need to finance social enterprises. Entrepreneur Commons (entreco.org) is an attempt at doing this.
Instead of spending money on economic development as it is done today, which has a lot of inefficiencies, it would be easy and much better to setup matching contributions to mutual guarantee fund, allowing (social?) entrepreneurs to work together, identify the best opportunities, fund them and use the returns to finance the next wave. The key is that the returns should go back to the community of stakeholders, so that it is truly social capital. There has also been a lot of work done on cooperatives and how this type of structure can allow social enterprise to get started and grow without the risk of falling into feudalism.
Having said this, yes, once you have a healthy base of projects and communities, it is easy to bring more capital by packaging the loans into bigger chunks that can be sold on the financial markets, so we could probably get a lot of leverage once momentum has been established. Mutual guarantee funds are doing this already, with 1 to 8 leverage provided by governments. We need more of this.
Long answer, sorry, but this what I get from my own experience: I think that you are right that derivatives would be a good instrument, however the current base is not healthy enough that it is what we should focus on now." (email Jan 2012)
1. Jessica Margolin:
"When entrepreneurs start a social venture, they are immediately in conflict: A social venture develops social connectedness, intellectual resources and skills, creative expression, personal health, a safer and cleaner environment.
But most equity investors measure their own success by financial returns, thus the social enterprise must also meet financial expectations. When setting course, social entrepreneurs may be immediately caught between a rock and a hard place.
Microfinance has emerged as a solution by providing debt, which changes the expectation of risk, thus of returns. Microfinance manages risk through its small scale and other methods. Yet social enterprises, particularly in developed countries, often require an investment scale that microfinance can't address.
But a hybrid is possible.
An example of such hybridizing is what Marc Dangeard is building with the Entrepreneur Commons, which is explained on his blog as follows:
"A not-for-profit social network of entrepreneurs providing financing for early stage companies through debt guaranteed by a mutual guarantee fund. The financial risk is mitigated by the mutual guarantee fund. The risk on the 'management' side is mitigated by the social network: loans are by invitation only, so you will have to be approved by your peers to get in. ..."
Interestingly enough this hybrid model may also help angels and other investors improve their return on capital: Marc relays that a study of over 1,300 VC and PE firms worldwide shows that the returns they bring on average is 3% below the S&P 500 (after fees; 3% above, before fees). So market rates are actually competitive returns, and investors receive steady revenue stream of debt repayments for the lifetime of Entrepreneur Commons, instead of the feast-or-famine of funding rounds and exits.
So the Entrepreneur Commons is an insightful way to solve the problems of
• providing seed capital for social ventures that facilitates non-financial asset building • providing financially competitive market returns for investors • providing liquidity for investors." (http://www.socialedge.org/discussions/funding/new-model-for-angel-investment/document_view)
2. Marc Dangeard:
Q: Some people suggest that there is already too much capital chasing green technology and renewables, that it is the next bubble in the making, yet we clearly need to move massively in that direction. How does this contradiction in perceptions arise?
MD: The issue with Greentech is it is very technical, and so it is very hard for an investor to figure out whether the technology makes sense or not. So probably yes there is more money than there are viable project. And then when you have valuable projects, it is very hard to find an investor who knows enough to be comfortable with the opportunity. This is a case where there is money and there are projects, but the matching mechanism does not work as it is (relying on investor expertise or on the few expert to screen deals). This is one of the issue that the Entrepreneur Commons is trying to address by making the investment decision process easier, relying on the entrepreneur expertise and his peers judgement of who he/she is as an expert and as an individual.
Generally speaking, in venture capital, it is not a case of too much many for too few deals, it is again a case of the inefficiencies of the matching mechanism. I see a lot of waste with the VC model coming from many things. And while the model works for VCs, it does not work for startups or for investors (the Limited Partners who give their money to VCs).
The problem goes 3 ways:
- there is example above, which is a case of not enough experts to screen all the deals, and they can only be good at screening deals that fit their area of expertise which means that they are limited in the number of startups they can truly address.
- there is the fact that venture capital is only working as it is for deals that are $5M or more (the famous funding gap caused by the limitations of VC partners who are limited in the number a deals they can handle). Meanwhile starting a business requires less and less initial fund because the cost of infrastructure has dropped, so a lot of the flow of deals has moved below their radar in recent years, and it will probably stay that way. Some funds are trying to do "early stage" but it is still very limited and the model is unproven for these firms. The only one that seem to have something that makes sense is Atlas Venture with their Y combinator program, which is very close to what Entrepreneur Commons is offering (YCombinator is still very agressive and not as interesting as an option for entrepreneurs, but I am biased when I say this).
- there is an abondance of ideas that have no business legs too, so it is true as well that there is a need to mentoring of these people to turn an idea which is a beautiful intellectual construct into a cash generating machine. Today, the waste is that these entrepreneurs with ideas spend a lot of time (at least in Silicon Valley) trying to raise money from VCs or angels when they should be spending time trying to sell what they have to customers. This is another aspect that Entrepreneur Commons resolves with self help groups (peer mentoring), allowing entrepreneurs to share their experience, and allowing them to realize as they work with the group the true status of their venture, because other entrepreneurs will have no problems shooting holes in their business plans."
- (Original proposal by Marc Dangeard at http://bizcoach.blogspot.com/2008/06/entrepreneur-commons-after-looking-at.html)
- The Entrepreneur Commons Resources list: http://entreco.blogspot.com/