Kevin and I spent a lot of time in the early 2000’s talking about the fundamental flaws in a market system that was clearly benefiting a smaller and smaller number of people. We joined

Kevin and I spent a lot of time in the early 2000’s talking about the fundamental flaws in a market system that was clearly benefiting a smaller and smaller number of people. We joined forces with Mark Beam, a former investment banker I’d met during a birthing class when both our wives were pregnant. The three of us started a non-profit organization called Collective Intelligence. Our founding question: How can we accelerate the flow of capital to good?

Historically in the U.S., a little over two percent of GDP is philanthropy, money we could generally say is focused on good. That leaves 98% of economic activity in the U.S. on the for-profit side. If we could help to catalyze more positive behaviors by startups, corporations and investors, even a small percentage increase on the capital side would have huge benefits to society.

As a veteran journalist, Kevin began interviewing anyone he could find, and Mark designed a “map” of the social capital landscape at the time, showing the major organizations involved, and the gaps where innovation and capital were needed. We also became involved in helping to coalesce a group of perhaps 50 San Francisco-based professionals ranging from traditional foundations to high-net worth advisers (The Capital Catalysts) who were also passionate about encouraging a business arena focused on “doing well and doing good.”

In 2008, Kevin, Mark and I, along with my wife and business partner Heidi Kleinmaus, Kevin’s wife and business partner Rosalee Harden, and social capital guru Tim Freundlich, founded SoCap: Social Capital Markets, a conference that bridged across traditional silos to bring together investors, entrepreneurs, foundations, consultants, government, and researchers to talk about “the intersection of money and meaning.” We were “lucky,” in that registration for our tiny gathering suddenly exploded when the Lehman Brothers investment firm imploded three weeks before our first event, and Wall St. bankers fled the resulting capital conflagration.

Over time, we developed a thesis that more capital would flow to good if certain market conditions could be encouraged. What kind of market behavior could we envision that could move the needle?

1. We needed “better” entrepreneurs. Driven by their hearts, many people who wanted to do good in the world started non-profits, which are inherently financially unsustainable. They need a constant flow of donations and volunteers to survive. We wanted to encourage entrepreneurs who could build sustainable businesses that could do good and do well.
2. We needed better businesses. As Kevin frequently pointed out, impact businesses often have a “cost of good.” If you hire young, untrained workers, you may have higher training costs and more rapid turnover than your competitors. But you may be able to publicize your social mission, and charge higher prices for your products or services. That calculus needs to be baked into the company’s sustainable business model.
3. We needed new forms of capital. Most money in the world is motivated by one of two major drivers: Market return and philanthropy. Kevin also coined the phrase “two-pocket thinking.” Market-return money just wants to generate the highest return possible. Philanthropic money wants to make zero return, with only psychic gain. To support impact businesses, investors needed to think differently. One approach was to “blend” returns, an approach championed by Jed Emerson at the Roberts Enterprise Development Fund (REDF), a foundation started by the legendary George R. Roberts of leveraged buyout firm Kohlberg Kravis Roberts (KKR). And we needed many other ways that capital could be channeled to businesses that avoided the kinds of negative results that can come from pure-profit businesses.
4. We needed patient capital. Traditional venture capital at the time was optimized for a six-year return on investment (nowadays trending more towards a decade). But impact businesses can take longer to find their markets and generate a return, so we needed investors who could stretch out their returns over a longer horizon.
5. We needed partnered capital. Zero-return capital such as foundations and governments can help to reduce early-stage risk, and market-rate-return capital can help to scale businesses. Today these are known as Public-Private Partnerships, or PPPs. For example, one category of PPPs today can be used to fund community broadband networks.
6. We needed new forms of corporations. The traditional C and S corporations didn’t allow for the kinds of agreements that impact entrepreneurs and impact capital needed, such as the commitments for the social benefits the organization planned to generate. A variety of states ended up creating “benefit corporations,” and the most iconic are known as B-Corps.
7. We needed existing corporations to sign on to having a purpose. Even if every startup committed to a social purpose, it wouldn’t move the needle as much as if existing corporations developed their own social contracts.
8. We needed metrics for good. Entrepreneurs and investors needed to be able to make data-driven decisions. That means an industry-wide set of standards for tracking impact. One example: The Global Impact Investing Network (GIIN) ultimately developed a set of standards known as IRIS, outlining metrics for impact.
9. We needed foundations to invest the corpus of their funds. U.S.law requires foundations to invest only a small percentage of their assets each year, an amount usually easy to recoup from investments. But why wouldn’t you want to invest the main funds of the foundation in doing good, or at least in not doing bad? And, perhaps the two most important:
10. We needed existing corporations to expand the range of stakeholders beyond shareholders, to include employees, customers, partners, disadvantaged populations, communities, and/or the planet. If an organization only exists to benefit shareholders (thanks for nothing, Mr. Friedman), the organization has far too many incentives to declare damage to society and the planet “negative externalities,” and absolve themselves of responsibility.
11. We need to reimagine the fundamental nature of capitalism, to what I call Inclusive Capitalism, deliberately revamping the design of a system that guarantees the flywheel effects of exclusion, and instead use relentless innovation and adaptation to meet the needs of the broad range of stakeholders.

SoCap, which has championed those changes for a dozen years, exists today. Eventually each of us in the founding team handed the baton on to others, so today a new organization runs the event, which in 2019 brought together over 3,500 people from around the world — when, of course, the world was still gathering in person.

Hacking Markets for Impact

This kind of systems thinking is important when trying to catalyze large-scale change, because it envisions the kinds of market conditions that would encourage a more positive future. We never claimed that we were the ones who accomplished these changes. Instead, we championed the need for them, in countless conversations with what we called ‘the coalition of the willing,” comprised of people who saw the same possibilities for a more broadly-beneficial economy.

I call this approach “hacking markets for impact.” If we see these movements as simply catalyzing disruption, they can be very difficult to predict or influence. But if we see them as market shifts, we can understand how capital, buyers and sellers act today, envision their possible motivations tomorrow, and help to encourage the conditions under which that market transition will occur.

So what do we call this burgeoning form of capitalism? In 2004, we called it “accelerating the flow of capital to good.” In 2008, we called it “doing well and doing good” at the “intersection of money and meaning.” In 2010, Business Insider co-founder Henry Blodget called  it Better Capitalism. In 2019, many are calling it “ Stakeholder Capitalism.”

I’d like to make the case for “Inclusive Capitalism.”

The major flaw of America’s peculiar form of capitalism is that it guarantees positive outcomes for the few, and not so much for the many. That’s a heretical statement to many who believe that “raw capitalism” (my label), without guardrails against negative externalities, remains the best economic system humanity has ever invented. They are partially right: It’s a great economic system for those who figure it out. But it’s not an inclusive economic system where a range of barriers advantage some and disadvantage others.

For example, the U.S. tax code rewards capital over labor, by taxing capital gains at a lower rate. That may have made sense when we needed more roads and factories. But the last time I looked, we have lots of roads and factories. Yet capital still trumps labor. So you can’t simply work hard and outstrip the returns of capital, unless you start with capital. In 2016, the richest 10% of households controlled 84% of the total value of U.S. stocks.

Yet we know that capitalism can bring broad benefits, because its benefits were more broadly distributed in the middle of the 20th Century in the U.S. And today, countries such as the Nordics and Germany have designed a different dynamic, maintaining a more even table between work and capital through mechanisms like protecting worker rights. But the U.S. economy doesn’t function as inclusively as it did in the mid-20th century, and because it takes broad commitment from a society to change an economy, it will take a significant amount of innovation and capital to hack markets to do more good at scale.

The Work Still To Be Done

Depressingly for me, progress in the arena has been slower than I’d hoped. I believe that a series of seismic events, such as our planet’s decaying health, growing inequality — and, yes, a global pandemic — will help to shift our collective intelligence toward the “wicked problem” of creating more inclusive economies. Such as:

• Inclusive Business Models. Courageous CEOs and Boards of Directors need to infuse deep commitment to Inclusive Capitalism, not simply by dropping slogans into annual reports, but by changing business models to guarantee sustainable inclusive practices, such as inclusive hiring and development, and unshakeable commitments to benefiting stakeholders beyond shareholders.
• Revamped Venture Capital. Traditional venture capital is part of the problem, with inevitable incentives to generate returns for a small number of investors. The entire investment model needs to shift to inclusive capital, encouraging women and minority entrepreneurs in numbers far more reflective of the actual demographics of our country.
• Ending Winner-Take-All Markets. The combination of network effects  and increasing returns  often guarantee that only one or two dominant players win. Research closely connects  monopoly power with inequality. We need to understand the dynamics of these markets, and have in place a series of economic guardrails that keep disrupted markets from becoming dominated ecosystems.
• Changing Systemic Incentives. Revamp the tax code, and legislate to change the power dynamic for everything from small-business loans to access to education.

We all need to remain dedicated to creating the conditions that ensure a dramatically more inclusive economy — an economy with the incentives so that everyone can do well and do good.

-Gary A. Bolles, Partner, Charrette LLC, San Francisco

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