I want to thank the supporters who make this possible. Some of you may or may not know the Aspen Institute. Of the 20 policy and research organizations in Washington, we're one of the largest. We would like to create opportunities for poor people and want to stimulate dialogue and research. We are indebted to the Chicago Fed for publishing this presentation in the magazine ProfitWise.

After 40 or 50 years of doing community development finance, we've learned that we can bring capital to the lower income communities but that it isn't being done to scale. The reasons are very complex. When we interviewed 100 people about scale, we asked why it's important and got a lot of different answers. Some people think that as you get bigger you automatically reach more people, but it's not necessarily true.

We started with a hypothesis. This is a nonprofit model of how to bring innovation to scale. We hoped that if we did a study of best practices and reported it, then people would automatically follow it. This seems also not to be true.

The idea of replication is like spontaneous generation. It needs a conscious process. Standardization, infrastructure building and rollout are all key.

Our research methodologies include case studies involving for-profit, not-for-profit and other organizations. One of the platitudes is that everything has to be customized for each of our customers, so we considered Dell Computers which has a similar principle.

What we learned is that profitability was the primary driver for all the businesses that went to scale. A lot of the products we offer are not profitable. Geographic expansion was also key and runs counter to what we believe. Major investment into infrastructure was critical. Infrastructure and technology are not just computer systems. Partnership is critical, and that is something that we need to review. One of the issues we face is a lack of talent, or it’s not developing the talent that we have.

After we looked at all these lessons, we looked at the three different stages. In the research phase, someone gets a new idea and experiments with it. They look at the feasibility, potential partners and then look at it's potential. If an idea makes it through this, then the product gets refined, rolled out to more sites and then the whole system gets evaluated. This is an iterative system until you get to the rollout stage. You're developing the infrastructure and still evaluating the profitability and feasibility.

When we asked the private sector about scale, they didn't know what we meant. They asked if the unit cost goes down. It doesn’t. So how do you scale a loss leader?

Our hypothesis is that if it costs x to do the research, it's 10x to do the infrastructure and then another 10x on top of that to do the rollout. Implicit in this model is demand. If no one wants your product, then you'll never get to scale.

There are many models of the organization. There is a continual need to reinvent yourself as you continue to grow and expand. During these cycles, there are multiple times when you invest in the infrastructure. In reality, most companies never want to get to the maturity stage but instead want to stay in growth. What can happen there is that if you don't respond effectively to the shocks of the system, then you can go out of business.

Organizations that go to scale only do so through sustainability and having a good product mix so that they have enough of a margin. Investments in infrastructure can make a big difference. It is so important to understand that reaching scale can take a very long time. For example, Accion took 40 years to get where they are today.

We couldn't develop one model for all industries. Every industry has 5 groups: industry members, investors, customers, trade associations, and policy makers. We looked at the corporate customer dynamic, which is not too regulated. Most corporations respond to the idea that "customer is king”. When there are small players, the trade associations play an important part in helping the organizations work with the bigger players. Unified Western Grocers are a great example of this. The next structure is the CDFI industry. Here the customers are mostly left out of the equation, which is a little strange; it is so focused on the people they want to serve, but the weakest part is the research data. In the last 5-7 years, the number of check cashers has almost quadrupled, and most of us have missed this trend. This has happened because of the effect of subsidy.

When you start out with a great product and you begin to pay attention to the organizational details, you can slope up the line towards achieving scale but then you run into industry dynamics. If you can do some strategic positioning, then you can really take off. One of the key issues of this whole effort is the identification of new and flexible sources of capital. Our current sources from government and philanthropic investment limit our progress.

Scale is not possible in place-focused efforts. The CDFI product has been developed based on perceived need and not on sustainability. We think this is a key feature for scale. We want to look at viable business models. We have talked about this already but cannot mention it enough: we need to build infrastructure.

We have come up with seven basic conclusions:

• We have come up with seven basic conclusions:
• shift focus from product innovation to product delivery
• from developing products to developing organizations
• funding environment must parallel these shifts
• achieve sustainability, optimize use of initiatives
• greater integration of the field into mainstream, development of infrastructure
• impact is key

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Thanks to both of you for getting your arms around what seems like a very complex structure. What's clear from the last 20 years is that more traditional funding needs to be done. Sometimes it's good to just get out of the way when the big financial institutions can step in.

We have a very interesting set of challenges. The CDFI was not started because we expected profitability or because we have a lot of passion about infrastructure. How do you grow an organization when the focus is about helping people? I'm reminded of my Aunt Pearl, who is turning 91 and who has many strong opinions. As you know, I come by them naturally. She said to me one day, "I don't get it. You were a partner in a law firm, and I understood what that was. I don't know what you're doing now." That is the essence of our situation. We are in a conundrum.

We’ve been around for 20 years and most of our growth has come about in the last 7 years. When I try to put what we do into the context of what Kirsten and Greg have said, I think about how we're going to partner - not just with financial institutions. We want to know how to partner with an industry. We think about outsourcing product and shifting the structure of our organization, moving to a horizontal instead of a vertical one. Just like Dell, what we do is quite standard at the core.

As an industry, even as a society, we've been harmed to an extent by having our organizations termed by our tax status. We're mission-drive and it doesn't matter that we're for or not-for-profit. We need to set up an entity that is structured to help us do what we need to do. We are structured so that varying kinds of revenue come in, but it is all for the same purpose of trying to help folks integrate into the larger world. We set up our structure in regard to mission and not for tax purposes. If you're attracting people who want to work in not-for-profit, they may not have the right mix of talents. If we get clear about being mission-driven, then you can structure however you like.

We thought iImpact was about dollars lent or houses built, but I don't think that's it. Now I think ultimately that that what we're doing is reducing isolation. This is a substantial piece of the value we're providing. One of the great challenges is how to measure that. A set of metrics that looks at what we produce leaves most of the value on the table.

In terms of focusing on the customer, we first need to know who the customer is. If the subsidizer is the customer, then we focus well on our customer. But we need to focus on our mission-customer, which is the community.

There has been partnership and collaboration historically, because we share the same values and because there is some pricing benefit. We've been finding in recent years, that the pricing is not that different from mainstream. We find ourselves asking why we are focused on the SRI instead of going for the best prices. Why aren't we moving toward the size that allows us to go for those dollars? We're starting to think about ways to fund this, but there may be some disconnect. This could be an opportunity lost, and we need to attend to that.

When I reflect on the comments you made, you'll look at these organizations and see that they've been able to scale. Much of what I think Kirsten said applies to our network and the individual organizations. I'll focus more on the organization side and not so much on the industry side.

Over time, we offered values that allowed the organizations to achieve scale. We created an insurance company that is now owned by 17 of our members. This was based on the fact that some of our members were at scale, but some of them could not yet go to the capital market. We wanted to provide a vehicle where they could access capital more efficiently. Through this we have saved millions of dollars. We run the organization, and most of our members participate through partnering and bundling. In order to pull this off, we partner with organizations that have different skills from us.

In bond financing many of our members go to capital markets on a one-off basis. We can pull these organizations together and have them go to the secondary markets to get better pricing. We're creating a bond conduit where we have an advantage with nonprofits that have great loss history. We can create our own vehicle, create a securitization with Wall Street and turn the individual loans into a security. We'll buy the B piece back and we'll own the trust certificates, which is a derivative from the mortgages and bonds. We now have this issue of capital, and we need to raise about $60M dollars in order to have those commodities.

We're looking at a third enterprise where you take some of the same strategy, look at the business needs of local organizations and think about liquidity. We could buy a portion of an organization’s loans and create liquidity, so that they can use the capital they have. We have very little equity. We get a certain amount of subsidy then need to figure out to make the equity we have work harder for us. We think this might change the industry, but we have a ways to go. There are some organizations here that have been helpful in looking at that.

There are issues around the quality and characteristics of organizations that have gone to scale. Few of our organizations started as neighborhood-based. We have 3 or 4, out of the 84, that started this way. More of them start out regionally. If you're constrained by a neighborhood, it's hard to be sustainable and have it grow. The need on the ground to get to scale is being regional. The ability to scale up further already has a basis.

These organizations are very adaptive to market conditions. They can respond quickly, start or stop a business line. Most of these groups have gone through some major reinvention moment. This is easier to do when you're responding to a market as opposed to neighborhood response.

There are ways that networks can help. One of the challenges is that there is a top tier of organizations that overwhelmingly represent the impact. They can take bigger steps. There could be a different role for an intermediary.

We're so product focused that it is difficult to make sustainable organizations. We're trying to make money so that we can reinvest in doing more good work. As Elyse said, we're mission-driven. Our system discourages the development of the organization. We had an experience a couple of years ago in meeting some European nonprofits and they are much more organization-focused. Their system is about giving the organization flexibility and the ability to put the subsidies wherever they wanted. That's not possible here. They developed an accreditation organization and focus only on the customer. We think about the customer but not in the way they do. In our work, customer is not king. If it were, that would completely change the system.

This paper is right on. One of the challenges I see is that it's not all about scale. There are ways to take the larger nonprofits and help them get to another level of scale. But you need different things for the smaller nonprofits. Our focus as a business cooperative is on the larger groups. We need to understand that we cannot base our total worth on whether something is scaleable or not.

Q: I have a question regarding the word 'standardization'. We talk about it in terms of risk. I'd like to hear you say more about that.

Elyse: If you think about any loan, it has a set of terms. It's true that there are different aspects to risk, but if you think about it not as a single instrument but as a bundle, there is a piece that isn't very risky and other pieces that are more risky. You may be willing to standardize the core.

Kirsten: We're not saying that all the products need to look the same. The investor ultimately wants to know what they buying. They want to know that the instrument they're buying has a standard quality. They don't care what's underneath it.

Tom: Within the portfolio we'll have variation for each loan and we look at where can bundle.

Q: I want to commend Greg and Kirsten for their paper. We use it as a training item to understand the framework. Why weren't we asking the questions back in the 80's? I thought the visionaries then were trying to figure out scale and the neighborhood?

Greg: Part of the experiment is about neighborhood revitalization through CDCs. This is a subsidy process. When you think of the business model, I see them only as a fund-raising machine. It's an important activity, and they have a strong financial component. But it doesn't strike me as something we would want to emulate.

Kirsten: We wanted to look at different models and went into the private sector. We've been working in this field for a very long time and asked lots of different people for various ideas.

Tom: In places like Boston, where the neighborhood organizations did very well, there was a time when the intermediaries also did very well. As the organizations got stronger, they didn't want the intermediaries any more. It became a parental relationship, and at some point they wanted us out of the picture. The CDC's can do things differently. It's such a hot issue that a candid assessment would be valuable.

Q: There are some other models outside of the nonprofit world. In the 90s we saw the social enterprises sector emerge. We saw a movement to get away from the projects and focus instead on the ventures. Would it be valuable to look at these enterprises? I get frustrated with why these worlds don't talk to each other. Don't leave us in the desert; we need a pathway out.

Kirsten: We'll look at the utility of other models in our next meeting in San Francisco. We've had different sectors approach us with their own ideas of how to make this work.

Greg: There were so many cases we wanted to do, but we didn’t have the resources or the time. We wanted to do PBS but couldn’t get the access. We'd like to know what other venues we can approach to have these conversations. I used to be a funder, and I'm a bit jaded. The funders are intrigued with the work, but it gets a bit overwhelming. The biggest challenge is that there are very few funders focused on the vehicles for finance.

Elyse: It's an interesting question how to build networks across sectors. We want to build bridges to the environment community, organized labor community and social enterprise. There are many partners here who are part of this greater venture. We want to create a strong set of bridges and look at commonalities instead of focusing on differences.

Q: My question is about interest rates and how that affects scale. When I look at the capital gap approach, a lot of things that happen in the banking industry that are not meant to be cruel but that are based on interest rates. What do we do about that?

Tom: We need to have the right financial team to help us. We consider that the borrowers run the company. We're making loans out to developers, and we have to have the sophistication to take the risks. It's really complicated yet think it can be done. You don't want to push this risk down to smaller organizations.

Elyse: I agree with everything that's been said. We also looked at interest rate reserves. It is difficult to pay for the level of expertise needed in each organization. We need to be able to pay for the day-to-day expertise.

Tom: This is why the model that Kirsten and Greg have put together makes so much sense. You can't manage it as a solo organization.

Q: Your notion of sustainability as a pathway to scale really resonates with me and my work. I work with organizations that are part of a partnership that are neighborhood based. Scalability is essential to them. What are some of the strategies you might offer to help organizations have more sustainable financing products?

Greg: That's the million dollar question. One idea is going back to funders and getting them to focus on the organizational level with their support. We're trapped in a funding environment that is very prescripted. You should read some articles by Clara Miller. She says that most foundations are willing to pay for the marginal cost of a project rather than the whole cost. When they look at what they think will give them value for their money, the slice is pretty narrow.

Kirsten: We're moving beyond the paper and are now looking at additional collaborative models. An operating infrastructure reduces the cost and helps business become profitable. CCA Global is a cross between a cooperative and a franchise organization.

Greg: What's interesting about them is that they have carpet stores. What they will do is to bid on the national contract for AT&T and then they source that through the local network of carpet providers. You can often get higher margin of business.

Kirsten: I see the Housing Partnership Network also going toward that.

Q: When it comes to interest rate management, CDC should not be doing that. They're good at assessing market risk. It's a treacherous course. We need to develop good credit enhancers. We need to intersect with the capital markets.

Tom: We're only getting into it because the business requires it. We have to have in-house expertise. We're hiring someone who comes out of the private sector, knows this business inside and out and is attracted to our mission. When you look at the work we do, it's difficult. We can offer a higher return, but it's hard to distinguish the social benefit when you're making a complex financing instrument. A lot of the structures you talk about are the larger ones, and we want to know how to translate the importance of what we're doing and how to market it to people who are looking for the social benefits.

Q: I would like to know your thoughts about whether there is enough talent in the organizations or what kind of training the managers need? Also - how do you attract people from the outside?

Elyse: That is very difficult. If you're looking for people from the outside, you have to figure out how to pay them, which can change the way you run your organization. The issue is people, money and culture. If you say that you're running a mission-driven company and you want to bring people in who are also focused on creating personal wealth, everything becomes very complicated. We need to think about how to compensate people in a market-based way and not just the market of nonprofits. Another point is that we provide other kinds of benefits, such as being kid-friendly and having flexible hours.

Comment: I think scale depends on which side of the mountain you're looking at.

What we've learned is that the capital requirements for getting to scale are significant. Reliance on philanthropic giving and government are hindrances. Getting to scale will require products and services that are sufficient in return to attract more investment.

There is a book called Crossing the Chasm, which focuses on the different kinds of investors. There are visionaries, early adopters, pragmatists and conservatives. Between them is a chasm of price. The motives of each of these investors are very different. For CDFI, we must understand that there are different characteristics between current investors and what might be our future funders.

If we can cross the chasm, we can make a lot of things happen. If we think about the universe of investors, we see the variance of sensitivity of risks and returns. On the program side, foundations are happy to give away the money. However, there is a natural firewall in them. They focus on what they want. They may or may not be sensitive to social benefit. Banks and insurance companies are similar but they're willing to do a little more about the community benefits. The government is the unique component that is supposed to take care of all the citizens and is willing to take some risks too.

Within the SRI world, individuals and religious institutions have been around for a long time. We want to look at how we can grow this area.

We want to tell you what we're doing tomorrow, which we're calling speed dating. We have 18 groups who are offering product in the community investment area. All of you will get a chance to know them. What this chart represents is an attempt to get across the chasm. There are many people who represent many different sectors.

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