Mission-Related Investing: A Cautionary Tale
September 12, 2011
(David Jacobs is director of foundation information management at the Foundation Center. In his last post, he wrote about journalism, objectivity, and foundation funding.)
Always eager to find ways to leverage their assets while advancing their organizational mission, foundations increasingly are turning to a new tool in the grantmaking toolbox: mission-related investments (MRIs) -- i.e., investing a portion of their assets to achieve both financial and social gains.
Such investments are still relatively new territory for many foundations. And as with anything new, we've see some early missteps that provide valuable learning opportunities for the field. Case in point is the bankruptcy of Solyndra LLC, a presidentially-hyped solar energy equipment manufacturer that received significant investments from the George Kaiser Family Foundation (among others), as well as more than half a billion in government loan guarantees.
According to a recent article in the Washington Post, Solyndra offered a unique solar-panel technology and the promise of four thousand "green" jobs. But the design proved to be too expensive to compete in the marketplace. The foundation attributed the loss of its investment in Solyndra to "the company's inability to overcome serious challenges in the marketplace, especially the drastic decline in solar panel prices during the past two years caused in part by subsidies provided by the government of China to Chinese solar panel manufacturers."
While the fallout from the bankruptcy may not be apparent for some time, it's not too early for those engaged in or considering MRIs to focus on some key takeaways that have presented themselves in the wake of the company's demise:
Don't skimp on due diligence: Although Solyndra promised to create thousands of jobs, the company was saddled with what turned out to be a fatally flawed business model. Indeed, Peter Lynch, a longtime solar industry analyst, told ABC News that the company's eventual fate should have been obvious from the start. "Here's the bottom line," said Lynch. "It costs them $6 to make a unit. They're selling it for $3. In order to be competitive today, they have to sell it for between $1.50 and $2. That is not a viable business plan."
Know when to cut your losses: Although Solyndra was running into significant market difficulties, the foundation decided to continue its support -- even after many of the company's other backers had ruled out additional investments. "We were at a point to where we thought we had the investment necessary to move forward," David Miller, director of corporate communications for the company, told Tulsa World, "but those investors looked at the market conditions and decided not to move forward." Miller said the Kaiser Foundation, which had an estimated 35 percent equity stake in the company when it filed for a $300 million initial public offering in 2009, was not among the investors who decided to pull their support.
Avoid any appearance of impropriety: Although the foundation insists that George Kaiser himself "did not participate in any discussions with the U.S. government" regarding the $500 million in government loans Solyndra received, the fact that Kaiser was a high-profile Obama donor has raised uncomfortable questions that the foundation is being forced to address. Assets can always be replenished, but credibility, once squandered, is nearly impossible to regain. Investment managers need to note both the optics and ethics of any mission-related investment they choose to recommend and pay special attention to the often-complex web of associations behind any high-profile project.
For that matter, investment managers recommending any MRI would do well to consider all aspects of the target company's business plan as well as the market for its product(s). It's not enough for a company to be engaged in a cause near and dear to the hearts of foundation trustees; after all, bankrupt companies are not in a position to advance a charitable or social agenda. Yes, companies will continue to fail and investments will be lost: there's no such thing as a sure thing in business. But by viewing the rise and fall of Solyndra as a cautionary tale, one hopes that other foundations will be better able to avoid difficult questions and unpleasant situations going forward.
-- David Jacobs