How Open Road is Helping Root Capital Confront Big Challenges for Even Bigger Impact
In this guest contribution to Root Capital’s Back Roads to Boardrooms, Maya Winkelstein, Open Road’s Executive Director, discusses the organization’s investment strategy and our evolving relationship with Root Capital.
At Open Road Alliance, we’re in the business of solving problems. Founded in 2012, Open Road is exclusively dedicated to providing the ‘fix-it’ funds that social impact organizations frequently need but typically don’t have access to. We also believe in the investment model of philanthropy – we deploy capital to achieve a specified return. Like all investors, we want to maximize that return, which in this case is measured as impact.
So, when I was on the phone with Root Capital in late 2014, I asked them what was the biggest problem that was keeping them from achieving maximum impact?
Open Road had partnered with Root Capital the year prior to solve a problem created by an unpredictable change in government regulations that threatened the success of the then newly created Coffee Farmer Resilience Initiative in Nicaragua. The Coffee Farmer Resilience Initiative and associated Farmer Resilience Fund had been created to respond to the devastating outbreak of coffee leaf rust disease (also known as “roya” in Spanish) in Latin America in 2013. Through this initiative, Root Capital and partners provide affected coffee cooperatives with access to credit, training and agronomic support services to help smallholder farmers address the challenges resulting from roya.
When faced with an unexpected obstacle to rolling out the program in Nicaragua, Open Road provided a $95,000 grant to solve the problem and allow the project to move ahead. Open Road was attracted to partnering with Root Capital because of their common focus on maximizing impact and their proven track record working with coffee cooperatives in Latin America.
The partnership was a resounding success. With Open Road’s grant, Root Capital was able to disburse $21 million over 14 months in short-term credit and deliver 330 days of training to nearly 20 different coffee clients in Nicaragua. To support replanting efforts, Root Capital also approved $3.5 million in long-term credit to two Nicaraguan clients. From a problem-solving and impact perspective, this was a win-win.
Yet the partnership, like most of Open Road’s portfolio, was focused on solving a discrete problem at the project-level where interventions and outcomes are typically measured in a 12-18 month timeline. We know how valuable these contingency funds at the project level are where 1 in 5 non-profit projects will face unexpected obstacles that require additional funding. Moreover, our own portfolio of 60+ case studies has shown that by helping organizations overcome these challenging moments in otherwise fully funded projects, Open Road can maximize its impact by leveraging other dollars already in the pot. Yet the problems and solutions we address are, by and large, project by project, piece by piece.
So when we asked Root Capital what was the biggest problem keeping them from achieving impact, we were asking them (and ourselves) to think big.
At Open Road, we recognize that money is never a solution to a given problem, but rather a necessary resource and tool for implementing solutions. As soon as you think of money as a tool – a means, not an end – the creative options on how you use and deploy that tool become endless. Not only is innovative financing a possibility, it becomes a necessity.
With this framework in mind, grants alone, however essential, don’t cut it. In other words, if money is a tool and your problem is a screw then you need to invent a screwdriver, not a hammer.
In Root Capital’s case, the big problem that they were facing was the constraints of the philanthropic market itself. In other words, the limited pool of charitable grants (i.e., hammers) being made available to serve as first-loss protection on their balance sheet was keeping them from reaching a whole new level of impact, namely reaching a goal of $160 million in available funds to lend to smallholder farmers by 2018. Put simply, Root Capital needed a new kind of tool to build this impact. After several months of work, they created that tool: long-term subordinated debt.
What attracted us to consider joining Root Capital’s inaugural subordinated debt fundraising round was the opportunity to take our problem-solving approach and apply it to a much larger, yet discrete, bottleneck that was facing Root Capital. In partnering with Root Capital on a long-term subordinated debt instrument, we are embarking on an experiment to push the limits on “problem-solving financing” and testing whether this new tool of subordinated debt can efficiently unlock greater impact. With this new product being counted as additional first-loss capital, we could reduce the constraints to growth that resulted in the sole reliance on traditional charitable grants to do so.
I’m often asked if Open Road is an impact investor. While I understand the intent, the question always slightly confuses me because the truth is we’re all impact investors. Every investment we make leaves a footprint on the world. Whether that investment makes money, loses money, or breaks even, so too does that footprint leave the world for better, for worse, or as we found it. At Open Road, we call ourselves impact-first investors because we strive first and foremost in every grant, loan, PRI, and deal that we make to leave this world better than we found it. As long as we can be confident in those results, I don’t care what financial tool we use.
I’d encourage anyone who also considers themselves an impact-first investor to consider joining Open Road Alliance and Root Capital in solving this big challenge, for an enormous impact return.
Read the original blog post http://blog.rootcapital.org/back-roads-to-boardrooms/how-open-road-helping-us-confront-challenges-big-impact