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August 2012
The document was written in the span of a few days in August 2012 when I was part of Tapas India Foundation. At that point in time, I had just left my full-time employment and commenced as a part-time paid member at Tapas. The name as well as the central idea behind setting up of Tapas owed its existence to Vikas Arya (who was also the co-founder along with R. Chandrasekhar).
The central idea, as it was evolving at that point in time, and as understood by me, was that it is possible to create an institutional equivalent of a private-equity-type-entity in the development sector. Such an entity can 'invest' in and 'hold' a portfolio of organizations ('social enterprises') in the development sector . The term 'investment' in this context would essentially mean institution-building support in its broadest sense and the 'holding period' could range from 3 to 7 years. Further, like in the commercial investment space, it could be possible to invest on the basis of certain pre-defined criteria that would assess the quality of the work, the management and some other softer factors.
I do not know whether this idea was original but I found it an appealing way to think about work that involves working over long periods with a given individuals or organizations. Also, it had a certain merit in terms of being able to communicate the work in a format that stakeholders from the investment community could possibly understand better.
However, when this document was written, Tapas had only started breathing as a real entity. Hence, while the idea was powerful enough to initiate an organization, I strongly felt at that point in time that it needed to be tested against the experiences till date, to be elaborated and reflected upon at the second and third level of details, and then converted into a certain internal constitution against which decisions should be based.
At that point in time I had two specific instances of experiences in mind: one with Sabras Processing and Marketing Ltd. (Ahmedabad, Gujarat) and another with MAHAN Trust (Amravati district, Maharashtra). In addition, I had the observations that I had registered working at Monitor Group and also the time I had spent at Accenture, though with very different kinds of organizations.
When I started writing this document I was surprised at the ease with which thoughts came. It had most probably to do with the fact that there were a lot of experiences and impressions that were desperate for expression. I wrote at a stretch of 2 to 3 days and then I felt I had emptied what I had to say at that point in time. Later on, I did think of re-visiting the document to complete it but never got the motivation to do so for a simple reason that: what was important was all said and the rest of the document was about extrapolating and taking to logical conclusion some of the points and tying it all together.
In a way, this document was written to primarily clarify my own thoughts. In fact, it was a certain fear that had prompted the writing of this document: am I sure that I am deploying my skills in the right-way with the organizations that I am working with? Are my skills actually going to confuse the organization or worse, de-rail it from its sense of mission? This fear was not without basis. The two organizations that I was working with at that point in time had been in existence for quite some time and, by all accounts, they were doing serious work. Working intimately with organizations that are cause-based, I felt, was not to be taken lightly. The sense of airiness and free-floating-ness that one gets when talking of business plans and business models and the kind of speculative leap of logic that one applies cannot hold when there are real people who are going to impacted by the work you do. That awareness was enough to force me to sit and write my own thoughts and ensure that I have 'got it right' and that I myself do not deviate from the 'constitution'.
I deliberately used the phrase 'speculative leap of logic' in the previous paragraph. Preceeding the writing of this document I had been reading all the old letters to investors of Warren Buffet, and Benjamin Graham Graham and David David L. Dodd's "Security Analysis". The book's caution on differentiating between 'investment' and 'speculation' was actually the point of departure for the way I decided to re-look and re-visit my work as a consultant. When I started analysing my own inputs, thoughts and recommendations I gave to clients I was left disappointed with the high degree of speculative and ideational element under the garb of 'strategic thinking'. Like a worm wiggling its way through the dirt, this awareness slowly built up over time and, to an extent, caused me to leave my full-time job with the Monitor Group.
It was a conscious struggle to ensure that there was some 'hard meaning' and 'truth' to the work that I tried to do (equivalent to a 'real investment' as Security Analysis would define it. There is a sense of solidity in the way Graham defined the term investment and differentiated it from other modes of thinking about investments). Of course, from there on it was a question of digging into the past to recollect similar things that I had heard from other individuals in different contexts.
There is an additional debt that is due to "Security Analysis": in this document some of the terms (especially 'capital', 'tangible', 'intangible', 'intrinsic value' and 'marketability') are used analogous to the way they are in "Security Analysis".
In general, I am not sure what is remarkably original in this document. My sense is not much. One thing I do find of practical value is the 7-point framework listed in the very beginning of the document. It is a framework (or some variants of it) that I find myself inevitably applying in all my engagments, and especially, at points when I am in a moral dilemma about what should be my feeling towards certains words and actions of my clients.
The utility of this document is in giving a certain way of thinking about organization development. It will appeal most to people who have had engagements as consultants with individual organizations over a longish period of time across strategy, operations and people-related facets at the same time. In addition, these engagements would have also forced them to engage with individuals at all levels within a given organization. I say this because the few people I had sent the document to only 2 gave some serious attention to it. And of the two, one of them fitted the above profile while the second individual had an appreciation for the value that above kind of consulting approach holds.
My personal conviction is that the approach outlined in this document can be applied without too much fuss. It does not propose a new way of working but it does propose a certain way of systematizing and formalizing the work that a lot of independent consultants as well as small-sized consulting organizations that focus on organization development (in the development sector) do.
Please note: I have left the terms "Tapas India Foundation" / "TIF" unchanged in the document. This is to avoid having to re-write parts of the document (removing the two terms would have required grammatical corrections to the sentence structure). When reading this document, however, the reader can treat the two terms as place-holders and replace them with whatever she or he wishes. Tapas India Foundation, as it stands today, should not be assumed to be equivalent to the one represented here. Further, the meaning of a given sentence, even if in present tense, should be interpreted as one of "what should be" rather than "what is" with regard to Tapas India Foundation's way of working.
Tapas India Foundation, August 09, 2012, Investment approach --- Working draft, Kushagra Merchant
INVESTMENT APPROACH OF TAPAS INDIA FOUNDATION (TIF)
Internal Memorandum
What is TIF's understanding of the term "investment"? The term "investment" in context of social enterprises is interpreted very broadly as far as TIF is concerned. Per se, TIF view the value of any entity-level "investment option" to comprise of following elements, viz.:
1. Social capital, i.e., the social impact that an entity generates
2. Value capital, i.e., Philosophical and value framework under which an entity makes decisions that determine its core identity and nature.
3. Organizational capital, i.e., Intangible elements related to culture, temper, integrity, its legal nature, etc. at an organizational level. It does not include the element of organization structure which falls within Operational Capital defined below.
4. Governance capital
5. Financial capital---something that TIF has consciously chosen not to offer.
6. Operational capital---comprising of processes, systems, information technology, supply-chain capability, distribution network, logistics, and any other element that ensures efficient deployment of financialc capital.
7. Business Development / Commercial capital, i.e. Positioning, branding, network / relationship building, creation of new markets, products, services, etc.
One good way to think about the above is like a pyramid or, more specifically, equivalent of an "organizational ice-berg". The final element, Business / Commercial capital, is the one that is most visible to the external world and receives disproportionate attention. It is important but in a high-quality institution there is a lot that lies below the surface that is of significantly more relative importance. Institution-building, if it has to, must happen invisibly and incrementally "under the surface". In a choice between a Titanic and an "ice-berg", a far-sighted leader or institution builder would choose the ice-berg --- unlike a Titanic there is substantial mass hidden underneath to provide support and sustenance when the winds start blowing.
The above is a general framework valid for any entity: be it for-profit or not-for-profit social enterprise. The investment approach of the typical commercial investment fund pays utmost attention to buckets 5 to 7 and gives varied consideration to bucket 4. In almost all cases the first bucket is not even in the consideration set and the motive is financial profit maximization. This is and has been the dominant investment philosophy. But financial and operating parameters most often fail to reveal the complete picture --- especially with regard to real organizational intent and real hidden structural risks. Further, the investment horizons are shortening, there is pressure of deal flow, increasing emphasis on growth rather than development and ballooning financial return expectations, even for the social sector.
Within the "social sector investment" field there are two distinct tendencies --- (a) a more or less commercial approach to investment taking into account broadly the same set of factors as in commercial investment process and then putting an implicit "social sector" discount on the values; or (b) a grant-based approach with no explicit return expectations. The latter has an unfortunate side-effect of leading to situations where there are no strict accountability mechanisms put in place to ensure appropriate utilization of funds. There is some consideration of the more subtler and deeper elements related to buckets 1 to 4 above. But it is usually limited in nature, unstructured and based on instinctive "feel-good" factors --- which is but human nature.
It is acceptable to mostly stop at the balance sheet of an organization when the organization is itself commercial in nature. But when an organization is "primarily" social in nature or claims to be so, balance sheet is but a starting point. The same effort expended on financial due diligence and management also needs to be expended on understanding the intangible make-up of the organization. Both the tangible and intangible legs become important during analysis and execution.
The same broad tendencies are also observed within mainstream management consulting firms active with social enterprises. The concentration is in buckets 6 and 7 above and often lacks a deeper perspective of the specific organization and the context within which it operates.
Thus, in aggregate, much of the dominant investment and consulting effort and focus on social enterprises is on growth of tangible capital. A large reason being that the metholodogies are established, comfort level of practitioners is higher in these buckets, financial returns lend themselves to easy computations, and importantly, the approach, by virtue of being a custom/practice, enjoys very high "marketability" --- skill-sets are easily redeployable, easy to "port" people from the corporate front, raising money is easier, convincing relevant stakeholders is relatively less time consuming, etc. The "marketability" measure represents a significant hurdle today when attempting a shift in mindset.
When speaking of any entity, professional discipline in execution, very high degree of accountability, and pain-staking financial prudence is extremely important. There is a wide-spread belief, especially amongst financial investors and social enterprises themselves, that these standards can be relaxed for social enterprises. However, these capabilities are as much required to manage a household as any organization. These remain the key to translating the potential to effective practice. What is indeed missed out in the equation is an understanding of how to carefully and sensitively combine these aspects with the "intangible capital", i.e., buckets 1 to 4 above, of an organization.
The intangible capital is by far the most difficult to understand. It is not amenable to "off-the-shelf" analytical frameworks and tools and requires considerable expenditure of time and energy to unearth and appraise. Importantly, it also requires a certain type of sensibility and sensitivity on part of the individual attempting to decipher it. Even in business schools, by far the most important starting point for initiation into a certain "way of thinking", these aspects have not been granted the attention they deserve.
Individuals, investment funds, consulting firms, and of course business schools, do speak of the importance of the "management factor". However, the buckets 1 to 4 go far deeper than the "management factor". In individual conversations, lot of people acknowledge it. But when it comes to giving importance and rationale acceptance to these concepts at an institutional level and translating them into a tradition, serious and sincere action amongst majority of practitioners has been lukewarm.
What does it imply for "TIF" TIF is a small and modest institutional response (or reaction) against what it feels is the prevailing current "investment and advisory deficit" with regard to the social enterprises. In form, TIF considers itself a venture capital firm. The difference is in how it chooses (to the extent it has the flexibility to) it's investments and what kind of capital it invests is singularly influenced by factors 1 to 3 above. It has consciously opted not to bring financial capital to the table at all.
TIF's core belief is that if an entity is fundamentally on sound footing as far as 1 to 3 are concerned and has access to adequate pool of near-term liquidity (on account of it's history, reputation, credibility, personal standing of the promoters, etc..) it is possible to patiently work towards giving a professional rigour and shape to elements 4 to 7 of the "ice-berg" without diluting the character of the organization. Of course, it requires considerable investment of professional management capacity that is philosophically aligned with the organization.
To achieve results with this approach one has to, at the outset, forego the romantic and primal fascination with the term "scale"; accept and work within limiations of the investee --- including talent, tools, pace of work --- all of which will be far removed that one expects in a more corporate-like setting. The intent is not to supplant the resource pool but improve it and carry it along; be willing to expend as much time to prevent dilution of the core character of the institution as on building up the commerce element; take a bottom-up rather than top-down approach strongly resisting the desire to import, in wholesale measure, corporate frameworks, approaches and beliefs. Time period for such engagements can stretch from 3 to 5 years to see modest visible improvements.
The investment/advisory approach has to be strictly analytical. But the fact is that the approach has to deal in substantial measure with intangible capital. As such it will be in form of a long-running bottom-up, iterative exercise piecing together elements one at a time across the "organizational ice-berg". The solution will necessarily be highly tailored to the 'character' of that particular institution. In the process, the definition of success may also need to broadened. For the kind of clientele that TIF aims to work with, financial prudence rather than profit will be important. And, in the end, success has to be measured against maximization of social capital.
One can ask a question --- why ot just replace the organization and put up a professional corporate like set-up in place? It is because, as emphasized earlier, the reason for engagement in the first place is the intangible apital that resides within the organization. Creating that required a certain group of individuals who are not replaceable. Trying to replicate this intangible capital generation is not within the capability set of a majority of professional management cadre.
The second question at this juncture can be: why bother? The chief reaon is that there has been enough constructive energy expended over several years (and in some cases, a few decades) by individual enterpreneurs in creating social capital on the ground. This social capital holds substantial value. Granted that the term 'value' is subjective and there will be a strong difference of opinion on what indeed is the value created. But, nonetheless, one is taken aback to learn and witness innumerable examples, which for a country like India should not actually be a surprise. In the process, a lot of these individuals, at a personal level, have forgeone compelling alternatives in life.
Emotionally, and ideologically, out of sheer respect for these individuals one would want to constructively support their efforts. However, there is a more pragmatic and rational reason. There is a lot of high-quality social capital that is created and sustained by individuals. There is a need to give it some (but not a lot) kind of an institutional form so that (a) there is a more efficient generation and effective deployment of that capital, and (b) it is preserved and sustained once that individual is 'succeeded'. Succession planning / transitioning remains the largest hidden lacuna in the development sector.
TIF will work with its investee clients to infuse capital at an organizational, governance, financial management, operational and commercial / business development level. As a result role of TIF will be --- like any other investor --- one of proxy-management, a reliable and trusted sounding board and a sharp "swiss-army knife". Difference being that TIF will continue to remain focused on and give disproportionate consideration to the intangibles. Practically, it will try to achieve this with a certain type of individuals operating within the Tapas institutional umbrella and working under specific tenets --- outlined more clearly in its letter of appointment.
How to cover costs?
Admittedly, this idea, while having a feel-good appeal, is by no means an attractive income proposition for TIF when it comes to compensating or providing for its resources, i.e., the time value of its team.
Considerations of long-duration, multi-dimensional engagements requiring personal involvement by an individual at every stage enjoin very substantial time commitments from a variety of indivduals possessing different skill-sets. The opportunity cost for those participating in this is very real in monetary terms. Given that TIF will associate with only a small number of clients with questionable long-term paying capacity, how to sustain such efforts present a significant dilemma. TIF does not have a conclusive answer, or for that matter, a working answer too.
Of course, not everything can be or need be answered upfront. But creation of an income source that can sustain itself will be at the back of TIF's mind. However, what TIF likes to tell its clients it would prefer to strictly enforce upon itself, which is, that the consideration of income generation should not come at the expense of character diluation and trying.
At the outset, to mitigage to some extent, the financial viability question TIF has defined itself to be volunteer-driven and led. It ensures two things, (a) right kind of self-motivated individuals are drawn to it; and (b) expectations of monetary compensation, and thus corresponding outflows are, by and large, not there. TIF will need two to three full-time members to act as a "binding force" the cost of which would form the primary expense item.
Overheads,to the extent it can, TIF will try to recover and recoup from its clientele. However, the nature (not the amount) of the overheads cannot be out of line with that of its clientele; i.e., if the entrepreneur travels in a sleeper-class coach, TIF members would also do the same as policy. This maintains a sense of alignment and balance with the client.
Beyond this, the blueprint on the commercial aspects remains to be defined. Lack of a commercial blueprint, however, is not a sound ecuse to not engage in the cause. Core team of TIF comprises of individuals who have built up an adequate corpus of savings through work in the corporate sector, and adoption, to some extent, of controlled spending habits. The salary / fee from TIF work would need to cover their monthly burn and add to the "reserve" and not the "surplus" line item of their respective balance sheets. The monthly stipend should provide a "comfortable" lifestyle but not beyond. For instance it will not be able to meet EMI expenses on a mortgage undertaken for a property. For adding to the "surplus" element each individual in the core team is free to pursue a commercial vocation provided it does not conflict with his/her commitments to TIF.
This then forms the identity and nature of TIF. The next section lays out the specific investment approach that TIF will use for identifying specific investee clients or entrepreneurs. This forms its "Term Sheet" --- analogous to that used for commercial investments. The difference being that this one is very qualitative by definition as it tries to gather and evaluate the intangibles.
TIF's "TERM SHEET" FOR INVESTMENT
What indeed is social in an organizational context? The motivation for posing this question stems from the label, of very recent origin, of "social enterprise" that is deployed with such a fervour that it makes it not easy to ignore. Indeed, one wonders if there is any substantive rationale for introducing such a classification for reasons apart from strictly marketing and attention grabbing? If the implicit or explicit intent is indeed the latter then such a lable should not enter into more serious and real conversations. But one finds that it is increasingly shaping the vocabulary of important debates.
Strictly speaking, the word "social" used in a qualifying sense (adjectival or adverbial) would mean that the subject it qualifies directly impacts one or more social variables. Examples of such social variables could be those that lead to social differentiation and creation of different social groups and exclude some social groups (e.g. caste, class, race, etc..) and implications they hold in access to physical and economic resources; basic human rights; political disenfrachisement; those that drive specific social customs and practices, gender inequality, etc.; providing aid to refugees, war victims, etc. Organizations directly engaged in modifying these and analogous variables within their context can be deemed social in the most definitive sense of the term.
Moving one step away from this we find organizations that are engaged in activities that in turn impact variables which have a direct bearing on the social well-being of the groups. The biggest example of this is primary healthcare, ensuring livelihood to earn at least a minimal wage, providing basic nutritional support, etc. These organizations, where there exists a strong empirical basis showing that such activities as listed above, directly impact social well-being can, for the purpose of discussion, be included in the social bracket.
Now moving two steps away we find there are organizations that typically impact some economic and material variables in their respective environments. And there are lots of such organizations. This is also where the term social steathily dons a veil of obfuscation. These are organizations which provide enhanced income generation opportunities, financing support, specific products and services including basic ones such as drinking water, sanitation and so forth. THere are a few possibilities here. In some cases there may be strong empirical evidence of a specific economic or material variable having a direct and substantial impact on social well-being. Organizations engaged in such activities may rightly claim the title of 'social'. In other cases though, the effect may only be indirect. In a handful of cases this effect may be even difficult to ascertain: visually or numerically; that is, the effects may be of the nature of a second or third order effects. In these cases, the claim to being 'social' may claim justification from the fact that these organizations may be working directly with a specific social group.
In such cases one needs to be more inquisitive and skeptical in really testing whether the appellation 'social' can be affixed to such efforts --- however noble and well-meaning they and the people associated with them may be.
What is the intrinsic social value within the investee? This is the primary filtering criterion. The social value generated should be appraised against the context in which the potential investee operates. Within that context, the value generated should be significant and unique. TIF should not give undue weightage to size but instead to the specific context of operation.
The value should be assessed based on both intangible and tangible factors. Amongst intangible factors is the (a) specific cause, (b) quality of the good will generated within the beneficiaries it is serving, (c) good will generated amongst related and relevant stakeholders, (d) any outstanding or future legal or political liabilities that can reverse this good will.
Amongst tangible factors should be considered the (a) asset creation that has happened directly or indirectly on account of the client, (b) specific achievements of the client, (c) any specific intellectual capital that is created, (d) the extent of institution building that has happened, (e) extent of concrete engagement with the government (at local, state and/or central levels), (f) assessment of any contingent liabilities in form of possible financial impediments, etc...
A factor that stands apart from all of these is the specific age and health of the entrepreneur. The entrepreneur will remain the "agent of change" as far as the organization is concerned and is intrinsically linked to any future social capital creation. Attempting long-tenured changes without adequate surity on the factors of age and health is a serious operational riks to TIF. If TIF feels that it is not completely sure of the time commitments from the entrepreneur, an unfortunate and hard decision of not considerating the investee any further may need to be taken.
The Second and the Third Filtering Criterion The social value appraisal should be objective in nature. If any other organization, instead of TIF, conducts the appraisal it should be able to reach a similar realization of the inherent 'social capital'. Beyond this initial threshold investment decisions would invariably be influenced by personal considerations of the core team. These considerations though need to be rationale in the sense that they should follow, and be a logical outgrowth of, the specific values and beliefs of individuals comprising the core team, driving them to consciously, or unconsciously, give more weight to some factors over others. It is assumed that the core team will always be aligned in its base belief system thus not allowing for a lot of divergence of viewpoints.
In general such an appraisal carries within it a high possibility of going wrong. Every individual and institution, unconsciously, houses in its base a set of dominant preferences, almost rigid in nature, the influence of which is apparent if one were to carefully trace the contours of all historical decisions. Ideally, whether it be in the case of an individual or an institution, one would like to be able to discern these influences and control them rather than the contrary.
In the corporate world (the institutional component of it for sure), generating shareholder wealth is increasingly a dominant, (and in a hapless number of cases the only) element of the value system. The corporate world in that sense, as a class, is easy to analyze as it is more straightforward about where its head and heart lies.
In contrast, the social sector as well as the governmental institutions carry with them a characteristic risk because of housing multiple, and many times, opposing value systems that are concoted in an opportunistic and short-sighted manner in decision-making making one feel naturally averse to what may appear a more than bearable quantum of 'hypocricy' in several pockets of these class of institutions. Indeed, this perceived hypocricy provides enough firmament to those waiting on the sideline to tear these institutions down.
Ideologies and Values. The term "value" used above does not really convey the true picture. What is used in practice in making decisions in organizations that harbour a complex nature are actually "ideologies'. Thus, free-market based approach, capitalism, socialism, corporate approach, modernism, traditionalis are by definition and nature ideologies. In the creative fields one has the more refined term called "schools of thoughts".
Ideologies, per se, are by definition static and self-limiting because they are built upon a set of assumptions (or principles if you would prefer otherwise) which, while seemingly rationale at a specific point in time, lose their potency and relevance with ageing. Ideologies have inherent, unconscious biases that condition and force the decision-making in a certain manner. In pratice, it is often the inter-mixing together of more than a few ideologies that transpires. In cases where the ideologies have contradictory tendencies, the results, to put mildly, are of a confusing and not of a particuarly appealing variety.
To take an example let us consider the ideology that seems to be in current fashion: market-based approach to poverty removal. Seemingly benign it is an akward compound of "free-market" with "socialism" to generate "wealth" at the "bottom of the pyramid". The quoted words, if probed with some care, especially free-market, socialism and bottom-of-pyramid, reveal themselves to be three distinct attitudes of mind. And when these are combined with a term like "wealth" it throws the mind of the careful and caring individual into a headspin. Indeed, where and how does wealth really find its place within these three terms so that it means that same thing in context of all three?
Does it mean only economic wealth or a combination of social and economic wealth? What is the right standard of measurement? Shouldn't all wealth finally come down to provision and fulfillment in adequate measure of a set of "rights"? Or should it be necessarily codified, measured and discussed about in terms of economic figures alone? Can material provisioning automatically lead to wealth generation in other forms? Does a notion of "trickle-down effect" make itself evidence with a consistent vehemence in reality?
Exactly what role do the terms free-market and bottom of pyramid really play in all of this? What exactly is their definition of wealth in the context of "market-based sustainable and inclusive growth"? Is it practical but severly restrictive? To what extent is it a product of arm-chair concotion and to what extent are these drawn from an honest and unflinching view of the reality? Are these, in any way, close to the natural laws of society and existence in general? If a certain class of individuals were to act under the influence of such terms, to what extent would these terms aid and impede wealth generation? One is really at extreme pains to understand how do all these pieces fit gother in a natural manner in practice.
If indeed value capital has to form a basis of decision-making, then it has to be looked at not from an ideological perspective, but for lack of a better term, from a pure value perspective. What is a pure value perspective? It is a perspective that arises from entertaining thoughts drawn from a highly minimalist set of universal tenets or axioms which are intuitive and simple enough to be grasped, understood, appreciated and not refuted by any layman independent of his or her conditioning.
Difference between values and ideologies is a point of much confusion and difficulty to discern in practice. So a simple but possibly controversial example should help. Gandhian values when looked at as a whole resemble a certain ideology while Tagore's works when analyzed present a body of thoughts closer to universal philosophy. The former, while powerful, does eventually place artificial constraints on decision-making within present context. All of its tenets are not applicable across all time periods and a lot of them were specific to a certain context. They can provide an important point of departure. However, if they are adhered to with a fierce tenacity they may restrict the mind to move beyond the point of departure. Thus they cannot dominate one's thoughts in toto. The latter body of work is generally applicable to many more time periods and being a philosophy teaches how to think rather than what to think. It provides a vocabulary and grammar to think bottom up from a few fundamentals. Hopefully, within TIF, the core members share the latter disposition to develop and deploy their thoughts.
In the investment context, the challenge is to be able to trace back an investment decision to its raw elements through a series of questions asking "why?". If the discovered elements actually do not fall within the universal value set, the one can say that the "investment" does not meet the value test. Of course things will never be as linear as this. In most cases such a round of questioning brings one to a precipice from whereon there is a general 'leap of reasoned conviction'. But at least these method provides a check on the "internal" tendency to start with ideological pigeonhole(s) and instead develop a perspective as close to the organizational reality as possible.
Value capital. To appraise the philosophical framework of an organization is not easy. The condition has less to do with intellect and more to do with time spent with an organization in a state of heightened and objective alertness. Even then there is no surity that all aspects may have received just consideration. TIF will confine its scope of work with individual-led organizations. It will not be dealing with established institutions, or fledgling organizations with a formal institutional culture. Thus, the value constitution of the said individual will very much mirror that of the organization. Or it may be more accurate to state the opposite. Hence, as far as understanding the value base of the organization is concerned, the focus will be on the individual at the helm.
Within TIF, an obvious working rule should be that one or more core members should have known the proposed investee in a personal capacity for a period of at least one year, and that a majority of the other core members should have had at least one meaningful and in-depth interaction with the individual. These interactions should provide some reasonable basis for the core members to assess the value and organizational capital within the organization.
As far as value capital is concerned, one of the best indicators in this regard are the personal attributes and history of the entrepreneur. This would include an account of his or her personal journey and temperamental attributes. There are a few give aways to get closer to developing an intuitive sense of these aspects. These could be: (a) material sacrifice that the entrepreneur and those immediatley close to him have made; (b) kind of team that the entrepreneur has; (c) dynamics of interaction within the team; (d) temperamental volatility; (e) personal eccentricities; and (f) observable and recurrent mental blocks.
These aspects can be determined only through raw and frontal observations requiring sufficient time and a sensitivity to finer behavioural signals. Often what is done is a form of gross observation where in responses are observed to questions, or there is a response to a specific question. But the real information emerges when the guard is let down.
An important consideration will be the nature of the sacrifices the entrepreneur, or those closely associated with him or her have made, i.e., entrepreneur's personal material opportunity cost. However, this condition may not always be fully met, chiefly because there was actually no other opportunity for the individual to engage in. Either way, the overall philosophy and beliefs have to resonate at a personal level with each of the core team members. If there is a divergence of opinion amongst the core team on this point, the investment option should be deemed to be terminated.
Organizational Capital. The second significant consideration, organizational capital, comprises of the softer elements such as (a) culture; (b) integrity & trustworthiness of the organization as a whole; (c) the "second line of command" that the entrepreneur has, in terms of both capability & integrity; (d) degree of stability and alignment within the organization at various levels (leadership, governance structures even if rudimentary, lower attrition levels); (e) financial integrity & transparency though not necessarily efficient financial management. All of these require some experience, maturity and people with varied backgrounds to satisfactorily assess.
Given the nature of these aspects, there can be allowance for difference of opinion within core team on these. Further, not every test of 'organizational capital' may be met satisfactorily by the investee before hand. However, the reason for appraising and giving it importance at this intial stage is it promptly brings to attention some of the trickier underlying structural issues. These need to be given serious thought before proceeding further. Once the engagement has commenced with these issues either unknown, or not sufficiently provided for, at every subsequent step of the way there could be frictions. Initiatives will not seem to flow but rather would need constant pushing. Continuous pushing beyond a point creates internal organizational fault lines.
Further, in this regard, TIF has severe limitations. It cannot, per se, lead an organizational change but can play only a limited advisory role. The change, if any, has to be completely led and managed by the entrepreneur. But it is of extreme importance for TIF that all significant and open organizational issues are fully addressed before further changes of a more commercial nature happen at the organization. Additionally, there is an appreciable cost for TIF in preemptorily overlooking these aspects in terms of time commitments as typical organizational changes can drain away significant time and pyschological energy.
If there are any doubts or disagreements within the core team, these need to be discussed openly with the entrepreneur to ensure that his or her willingness is secured to engage in such a change endeavour. If it is perceived that there are significant risks to engage in such a change, especially if it can disrupt current organizational dynamics beyond repair, then this needs to be taken as a red flag. This, then, constitutes the third pre-condition or eliminating factor when deciding to cement an association with an investee company.
What is the "Moment of Truth"? The decision making process, in general, is always intuitive and probably, quite instinctive. Decisions are made first and perfect rationalizations are provided post facto. It is never possible to completely escape this element of human pyschology. But one can always provide safeguards against it at every step of the way. That is the reason why three filtering considerations described and discussed earlier are to be applied upfront. But these, in themselves, will not yield a conclusive answer on whether or not TIF should invest.
That final decision will be based, in a large measure, on the instinctive feel for something. That something could be the personality of the individual entrepreneur, the force and power of the specific idea that he is pursuing or just plain emotional attachment or association of one or more members of the core team to the underlying cause the organization is addressing. This is the "moment of truth". What drives this is again dependent on one's upbringing, education and professional exposure amongst other considerations. A most apt term for it is the average aesthetic sensibility of the particular group of decision makers. Rationality, or more specifically, Reason, usually is overpowered at this stage. In extreme cases, it simply breaks down.
Here too it is hope, in very strong terms, that the core team, as a collective, shares this realization. However it is very important that this factor be absolutely subordinate to the three factors listed earlier. Those are relatively more rational and can be subjected to reasonable analytical scrutiny and discussions. The instinctive factors are difficult to express and have a conversation around. So, once again, it is strongly hoped, and one can only hope, that "Moment of Truth" considerations are based more on experiential, value-driven and intellectual intuition than one based on pure emotion, prevailing popular trends, mass media opinions, desire to achieve instant recognition, secure easy funding, and so forth. That last, especially, leads to many institutions and organizations in this sector compromising on their very nature.
TIF, inherently does not possess any exceptional strengths to avoid these typical pitfalls. This document, is but one of many steps taken to put in place some safeguards. This document, in particular, goes through some pains to explicitly lay out the nature of TIF and its investment philosophy and approach because it knows, and acknowledges, that for all practical purposes, "Moments of Truth", or more accurately, "Moments of Emotions" will drive a lot of decision making in future. By being explicit about things, one can start institutionalizing the thought process. If the institutionalization is done in earnest in the right way, and respected, it is the biggest dampner to raw and unchecked emotions and the biggest guaranty of longevity. The challenge of course is to follow the letter of the law not in form but in spirit.
Where should the client go?
Once the core team is convinced of the essential merits, and understands and accepts the demerits of the "intangible capital" position of the enterprise, a step is under-taken to identify how an organization wants to evolve as well as possible areas of organizational intervention.
Attempting to answer these questions is usually characterized by indefiniteness, lack of clarity, and, at times, a wavering mindset. The leadership can usually articulate the broader vision more concretely, but that is of only modest help when identifying a workable model of the organization and developing a plan of action taking account of its inherent limitations.
Of greater import, however, is the attitude of the one posing the question to the client.
Where lies the anchor? In the commercial investment & advisory context, discussions such as where a client should go are centered around maximization of enterprise value; a term which is seemingly well accepted and amenable to rough quantitative approximation in financial terms.
Conceptually, it consists of two parts: a current value and a future value. Much of the energy in commercial investment is expended in affixing a near perfect quantitative measure to the future value component giving rise to painstakingly prepared multi-year business plans which serve to provide a sound rationale for infusions of appreciable doses of capital rather than to serve as reliable tool in management decision making.
Unfortunately, the same trend, albeit in a subdued hue, is also being applied in the social investment field what with the undue fascination over creation of business plans as a vitally important document. The supposed rationale is it helps clarify the thought process, gets the entrepreneurs to think more in financial and managerial terms, and communicate the same in terms which the mainstream business professional class understands. The base intent, or purpose, is of course commendable (in case the reader missed it: that remark was meant to be bitterly sarcastic). But it has ended up occupying a considerably larger share of mind than is really necessary of those who wish to provide support as well as of those who wish to receive it. LIke in a lot of aspects, the form has triumphed over the substance. This disproportionate emphasis holds restricted meaning and appeal for social enterprises as a class, be it for-profit or not-for-profit.
The basic fact being sorely missed out is that the raison-d'etre of entities in this class is their unique intangible asset position in form of social capital, organizational character, and values. It is ultimately the maximization of this capital position that is the very identity and purpose of this class of entities, while the tangible assets but play an important but enabling role. How the very identity can be captured in pure financial terms defeats comprehension.
There is a very strong place for balance sheet and income account of a social enterprise --- as excellent and highly reliable tools to manage the entities. Their place, however, is not as objectives to be delved into and refined. One of the chief reason for wrongful emphasis of financials of a social enterprise is the incessant, and unfathomable, justification with the terms of scale and financial self-sustainability. Combined, these two have done considerable damage to the investment & advisory activity in the arena of social enterprises.
Emphasis on physical and financial growth assumes primacy, by necessity, in only a specific type of enterprise -- an industrial mass production system, or more generally, in any enterprise, that by its very nature, relies on and consumes appreciable amount of 'returnable financial capital'. Growth remains, over and above any other measure, the only way to justify such investments and generate the necessary returns on such investments.
Even within the realm of commercial entities, not every entity needs to be obsessed with volume growth. In a privately held and financially well-managed commercial enterprise, the growth may quite likely be financed through internal accruals, and, as a result, will necessarily be self-contained and limited. However, wherein large external injections of capital are resorted to the price paid is the single-minded focus on an ever unsatiating appetite for financial returns.
It is indeed an unfortunate tedency which has developed amongst institutions with access to large pools of capital where every possible type of enterprise is slotted into 'growth/scale' framework. To provide a different perspective on this point, one does not, per se, expect an artist to mass produce his work. That would dilute the very nature of his work which by definition is highly creative, context-sensitive and personal in nature. What one does ask of the artist is in fact that he expand internally in scope, thought and quality of his work.
One is logically permitted to ask why should one demand mass-production like commercial attitude of enterprises engaged in social value creation? A typical social enterprise combines elements from social sciences, ethics, a deeper understanding of human pyschology, various types of rights -- amongst a number of other disciplines of knowledge. As a result, it acts on much broader definitions of wealth and well-being. Quite a number of these enterprises also very transparently reflect the individual creativity and value orientation of the founders.
There were historic guilds of artists and artisans. But the formation of guilds meant not so much to commercialize art & craft as to provide a legally and financially protective and enabling environment for its members to practice their craft & creativity and ensure adequate sustenance. Forcing the members to change the way they produced the objects of art & craft merely to ensure 'marketability, scale and financial sustainability' would have defeated the very purpose of forming the guild in the first place.
Attitude of an enterprise and those actively shaping it is easily visible in the statement of objectives of some of the emerging social enterprises such as "Opening of X number of branches of N years; Impacting Y patients in next 5 years". At some level, the entrepreneur feels obligated to commit to these even though deep down he knows he has little inkling of what the concrete and practical roadmap is to accomplish these which is based on sound experience and tested guidelines.
This over-emphasis on quantitative increase in output is a serious risk to an entity of this nature. One does not have to look afar. Microfinance in India bears a somewhat sad testimony to this misadventure. Rather, preserving the current social capital, making it more robust should be the first step. Quantitative increase can, if required, supplement that effort and should not supersede it.
The physical form may still be an organization (even a for-profit Pvt. Ltd.) because it is only through an organizational and institutional form that long-term wealth generation (whichever way one defines wealth) can happen. Such an organizational form mandates and demands quality management expertise. To that extent, social enterprises also draw from the merit and principles of good organizational governance, financial prudence in decision-making, learnings from the vast and significant body of operations & production research, and Information systems with regard to building of reliable organizations.
Access to material, financial and managerial resources are required to conduct any activity well over a period of time and these need to be ensured in adequate measure. But utmost caution should be exercised that organizations are not morphed into one's whose primary concern becomes acquisition of more and more of such resources, which are essentially supplemental to its purpose, but over time can become central to it.
In purely operative terms, it is easy to characterize two broad classes of organizations. At one end are organizations whose thinkingand character are dominated by an attitude of acquisition of more such material and financial resources. At the other end are organizations whose thinking is dominated by generation of more social capital. Either extreme when pursued in isolation is unhealthy. The above classification and generalization, admittedly simplistic, nonetheless provides a perspective on the right attitude to be taken..
To conclude and summarize, the intent and attitude should not be to draw the social enterprises away to become more commercial-like in guise of scaling them up, and/or making them financially viable. The intent should be to formulate and apply an approach that builds a good enough layer of tangible assets to protect, preserve, and develop the intangible assets.
The approach should involve, amongst other aspects, the highest grade of financial prudence; a balanced attitude towards discipline in execution; a professional-like governance mechanism (but not overtly so); institutionalization of processes and systems to the extent necessary; and a communication & positioning better aligned with the current climate.
This approach differs from the prevailing tendency in one singular aspect: it requires decision-making to be in a constant mode of scrutinizing, in a deeper and penetrating fashion, the trade-offs between commercial & financial considerations on one hand, and preservation & nurturing of social capital on another. The agenda of growth would have to be balanced against that of real development.
At the end, singular focus on self-induced growth (in spurts, unlike a naturally flowing one) is more an outpouring and expression of ego of an individual or collective in the entire scheme of things. Those whose hearts lie with the cause tend to have a slightly contrasting attitude on this front.
Lexicon, a mirror to the mind. A discipline of knowledge, or for that matter, a profession is understood as well as shaped by its basic terms and rules of grammar. Typically, the lexicon is built up organically over a period. It will keep getting influenced, and borrow generously, from various sources. But ultimately a lexicon unique to a discipline or profession will emerge as an integrated whole, or at least, what appears to be an integrated whole.
A significant portion of the lexicon of social capital, for a long time, comprised of terms that had evolved over several decades. An overarching framework was that of social equity --- and not just in material terms. The conception of social equity was expressed in terms of a rights-based approach. The terms aligned to a rights-based approach had significant philosophical import and meaning. Any sense of levity with regard to them would have been a reason to invite censure.
The forms of organizations and individuals involved in social capital generation came to be termed charities, foundations, trusts, non-governmental organizations, co-operatives, social reformers et al. Then of course there were the movements, 'aandolans' which were methos of building pressure on targeted groups of stakeholders.
This lexicon of social capital derived its purpose and meaning from experience of several individuals. These experiences were valuable and taught a certain way of thinking. It has been the fashion for sometime now to increasingly discard the above lexicon terming it outdated and not relevant in the present milieu. Part of the reason is that, like in any field, the lexicon has been misinterpreted or abused.
There is a term much in vogue now called market-based approach. It is deemed as a sacrosanct way to achieve scale and financial sustainability for the benefit of society at large. It is real concern when even policy-makers start deploying it with ignorant or careless abandon. One is but struck by one thought: if the intent is to really benefit society at large, then shouldn't it be the case that it is social capital that needs to scale and sustain? In that case, shouldn't the operative philosophy be one whch focuses on social capital generation through incorporating selective meritorious practices of corporate-method of decision making within the developmental organizations? But experience bears out a different story: more often than not the dominant operative philosophy is treating these same developmental organizations through the narrow lens of a 'business plan'.
A factor which explains, but does not justify, this attitude is the belief that if the 'business model' works and adequate capital is put behind it and intelligently deployed, growth would happen as a logical and natural outcome. This belief, in turn, is driven by the surplus financial liquidity impatient to chase the 'social dream'. It may just be a phase and pass-over, and the history of the future may not take so kind a look at it. But in waiting for the judgement of the future, this phase may do significant damage in the interim.
Unfortunately, the right unit of analysis is not the 'business model'. It is ironical that the terms business and model are quite liberally applied in case of development sector organizations. A 'model' implies something of which the principles of operations are well understood and amenable to reasonable codification. Once this codification is complete, it is simply a question of ensuring the right inputs are available and the principles will work as expectted generating the desired output, give & take a few here & there. When such a line of thought is placed next to the term 'business' one has to put forth a very strong objection, viz, can any respectable institution be codified in this manner, especially the ones engaged in generating intangible social capital?
For to model an organization or enterprise of this nature, i.e. to decode its principles of operations, presumes a really solid understanding of the nature of its output. The term 'business' is woefully inadequate to represent social capital. It may well be resonant with entities selling consumer goods, entertainment services, et cetera. But one has to really ask oneself whether this term is justified, on both logical and philosophical grounds, to be used in a very different context?
What has happened is a wholesale import of 'business ideology', and not a carefully thought through construction of a framework based on first principles. The latter is extremely difficult and is unlikely to happen for some time to come. But one does not even see a recognition of the same within the mainstraem, and among people, who by a combination of merit and good fortune, happen to hold significant positions of decision-making.
What is social capital? At the core, creation and nurturing of any organization and, in particular a social organization, is a creative exercise. There is a large degree of science and system behind running them. But fundamentally, social organizations are intensely personal in nature, both internally and externally in their interaction with the people they serve. The basic unit of output generated generated is an 'experience' which fulfills the social need.
Putting a measure on the mark. There is a term in the world of financial investments called intrinsic value. It is at once a very simple yet an all-encompassing powerful term. It is a measure of the intrinsic worth of an organization expressed in financial terms. It is often the case in sciences that the power of a principle is its simplicity. Such a principle can take a seemingly complex natural system and conceptually boil its essence down to a point. Right understanding is just the beginning. Once you can reduce that understanding to a point, you can play around it in your head and use it best to create new systems out of it. Intrinsic value is equivalent to the "point" of the financial investing univerise. A good grounding in the principle would come from the voluminous and scholarly writings of Benjamin Graham; or if you are short of time, Warren E. Buffet's letters to shareholders of Berkshire Hathaway.
It would indeed be an unreasonable but, most probably, an outrageous thought to discover the 'point' for a social organization. But that does not preclude trying and engaging in a process of discoery. And there may just be a logical way to arrive at a rough conceptual framing of it in specific context of social, or develompent sector organizations.
Intrinsic value in financial investing recognizes and measures the underlying financial worth of an enterprise after considering all relevant quantitative and qualitative factors of strategic and philosophical importance. Let us, for a moment, replace the term financial worth with social worth; or, more accurately, social value. Let us also say that there is an intrinsic measure of social value available. Continuing our analogoy, the intrinsic value in the case of financial investments can be expressed as a linear combination of value of different assets, both tangible and intangible. Is such a decomposition feasible in computation of social value?
Of course, we have conveniently bypassed the tough question of how to define 'social value' of an organization. Actually, if one really penetrates with discernment, the term intrinsic value in financial investments is an equally abstract term. What does it really mean when one says a business is worth 100 million? It means the present value of discounted cash flows is 100 million under reasonable business conditions and using time-tested conservative assumptions. The number 100 million definitely means something, but not as much as one would like to believe. It gets it real meaning because (a) it is expressible in a definite and measurable form which is unlikely to change over a sufficiently long-period of time; and (b) there are enough people willing to accept and act on this form of expression of intrinsic worth.
On the other hand, the moment one talks of social value one of the reaction is of a raised eye-brow, and an impression of the individual being wordly unwise. One can debate the reasons for this but an evident one is certainly that the term social value cannot be captured so easily in the language of numbers and definite physical conceptions. At some level, there is an element of, for lack of a better word, religious experience involved in fully internalizing the meaning of the term social value. And a corner stone of such a religious experience being the language and test of conscience.
Trying to equate social value with the number of people impacted represents a superficial and dim view of things. Equally, proceeding on blind faith in the "power and goodness" of the underlying cause is equally naive. Appraisal of social capital will necessarily be largely in philosophical and religious terms which, however much as we might try, cannot certainly evade the necessity of a proper language to talk in.
In the arena of financial investments, the balance sheet and income account, if analyzed thoroughly and objectively, provide a detailed view of the inherent strengths and weaknesses, and thereby an indication of the financial position of the enterprise. On this is added a growth factor to arrive at a rough measure of valuation. This overall approach is somewhat broadly understood and established. Is it possible to arrive at an analogous logical and sequential approach when evaluating an organization engaged in work of social development?
Usually, the language of conversation in context of a developmental organization is in terms of activities, initiatives and projects. These terms ideally should cohere around a set of principles and ideas. It can be argued that the instrinsic worth of a developmental organization is the tangible worth of its operational activities, initiatives and projects, and the intangible worth of its principles and ideas. The former can be thought of as the form of the organization, while the latter the substance. The former can be assessed in terms of metrics of impacts which are fashionable amongst donors (and impact investors) today. The latter, on the other hand, is usually not given much heed to in conversations, which is remarkably surprising because it constitutes the intent behind all the tangible factors.
It is possible that two organizations carry out the same tangible actions but with every different intents. The impact metrics will be the same for both, however the 'effect of the impact', to use an unusual and language-bending phrase, will be remarkably different. Without going into further elaboration, suffice it to say that it is indeed feasible to apply a mental model to assess the intrinsic worth of organizations in the development sector which is analogous to that of the financial investment universe. The specific techniques and methods will differ, the but logic does not.
Assessing the intrinsic worth. So how should one go about assessing the tangible and intangible components of intrinsic value? The reader may be surprised to learn that as far as the tangible component the approach starts with the actual financial statements of the organization, akin to that of the standard practice in the case of financial investments. However, this is where the similarity ends. While in the case of financial investments, the prospective investor would like to understand the financial strength, capability and future potential of the enterprise at hand, in the case of a developmental organization the question is one of assessing purely the stability and security of its financial strength as well as do its finances reflect the nature and character of its activities. The reason for this divergence is plain and simple: because the intent is to invest in the development of the organization and its mission, and not make it grow to improve its surplus.
This holds true even when the organization at hand may be euphemistically called a social enterprise. This point is specially relevant because under the misnomer of the term social enterprises, most financial donors and impact investors end up applying the tricks of the trade of the world of financial investments which recasts a mission driven organization as one with a business plan which is forced to show a secular, and in some cases, hockey-stick growth, for years to come. It is a bit of travest to put it mildly.
On the other hand, the individual interested in organization development would be better placed to devote himself to first get a sound understanding of the cost structure and balance sheet position of the organization in question. He or hse would ask for the books of accounts, and if he or she is a scrupulous sort, the journal entries for the key heads of accounts, or the trial balance at the minimum. High-quality, reliable, and disciplined book-keeping is a rarity even in the Indian corporate sector, so one should hold on to modest expectations from the developmental sector. Not because there is no desire on part of the sector to do so, but often the pool of talent available is limited, and in some areas non-existent. So, the data available may be uneven in terms of quality and quantity. Nonetheless, this is as concrete a data as one can expect to get, and it is important to make full use of it.
The journal-level financial due-diligence is an important step because it throws light on how, and the attitude with which, the organization conducts its affairs; and it immediately shows, or gives strong hints, of inherent organizational faultlines. Idealism and discourse with sweeping ideas suits the leadership of such organizations. For an investor of organization development it pays to bring a sense of financial realism, a scrupulous attitude, and an operational pragmatism to forewarn and prepare the leadership against the inevitable troughs which it will have to cross at periodic intervals during the journey of the organization. This attitude on part of the OD investor constitutes its singular contribution to the organization.
Defining the identity of the organization. This assessment, or rather definite expression, of the intangible worth of the organization is a slippery step to climb as it essentially determines what really constitutes the nature of the organization. When doing an outside-in advising what seems logical and do-able is not necessarily so if one is put in the seat of the leadership. Similarly, the leadership will most often be caught within a certain pattern of thinking blocking possibilities which are consistent even with the present financial and operational realities of the organization. In some ways, the nature of the organization is a mirror of the pattern of thinking of the leadership.
The objective of this s tep, then, is to re-shape that thinking at the outermost level --- taking account of the financial constraints identified in the first step. "Outermost level" implies the identity of the organization, i.e., the answer to the following sequence of steps:
1. What are the activities that the organization is currently immersed in?
2. Why is it doing these activities?
3. Basis these activities and the reasons underlying them, what is the identity of the organization, both in functional terms as well as in terms of its inherent character?
4. Is this identity in line with what the leadership or owners think is the true identity of the organization? If no, how big is the gap?
[Transcription in progress ... ]
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