President’s Letter: A Look Back at 2013

Heron’s President Clara Miller takes a look at how 2013 shaped the foundation, which has undergone significant changes. 

Nearly two years ago now, we took time to examine and question the relevance of Heron Foundation’s mission—to help people and communities help themselves out of poverty. And we found the world has changed.  We reaffirmed the importance and relevance of the mission, yet we felt we needed to change our strategy. Given the evidence, we had to admit that those we hoped to help had lost ground. American poverty was more widespread and tenacious than in fifty years, the ranks of the unemployed had swelled and their chances to move up and to stay in the middle class had dwindled.

Heron’s strategy has therefore shifted its focus from asset acquisition to jobs, livelihood and opportunity for those on the economic margins.  We now invest not only to solve the specific problem of U.S. employment (i.e. to create job growth, stability, and opportunities for advancement), but to help assure that innovative solutions will “stick” by investing broadly in enterprises that epitomize a healthy, balanced and reliable “business as usual” economy.

One of Heron’s social sector heroes, Steve Dawson of Paraprofessional Healthcare Institute, talks about “raising floors and building ladders for workers.” Heron not only invests in helping the PHIs of the world succeed, we also invest in a broader array of enterprises that assure there will be a reliable, long-term job opportunity when these trained and willing workers arrive.

While 2012’s best-known Heron story was a strategic shift, the more subtle story of 2012 was our realization that if we were really going to make “everything at our disposal…a mission-critical resource,” we would need to make sweeping operational changes at the foundation. Such challenges include (but are not limited to):

  • expanding from 40 to 100 the percentage of our financial resources invested for mission;
  • restructuring the staff so that all capital can be deployed regardless of financial tool, asset class or enterprise type;
  • figuring out how to keep operating costs reasonable while increasing the scope, scale and complexity of investing activities;
  • credibly tracking mission and financial results together for every investment;
  • becoming accustomed to operating within the legal and administrative rubric of a private foundation, while becoming more market-focused.

I realize that most nonprofits and foundations measure and report on their progress by telling the inspiring and heartwarming stories related to grants they made, research and policy milestones accomplished and similar program-oriented achievements. We do have our share of such stories (stay tuned!), but I’m going to resist the temptation to feature them here and instead tell the story of 2013 through a very different lens: our changing business model.

Most of our 2013 stories track nearly invisible changes in systems, processes, operations, and data—not to mention culture and philosophy—that will make the achievement of our large-scale ambition possible.  They’re stories about relational, comparable data bases decreasing our investees’ reporting load (potentially freeing up around 50 percent of reporting cost, per organization). It’s the heroism of entering 7,700 separate positions into a database so we can track social and financial gains in real time in our equity portfolio.  It’s the hard work of walking the talk: “all investing is impact investing.”

In 2013 Heron has been on a very steep learning curve. One indicator of its severity was the number of “firsts” we tallied (amidst many woulda, shoulda, coulda moments). I thought that an explicated list would help me reveal a bit of what we have done operationally and why.

Here are the highlights of the 2013 “firsts,” with a bit of commentary:

 

The first year of our integrated “capital deployment” unit—which combines the previously separate investing and granting operations, including:

  • Design and early execution of our first “pipelined” tracking system for deals, across asset class and across enterprise types with both mission and financial results. It is very complex and flexible, and our ambition is to have it tell us the full story in real time.
  • Early design of our first omnibus reporting system, to report results of all assets (debt, equity and funds) on a financial and mission basis.
  • The first portfolio impact rating scale that integrates financial and social impact together.
  • Our first market analysis by industry, across legal forms of organization.

 

Why did we need to integrate our grant/PRI making and conventional investing staffs?

This was our thinking: Once we made the decision to dedicate 100 percent of assets to mission, we then had to be able to track both financial and mission performance for every dollar, credibly, across the entire portfolio—grants, PRIs, loans, bond purchases, equity, everything. What was the best use of a Heron dollar? How do we track integrated financial and mission performance and return over an entire portfolio, in real time? What was the financial performance of a grant? The mission performance of a private equity investment, or a public company holding? To put it bluntly, we needed simplicity of operations (afforded by making two units into one) and most importantly, we needed brain power and input from both sides of the house to make the best investment decisions.

 

A number of “first” initiatives on data and reporting, across the foundation and in the form of grants, including:

  • First use of an outside, cooperative data warehouse as a reporting unit for Heron grantees, investees and others. Coop Metrics now tracks cooperatives, nonprofits and small for-profits for self-reported, real time financial data in auditable and comparable format.
  • First investment into an organization leading data standards development (SASB) for ESG data reporting by public companies in SEC “10K” filings.
  • First full year without any special reports on grants, having stopped all grant reporting to Heron in 2012 (we do ask for annual reports on whole enterprises and reporting as per financial/mission tracking agreement from all exposures in our portfolio, nonprofit, for-profit, and cooperatives).
  • First Bloomberg data terminal.

 

Why the interest in data and data infrastructure building? Why would we stop specialized grant reporting to Heron? And why the Bloomberg terminal?

We know that given our ambition, we will need a large volume of diverse data that will allow us to track our mission results together with our financial results. We expect to also buy research and analysis from specialized sources as needed. We also want to track our entire portfolio of grants, loans, private equity deals, bond purchases, public equities, etc. against our investees’ own goals and against other peer enterprises. A shared data “utility” will help us do that. And finally, we want to simplify compliance and reporting for our investees and ourselves.

On the SASB and Bloomberg terminal front, we found that while financial data is readily available, there is a dearth of credible mission and ESG data for for-profit companies, including public companies. We, with a number of others who are already working on this need, would like to contribute to the development of rigorous, credible, standardized and auditable evidence for net contribution to society by these companies.

 

Some notable investment (including grantmaking and PRI) “firsts,” reflecting our new market posture.

  • Our first $1.5 million and $2 million grants to nonprofits as enterprise capital grants (also called philanthropic equity and growth capital) in campaigns reflecting our financial role as a capital investor rather than a purchaser of services. Our average capital grant size is around $1,000,000, and the campaigns are typically between $5 and $15 million, so our funds are only part of the story.
  • First $5 million program related investment (PRI). Having invested in the growth of the CDFI industry in the last 10 years, we are in a great position to provide capital to the resulting larger scale, such as our investment of this size in Craft 3.
  • First direct private equity into a for-profit manufacturing company which manufactures innovative “green” packaging and will create jobs.

 

Why the big grants and PRIs?  

We have taken on the role of a growth stage capital investor.  Our view is that the greatest increases in stable jobs and employment are likely to be found in growth stage enterprises. We have also embraced “enterprise” as our primary unit of investment (rather than programs, individuals or similar alternatives). On the equity grant front we look for organizations that are poised for healthy growth and then work with them to organize and run campaigns to raise growth funding. We invest in mission aligned private equity firms to similar ends.

 

Two major “firsts” in financial planning and reporting!

  • First new audit format for a “fully mission/impact invested foundation” negotiated by board member Bill McCalpin and me with our fairly conventional (yet flexible) auditor.
  • First functioning prototype of a fully integrated foundation-as-enterprise planning model.

 

Since our ambition is “all assets for mission,” we (Bill McCalpin, our lead partner for audit, and I) wanted a category of assets called “not examined for mission,” for those assets (primarily public company stock positions) that had yet to be assessed to see if they are a net contributor to societal value or not. Our auditor looked at me pleadingly: “Clara, I’m an auditor. I can’t have  ‘unexamined assets’ listed in an audit.” However, we were able to work things out, and now we are moving in the direction of having the mission performance as well as the financial performance of our entire investment portfolio appear in our audited financial statements.

We used to know as much as 90 percent of the grants we were likely to make at the beginning of any given year. While this had some positives, such as our grantees being able to rely on their operating grants in advance, it also had some negatives, including using the private foundation payout requirements as our primary “market signal.” As we have begun to operate in a more market-facing way, we are instead pipelining all investment (including grant-making) opportunities and trying to respond to the needs of investees in real time while still complying with our payout regulations. This requires that we understand and plan for our liquidity, returns, asset mix and similar with a new kind of financial model. Our vice president of finance and administration completed a first prototype of such a model, which we expect to use in 2014.

A few firsts in developing social and knowledge capital. “All available capital” means being intentional about learning from others, sharing our own experience and knowledge and looking for “deals” that others have underwritten (as well as sharing our own underwriting). We view this is as a critical part to the evolution of our business model. Thus, some baby steps in that direction:

  • We housed our first Heron/NFF Fellow (Rodney Christopher) and first Kresge Fellow (Tania Das) to help us move closer to two long-time friends.
  • As one fan put it, those “brilliant weekly emails (i.e., ‘In Case You Missed It’)” the first Heron newsletter.
  • First Heron-sponsored national convening (on “big data” for impact investing) at Pocantico Hills, courtesy of the Rockefellers Brothers Fund, followed by
  • First You-tube videos of conference highlights and curated conversation among participants on social media following same.

 

I hope you will excuse my somewhat breathless air, and please overlook the absence of reporting on our social goals and impact (this will be ongoing, and coming soon). I realize that none of these mostly “build” tasks is what most of us care deeply about when we do this work (I mean really… “new audit format”?  Pleeze).

We do know that if we don’t have the systems to monitor real, standardized data, over time, our plucky talk about systemic change in the economy will be just glib bravado.  Mission and impact results will be fundamentally unexamined, non-rigorous and over time, they won’t stand up to the scrutiny of the larger market.

These systems won’t reduce our risk of failure, they will simply make it possible for us to know how we are faring against our goals. And as for failure, these systems will make it more obvious—to ourselves and others—when we are succeeding and failing. The investments to build our platform are prerequisites, not destinations. They will only get us to the base of the mountain; they will not assure that we are able to climb it. We are simply building the capacity to try.

This work is a bit risky. In the coming months and years, we will be allowing others into our decision processes, and exchanging “deals” for the promise of more social good. And in some cases, we will be ceding control of when and how we deploy capital in exchange for being the early money, attracting more capital, and working with investees to raise it. These practices are likely to be unsettling because they open us to public failure and a new form of practice for ourselves, our traditional partners and the philanthropic field as a whole.

But we think that the potential gain will outweigh these pale perils, and that the price of business as usual would be that we hadn’t even tried to take the steps we need to be able to succeed.

Heron 2013’s biggest story was that despite some mistakes and missteps, we made pretty good progress building an alternative model of a private foundation that operates outside its protective “terrarium.” With a bit of luck, 2014’s report will carry many more stories about how our full range of investments—and our mission—are faring with this approach.

Warmest regards,

 

Clara

 

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Comments 9

  1. Gonzalo Fiorilo says:

    I’d like to emphasize the women poverty. In Bolivia the poverty has women face. Mainly in rural áreas this is due to the poor education among women. The most of them are illiterate, but I am conscious that with a suitable program we could créate various Jobs for country women.
    I agreed with the need of severe control systems. It is imperative to know how each dollar is invested.

  2. Christine Letts says:

    Bravo Clara et al! I look forward to the day when you describe the big systems, structures that you are aiming to influence and change through all of these investment changes. I have great hopes and expectations!

    1. Kate Starr says:

      Thanks for the encouragement! As you know too well, these threads are intertwined and we’re looking for ways to pull on more than one at once and pull together with others!

  3. Tom Reis says:

    Clara, Bill , Buzz, et al–

    It’s refreshing to read about another important philanthropic institution pulling away from the fixation on the “tools” of change making and instead remembering it is first all about accomplishing mission. Tools, of course, are still the important crux of the matter, as execution trumps it all. But not tools for the tools sake, as so many smartie pants philanthropoids want to stay fixated on. Or should I say tool–i.e. grant making and grant making alone. What, we are innovators just because we will consider building a house with something besides a hammer? (adding PRIs and Impact Investing tools to the mix makes us cool?). I affirm your journey to do whatever it takes to achieve your mission…as I like to say, sustainable social change making is very difficult to achieve, so use every white rabbit out of every hat you can find…stay tenacious!

  4. Marcy Murninghan says:

    Bravo to you all for helping fulfill a dream that Paul Ylvisaker and I often discussed years ago. It’s about behaving as an ethical, integrated fiduciary, in service to the civic ideal. That’s something to emulate, and thank you so much for playing a leadership role with your exploration.

  5. Kate Starr says:

    To your point, Tom and Marcy, we found much inspiration in Simon Sinek’s Ted Talk (http://www.youtube.com/watch?v=sioZd3AxmnE) to focus on WHY we do things rather than how or what. Trying to keep it simple!

  6. Basil Whiting says:

    Bravo, Clara!

    Frank, thoughtful, and open! I can hardly wait to see the report on 2014.

    (As you may or may not know, I retired from consulting to foundations and others in August of 2010, my having some health problems and my wife having broken her neck and requring my care. So, I decided that, at the age of 72, it was OK to let go of my good work. So far, things are working out well on all fronts, though it’s an interesting adjustment.)
    Baze

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