 When you work in this field, you meet a lot of amazing people and Some of them there are amazing because of the work they're doing some are amazing because they're so willing to spend their time with you To exchange ideas with you. I hope you all meet those people while you're at SoCAP I'm excited to bring to the stage two people who I absolutely cherish every minute. I get to spend with them I've learned more from Fran Siegel over the last five years than just about anybody else and Ariane I've met more recently but is someone who's always thoughtful always wants to hear a good question and The benefit of having them both up here Is not because they're wonderful people but also because Ariane is one of those people who has found that magical space where Financial return and impact are not compromised. He's running a very successful fund called core innovation capital And I'm excited for you to hear from them the way that works the way Ariane thinks about this work the impact that he's having and all Of the other topics that they're gonna fit into the next few minutes. So please welcome Fran and Ariane Can you hear me? I'm Fran Siegel. I am chief investment officer of impact assets Which is a nonprofit financial services firm focused on increasing the flow of capital to impact investing And I am delighted to be in dialogue with Ariane Shuta who is a founder and managing director of core innovation capital Just we wanted to kind of contextualize our discussion for a moment You've heard this morning a fair amount about About mainstreaming and about incumbents entering the field institutions putting capital to work and Ariane and I are both really passionate about democratizing About making financial services making impact investing available to all to the retail investor And so we hope that we can offer a slight point of contrast to some of the other speakers this morning The other thing is we talked a lot about the supply side of capital. So drawing more capital into the space Whereas Ariane's work and his partner Kathleen as business partner Kathleen Put put money to work and so we'll be talking about impact entrepreneurs not just the supply of capital But also the demand for capital so a first kind of opening salvo is the core innovation invests in companies that serve the domestic unbanked and underbanked so I'm wondering if you could talk about what that market is and Quantify it if you can and talk about why the sector is growing sure So thanks Fran, and it's great to be here I kind of came to this after reading a book about a guy named Muhammad Jonas And he was new to me and microfinance was new to me I'd spent a decade building educational software and a bunch of venture-backed companies and I Was just really genuinely blown away with what they'd done And I'm an immigrant here myself And so I didn't want to go to Bangladesh or India and I was really interested and kind of inspired when Al Gore was sent packing When he went to visit India and talked about global warming and they said you come from the biggest polluter Go back home and fix your own backyard And so I've been really inspired to do what we can from our side to fix our own backyard So I went looking for who's doing this kind of stuff in the United States, and I found myself in south side of Chicago Visiting with the founders of shorebank for some of those who who know about shorebank They've from their little corner of things done an incredible amount to really advance Community development and financial inclusion not just in Chicago or in the United States, but really globally And so while on one hand I was really like deeply inspired by what they'd built I also looked at what that community had done in terms of scale and after about 40 or 50 years the community development movement while it has done remarkable things in local neighborhoods if you add it all up and look at it from a United States perspective is Serving about one half of 1% of the population And so it hasn't scaled particularly well, and so one aha was gosh, there's incredible work very powerful Important and powerful work going on, but it hasn't scaled at all. And so When you look at the United States, right the income divide is growing and that represents a dire policy problem many many tens of millions of customers underutilized traditional banks and Overutilized alternatives those alternatives are extremely expensive It's expensive to be poor as it sadly turns out and So this is also a dire need and But there's also a flip side to it, and that is that is not just the need. There's also is an incredible opportunity And so as we started looking at how do we reframe this as an opportunity, right? You start looking at it from a revenue perspective and so Then the need that we have around Financial security for low-income people in the United States and financial mobility for yet low-income people in the United States Actually represents about a hundred billion dollars on annual revenue that low-income people spend on very basic financial products all products that Probably almost everyone in this room gets for almost free And so no matter how empathetic we all may be we basically live in a bubble and it is hard to imagine the Incredible expense that is incurred by an incredible number of people who live all around us And so looking at it through a market lens was really the aha that led to the creation of core and to the thesis of investing in financial services companies that could serve low-income people at scale to the tunes of tens of millions as opposed to Hundreds or thousands or maybe tens of thousands And do so in a way that is profitable and Uplifting for them economically. Mm-hmm. I spoke yesterday in a session with Kathy Clark about how focused I am on the microfinance movement and global sustainable agriculture lending in emerging markets and you touch on this a little bit but but how Those markets in some ways from a lending perspective are ahead of the United States and what can we learn? from microfinance and global sustainable agriculture, which really look at the rural poor and the urban poor as Strong credit risks and what can we do to help build the credit rating of a folks at the bottom of the pyramid and Just wondering if you can kind of elaborate on that you have roots in in both microfinance and Community community banking, but it just occurs to me in the wake of the financial crisis and subprime lending that The low to moderate-income folks have kind of gotten a bad rap in some ways worse than ever before And so can you talk a little bit about those some of those market factors? Yeah, so clearly there's a lot to learn From what's happening around the world and in many very important and annoying ways the United States is antiquated and behind from its financial services offerings However, we've and I've I've been scouring for a decade now to find ways to translate What's happening abroad and apply that here? It's very it's been very hard to do that in many cases literally Because the the in the financial services infrastructure United States is so different There are other places in the world where they are similar like South Africa or Brazil or more similar than Or the UK or the EU than many other places But it's hard to replicate literally and so what what but where there is tremendous power and Lessons from abroad to be applied here is more metaphorically speaking and so for example this notion of a social Lateral is something that the United States barely utilizes so there's about 70 million Americans Who don't have a FICO score and that doesn't mean that they are? Subprime or irresponsible. It just means that there isn't the data in TransUnion Equifax and Experian that create a FICO score and so they're invisible and so It's a continuous challenge for the United States financial services system to underwrite this customer Accurately so they're not risk-adjusted. They're basically treating all of these thin file or no file customers as subprime customers at their detriment and so The microfinance world for example has figured out very powerfully how how you use your Community and your friends and your loved ones and the notion of shame for example to decrease defaults that is Hardly utilized the United States and is a very powerful idea And one of our portfolio companies is actually trying to do that in a very modern way so we invested in a company called vouch And vouchers trying to be an alternative to a payday loan payday loan famously cost three-digit APRs it's easy and to get you know riled up about that at a cocktail party But vouch is trying to Address the same customer at one-tenth the price of a payday loan largely by helping people leverage their social collateral so Helping the lender vouch basically determine the the resilience of someone's character and character is really hard to define and so they basically allow you to Engage your social community to vouch for you to sponsor you you can either say Fran I think you're responsible and it'd be a kind of a soft vouch Or I could if you're trying to borrow five thousand dollars I could say I'll back you for a hundred bucks and you could get ten people to back you for a hundred bucks It's kind of like a cosine and that's a very modern online Translation of a very old idea right that's existed in microfinance for a long time and and You know more old-fashioned forms of borrowing for millennia before that So as an example of how of how we're kind of metaphorically importing some ideas from abroad So I think of the kind of investing you do at core as kind of fintech for good For fintech for impact. There's been a lot of discussion around fintech It's it's quote-unquote super hot right now and and how do you see yourself fitting within the broader trend of Fintech in in serving this very particular constituency Yeah, so we're unique in the United States in that we're a Fintech investor that knows the sector well, but is decidedly interested in investing in companies that are Economically empowering for low-income people So we have a an angle on fintech. We play very nicely. I think with the broader ecosystem And by and large we Co-invest with mainstream investors. We'd love to co-invest with more impact investors But I actually have none as co-investors But we do have under recent Horowitz or Greylock or Google or Venrock or Charles River and many others as co-investors Who and who co-invest with us for a variety of reasons? They may not call it impact. Maybe they call it reputation risk management or maybe they It just gels with one of the partners or maybe they see it as You know effectively increasing the enterprise value Ultimately if our thesis is right We're able to align creating high impact and great returns By investing in companies that are going to create long-term value on lots and lots of customers and That ultimately translates to higher enterprise value and it plays out in financial services that if you look at companies that are more Predatory like companies that are publicly traded you actually see that their enterprise value is relatively little on an EBIT Or or revenue basis versus companies that provide much longer-term value And so that's how we're trying to marry these two ideas so that they're actually synergistic to each other as opposed to in conflict So let's move a little bit now bridging to financial returns and You probably know Aileen Lee from cowboy ventures who famously coined the term unicorn Which is privately held companies that have evaluations of at least a billion dollars on the list is growing of those And so I'm trying to coin The phrase impact unicorn and an impact unicorn and yeah, I think you invest in impact unicorns where the where You can seek to achieve market rates of financial return as well as extra very very strong Impact and that the financial returns are released Because of and not in spite of the impact But the true story of impact investing is that it's a spectrum From return of principal to concessionary term to market rate and even premium rates of return You have have spoken specifically about this dichotomy of Missionary to mercenary and I was wondering if you could expand on that dichotomy and say where you think Core fits on that spectrum. Sure. Well, and I think of it as a spectrum and not a dichotomy and it's kind of a It's meant as a characterization which is meant to both insults kind of people at either end of the spectrum as a Stimulus to get them to think differently. And so right. I kind of see the spectrum as there are missionaries on one hand and basically the missionaries are You know, we'll give lip service to the business part of it They know they need to talk that language, but at the end of the day, they're really mission driven Nothing wrong with it great very courageous group of people and there's mercenaries Which I also don't see is particularly wrong and that's frankly most of society and like you know These are not evil people and you know the good or the impact may be you know an afterthought or kind of you know The community section on their website or something like that Nothing wrong with that. There's incredible philanthropic dollars and efforts and well-intended people who are on either end of the spectrum But you know what I mean and so from our perspective as we look at entrepreneurs The lion's share and the mercenary category a Very small number of them are in the in the missionary category And we've found sadly that the missionaries by and large are not company builders It's the it's difficult for them to raise The kind of capital they need to build the kind of scale that we think is important Even though we are agreed with their intentions and the mercenaries basically don't care enough to build in Oversampling of value to low-income consumers into their business models and to go through the Hardache and the harder work to to make business models that work or to create technology that brings that drives real Efficiencies like an order of magnitude type of efficiency where you're ten times better than what there was there before and So we look for what we call the visionaries who are neither missionary or mercenary But they are the they're driven by the desire to really make deep impact as Deborah referred to I like that framing but they are schooled and effective in the in the in the business of business And those are and and often they end up being what we call a kind of accidental social entrepreneurs They many of them don't know what this is or who we are or what is this? You know so cap and the so caps of the world But they care deeply And so almost all of our entrepreneurs are accidental social entrepreneurs and I think We should all look beyond our Right the converted To see who are the people who can really take us to the next level and many times they will not be Right here amongst us Okay, so moving from financial returns to impact returns It impact assets we largely invest in fund managers And so we have a database of you know 500 600 firms that we follow and we we tend to invest in just a handful a year in the same way that you look at hundreds of deals and maybe only invest in a handful as well and we talk a lot in the space about aligning Impact with financial incentives, but the truth of the matter is meaning that the is the fund managers Financial incentives aligned with the releasing of impact and I will say that I have seen Like very few of these in the wild We all see if you know, it's a good idea, but you know It's it's very rare and core innovation capital is one of the few Fund managers that that do this kind of alignment, and I'm wondering if you can speak about that sure, so We're looking to make market rate returns Which in the venture space is actually very difficult because venture capital for those of you who don't know is actually really crappy asset class Almost all there's a power curve in venture so almost all venture capitalists underperform S&P 500 Let alone get anything close to what people think of as a venture returns And so the notion of concessionary within venture capital I think is a bit of a is a of a misnomer because it is discounting a already, you know discounted median performance so For us the challenge was okay How do we combine these two and how do we stay true to being high impact and delivering deep impact? and so We clearly have our toes to the fire in terms of creating great financial returns and our LPs bug me about this every day Or whenever they get a chance that we should be you know like Pushing that harder. We've tried to build in into our into our inner fiber Into our general partnership agreement and our limited partnership agreement Also holding our toes to the fire to create great and scalable social impact and it's something that is Unique and it shouldn't be and it's something that I would love to see more in our industry that We don't just rely on our good intentions and everyone here is incredibly well-intentioned But good intentions are the road to I forgot but you know Setting up an accountability mechanism is very important to help us execute Highly against our good intentions and so we've built this system by which we basically Tie our compensation to our not just our financial return, but our impact And so when we underwrite a company we look for a variety of impact metrics how many low-modern income are they serving can they get to scale can They get can they reach millions? Are they providing are they saving them something like an order of magnitude over the best alternative and can they help the customer in the long-term? build assets build credit and Find a pathway to the financial mainstream and then every year we create an objective report with data reported From our portfolio companies. We have a three-person impact audit committee that is independent from us That scores us from one to a hundred and that score equals a hundred percent of our bonus and ten percent of our carry and that and it's broken down to a number of parts and that practice in Very practical ways has really helped us improve the way we execute against that and so You know if we get a score of eight or seven or something that and part of our in part of our impact metric That is embarrassing right like that is not why we're doing this. We're doing this to be in the top One percent the top five percent and so we've we've made changes and you know again Like I don't need to be reminded why I'm doing this but like having that mechanism is Incredibly powerful and it's something that I would really like to see and encourage more people who are investing in funds or met people who are managing funds to Self-impose right to create a mechanism to follow Peter Drucker's kind of famous mantra of what what's measured gets managed To create excellence not just in great financial returns, but social returns as well Well, thank you behold ladies and gentlemen and impact unicorn Thank you