Episode 5: Sarah Kearney, Prime Coalition
Today’s guest is Sarah Kearney, founder and executive director of Prime Coalition.
Sarah founded Prime Coalition in 2014 to build a tribe of courageous philanthropists that believe market-driven technology innovation and deployment is critical to our fight against climate change. Prime's approach is based on her prior experience with the Chesonis Family Foundation, graduate research at MIT, and her personal drive to ensure that our children won't have to confront increased geopolitical conflict over dwindling global resources. She believes the world needs a robust marketplace of catalytic capital investment intermediaries like Prime and that she will spend her whole career trying to help build it.
We cover a number of topics, including an overview of PRIME and how the model works, why it matters for philanthropists and for the breakthrough innovation that is needed to help address climate change, and where else this model can apply beyond climate change over time. Sarah was a terrific guest, in that she is quite knowledgable, mission driven, and as high energy as they come. She’s also patient with all of my beginner questions, as “catalytic capital” was not a topic that I was very familiar with.
Enjoy the show!
You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
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Jason Jacobs: Hello, everyone. This is Jason Jacobs, and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests, to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help.
Jason Jacobs: Hey everyone. Welcome, today's guest is Sarah Kearney the founder and executive director of Prime Coalition. Prime Coalition is a public charity whose mission is to partner with philanthropists to place charitable capital into market based solutions to climate change. I just met Sarah last week but had heard about her from probably 50 different people before finally having a great lunch with her. And, I'm so excited to have her on as a guest. She's doing a bunch of really innovative things with Prime around taking charitable capital and deploying it on the innovation side of climate change, specifically with technological breakthroughs and has aspirations to apply that model across a whole lot of other sectors as well. I hope you enjoy this interview with Sarah as much as I did.
Jason Jacobs: Okay Sarah Kearney, welcome to the show.
Sarah Kearney: Thank you so much for having me, I am pumped to be here.
Jason Jacobs: Typically I am high energy, but as you walked in here it actually made me think that I've met someone who's higher energy than me.
Sarah Kearney: I'm going to take that as a compliment. I have a self-awareness about being too much at times, so I'm not coffee drinker out of mindfulness for others.
Jason Jacobs: I should be the same way, but I am quite the coffee drinkers. I'm sure former Runkeeper people if they're listening to this would say that I should not be a coffee drinker, but I am. I'm very excited to have you here. It's funny we just met for the first time last week over lunch, but your name has probably come up 50 times in the journey so far, it's like six degrees of Sarah Kearney.
Sarah Kearney: Hopefully people said nice things.
Jason Jacobs: Oh no, and you guys are definitely, you're known in the network. You guys are doing very meaningful work and it's work I didn't know existed, and that I'm sure our a lot of our listeners don't know exist. And not only am I psyched to get you on her to talk about Prime Coalition, but you have got a really interesting perspective on this problem that's on my mind, and our listener's minds as well.
Sarah Kearney: Great well I'm very happy to be here, happy to share my story. I personally and Prime as an organization have pretty audacious goals that I hope to achieve in my lifetime. Both related to climate change mitigation but also to setting a standard for philanthropic investment intermediation in what is now kind of an undeveloped market place for that across many cause areas. So I'm always happy to share that in hopes that other smart people will join us in a choir of voices working toward both of those goals.
Jason Jacobs: Well that sets the table nicely let's just get right into it then. Let's talk about those goals. What are they?
Sarah Kearney: Sure so Prime is a non-profit, which means that we have a theory of change and a mission and our primary impact goal. If you think about it as kind of a logic model, the thing all the way on the right hand side is to reduce the biophysical and social consequences of climate change that is our paramount end goal, mitigate climate change. But along the way we have found that we are among a very small set of early organizations that is helping to unlock catalytic capital, philanthropic capital, to market driven solutions. And so, kind of a secondary goal that we're working hard to do well is to bring rigor to the framework that anyone could use in any cause area that might have market driven solutions to a social problem and a capital gap that can be filled with philanthropic capital. So I'm happy to say more about that later, but our goal in the foreseeable future is to stay within the bounds of climate change mitigation, but do things in a way that can be replicated in many cause areas.
Jason Jacobs: And you were explaining it to me a little bit over lunch, let me test my mettle and see if I get it. But basically if you take innovation, innovation is an important lever for climate change. And it's also one where some of the technology that ultimately needs to scale. There's this period early on where it isn't a good candidate for market based capital but, that where potentially got over a bridge where some modest amount of capital could help them get over that bridge, it would actually be well positioned for market based capital. When you find those in areas that should scale but have that bridge to cross before it's ready for market based capital, that philanthropic capital might be a good candidate for innovation investment.
Sarah Kearney: That was excellent I'm very impressed with your takeaway of our lunch meeting.
Jason Jacobs: I just wanted to show off, I mean, that's why I brought you on, because to show how much I know.
Sarah Kearney: You're hired. We've used a few different words over time. The kind of taxonomy of the moment is catalytic capital but basically in my mind the type of capital that we're talking about, the real unique value proposition of it, is that it seeks to achieve additionality. And so, when we're talking about for profit investments that achieve additionality, that could be done in a number of ways.
Sarah Kearney: One is accepting timelines that are longer and untenable for our traditional market rate investment vehicles, whether the asset owners themselves can't take on that timeline, or it's an asset class like venture capital that might not be able to invest beyond a ten year close ended fund lifecycle. So timeline is one reason that someone might not be able to invest, another is disproportionate risk. So risk of a wide variety, anything you could qualify as a risk. In our category often times it's technological risk, regulatory risk. So philanthropic capital has a mandate to take on disproportionate risk. And the third is, and this is what has become kind of the moniker of philanthropic investing is, lower financial returns. Now you don't have to make financial returns then your market rate counter parts. But it's almost like Kleenex became to facial tissue, what below market financial returns became to philanthropic investing, like become synonymous with. One of my bug bear issues is that I think it's exciting, the idea of just doing investments that no one would be able to do because it's disproportionate risk, like super high risk but could also be super high financial return if you do it really well and work hard to build successful companies.
Sarah Kearney: So for any of those three reasons timeline, disproportionate risk, lower financial return, you qualify because of the additionality for philanthropic capital. And you have to remember that the opportunity costs of this philanthropic dollar is making a grant. And so you can take a dollar that would otherwise be used as a grant and instead make a for profit investment. And it could be an innovation like you mentioned or could be many asset classes. Prime started an innovation because no one had really done this in any area of science and engineering innovation before we started bringing our philanthropic partners together and we though the dollar size was appropriate. But now that we've proven out the mechanics I'm actually super excited about how the same framework and approach of aggregating philanthropic capital can be used across a wide variety of asset classes. You know, can imagine buying down risk for project finance, growth equity, and not just in climate change like I said before but any area where there are market based solutions to big social problems.
Jason Jacobs: Well when you look at the types of capital that come into this area, there's the impact capital and that could be, and I just learned this word in the last few weeks, but concessionary or non-concessionary capital, so capital that is okay compromising financial returns or capital that expects market rate returns. And then you're talking about, it sounds like what did you use the term, blended capital. So what are some of the biggest differences between this blended model involving philanthropic capital and more traditional impact investing.
Sarah Kearney: There's a lot of words that people use interchangeably, and I think they all mean different things to different people but there was a time a few years ago where I used the word concessionary investing to one of Prime's philanthropic partners. He's actually kind of the granddaddy of Prime, his name is Jesse Fink, and he was the first ever operating grantor that made a grant to this idea before we had anything to show. So it was very courageous and he's very daring and just a wonderful kind person. And years after his first grant I said, "You know I really want to build up this market place of concessionary investors", and he said, "Sarah don't use that word I don't wake up every day wanting to make a concession." He's like "I wake up every day wanting to change the world." So we need a better taxonomy, that was really meaningful to me and I really took it to heart.
Sarah Kearney: And the second piece is I think there is a lot of creativity that could go into this idea of blended finance. It's work that has been done in other sectors for a long time. Development finance abroad has been doing this. There's a number of examples right here in Boston and other cause areas that have done it.
Sarah Kearney: But it's basically where you combine different classes of sharers in the same vehicle to accept different levels of risk and different expectations of financial return, so that you can kind of efficiently apply those different colors of money at different times for different purposes and everybody performs better together. And so in our case our early mathematical showed us, and we're in the midst of making this even more sophisticated now, that if you could combine charitable capital, the kind that Prime has been marshaling over the past five years together with market rate capital, the same types of money that might go into a traditional venture firm. The market rate capital can protect the charitable intent over the lifetime of the company, and the charitable capital can buy down the risk early. And using the same mathematical model both sides perform better when they are working efficiently together.
Sarah Kearney: So this is very early in our own modeling of all of this, but it's kind of the ultimate vision for how Prime could lift up the whole investment sector in this cause area, is by combining. Maybe it's not as simple as two different as two different colors of money, maybe it's three different colors of money. You have a first loss reserve, a catalytic tranche that takes on disproportionate early technology risk, and you have a market rate tranche that goes in later but can come in, in part early so that it's buying shares low. Anyway, there's like a lot of complex financial engineering to be done but that is what I think when you say blended capital back to me.
Jason Jacobs: But to make this work it seems, I've been reading a little bit, it seems like under the hood it's complicated with the tax laws and different types of, there's some acronyms that I'm blanking on, but there's some different acronyms for some different types of grants that can be made. I think one begins with a J maybe? Did I get that right?
Sarah Kearney: Prime, the public charity that I founded, we really focus on one type of money that could play into blended capital. For that type, which we call either catalytic or philanthropic some people call it concessionary, there are multiple ways to deploy that money into for profit solutions. And so for us if a blended finance vehicle is the ultimate vision, we saw a number of steps in order to prove out the mechanics even just for the charitable part of that blended capital vision.
Sarah Kearney: So phase one for us was deal by deal syndication to explore the boundaries of what your allowed to do with charitable capital. And in that phase we helped four different types of philanthropic asset owners, foundations, donor-advised funds, corporate giving programs, and individuals/trusts/households/corporations deploy money either directly into companies that we had preestablished as qualifying for charitablilty. And we would help a foundation claim that as a program related investment, so PRI as one acronym.
Jason Jacobs: Ah yes.
Sarah Kearney: Doesn't start with J.
Speaker 3: Ah.
Jason Jacobs: P.
Sarah Kearney: I'm going through this with my three year old right now no that's a P not a J.
Sarah Kearney: And PRI is something that's only relevant to private foundations. But for them they have a mandatory 5% pay out requirement where they have to give away 5% of their assets to charity every year. And a PRI counts toward that expenditure requirement, so to them it counts as a grant but it can take the form of equity or debt directly to a for-profit, to a nonprofit and the only different is that they write it into their tax forms at the end of the year as a grant. It's call a program related investment.
Sarah Kearney: The other way that people came in, in deal by deal syndication mode with us was through something we call a recoverable grant. So this looks like a reciprocal contract, but the function to the grantor is the same that they've been in the business of doing for hundreds of years which is making a grant to a nonprofit. And it just happens that we give the grant back to the grant making organization under a certain set of circumstances. We then make a grant to the company back to us in a success scenario.
Sarah Kearney: So that was phase one deal by deal syndication the two paths for supporting Prime type companies. And for us and all of the phase we have the same underwriting criteria. We're looking for gigaton CO2 equivalent emissions reduction for each company we support. We're looking for companies for which we have confidence that, if they were to reach a certain milestone, market rate investors would be interested. And then, the third is that the company might have a difficult time raising money without us, so additionality. So that was phase one.
Sarah Kearney: Phase two for us we now have the Prime impact fund, that's up and running. And this is a 20-40 million dollar seed fund that is 100% philanthropic. And so the ways that people have come into that are as traditional grants, recoverable grants, program related investments, and in some cases what we call mission related investments which doesn't count as a grant and might just be from an individual, a foundation that doesn't care about the tax write off but believes that this thing is needed to fill the capital gap that we're addressing. So those are the mechanics of money into Prime.
Jason Jacobs: So is all the money that's coming into Prime a philanthropic grant of some kind?
Sarah Kearney: Yes. In phase one yes. In phase two in majority yes, and a few parties that surprised us by saying, "I don't care about the tax benefit, I know this is needed I'm just going to do it, I don't have a foundation or a donor-advised fund, I'll just do it personally." And so in that case they didn't get a tax write off for it and they went in with eyes wide open that this whole thing is designed to be philanthropic and that we're targeting additionality, but they didn't get a tax benefit.
Jason Jacobs: And what percent of those dollars that are coming in are done as grants that are just like I would give a grant to a charity that I'm supporting where it's not about an investment and a return verus a grant that then the grantee is expecting some type of return on that capital that I assume can then be redeployed for additional grants?
Sarah Kearney: This also surprised us, we really thought for the Prime impact fund people would come in either as program related investments or recoverable grants. And so we were surprised by the mission investors that didn't get a tax write off, and we were surprised by the traditional grantors. So we do have a number of parties that came in with traditional grants, I would say it's about a quarter of the total fund dollar wise and probably 10% in terms of number of organizations.
Jason Jacobs: Uh-huh (affirmative) Typically with Prime in many instances you're coinvesting with more traditional financial investors correct?
Sarah Kearney: That's exactly right, that is something that we look for and work for. We like coinvestors at the same time and we hope that the company eventually graduates from us for follow on investment from other firms later.
Jason Jacobs: So this is where I get a little confused. So let's say I want to help the cause and there's two paths. One is to "invest" through Prime, which sounds like it a grant right, or I could do a financial investment through the financial investor that you're investing alongside of in which case I'd be supporting the mission with the chance of a personal financial return. Am I understanding that right?
Sarah Kearney: Yeah I think our coinvestors, so for example I'll tell you the story of our first investment, I think it's demonstrative and speaks to your question. It's a company called Quidnet Energy and the idea came from a Saudi Aramco engineer, and he's a geophysicist. His concept was to use old oil and gas wells to do pumped hydro storage. So, pumped hydro is the most ubiquitous form of grid capacity energy storage on the grid here in the U.S. but you can't do it every where you need to dispatch large amounts of electricity. And so, his concept was let's turn pumped hydro on it's head and pump water down hole and under pressure. If you take the pressure off, water will come shooting back up out of the hole and turn a turbine, and it will be like a big cheap land battery, where you don't have any of the expensive parts of battery storage for the grid. And he had done all of the computational modeling and he needed to run a pilot test to prove that this idea was not crazy. And it was a pilot test that could have squandered a million dollars in a couple of hours. And so we went to Prime's investment advisory committee and we said would you be interested in investing in this company if it makes it to a certain proof point?
Jason Jacobs: And the advisory committee is more traditional financial investors that would be potential follow on for Prime investments?
Sarah Kearney: That's exactly right. The Prime investment advisory committee represents what we think is possibly a majority of market rate investors in this sector for early stage investments.
Jason Jacobs: Non-concessionary.
Sarah Kearney: Non-concessionary.
Jason Jacobs: But still catalytic. Or no?
Sarah Kearney: Yes. In some ways, I mean their volunteerism with Prime is certainly catalytic. And so we asked them, "Would you be interested to invest later?" And the second part of their assessment is, "What are the reasons that would prevent you from being able to make this investment right now?" And that gives us the contemporaneous documentation of making the case that this company would have a difficult time raising money without our philanthropic capital.
Sarah Kearney: So that kind of establishes charitablity in that moment and then once we decide to invest from Prime if other market rate investors want to join us that's great.
Jason Jacobs: In that round?
Sarah Kearney: Sure, yeah in that round, in following rounds. We have seen time and again that just our presence in the round gives others confidence to be there. So in that way, in addition to go earlier than most, or willing to go just being there first. And a lot of times now with the Prime Impact Fund leading setting terms, doing things that other investors might not be in a position to do, is catalytic in and of itself.
Jason Jacobs: But everyone participating in a Prime vehicle is technically a donor not an investor, correct?
Sarah Kearney: If they are going through Prime they are a philanthropist.
Jason Jacobs: Got it. Essentially if someone could raise the market based capital without you then that wouldn't be a good fit. The fit is either when you are a bridge or you're the catalyst that gets the others to the table.
Sarah Kearney: Yes. And in fact this has happened, we've brought a company to our investment advisory committee that went through, and then that company was able to raise it's round without us, and that's great. That's a win, because you have to remember our ultimate end goal is climate impact. And so if we think a really high impact company was going to need our help and then they don't that's a win for planet Earth.
Sarah Kearney: So just going back to the Quidnet example, Prime did 100% of it's seed one tranche, it paid for one pilot test. The pilot test went really well. We were able to raise the seed two where Prime was 50% of the round and the Clean Energy Venture Group, here in town, was 50% of the round. That paid for 47 more pilot tests that went very well. We were able to raise a seed three that was then 80% market rate, 20% catalytic. That recruited a CEO, and then the CEO was able to raise a series A that was co-lead by the Breakthrough Energy Ventures and Evok Innovations which we would consider market rate investors. And so that kind of story kind of ramping support from the philanthropy community and graduating to market rate investment is exactly what we'd want to see over and over again.
Sarah Kearney: And then back to your question you, Jason, have the option of being an LP, well I don't know if you personally have the option of being an LP, but being an LP a venture fund you can also use your donor-advised fund or your foundation to make a recoverable grant to Prime and you'd be playing in different ways over time, potentially for the same company. You're able to do that working for a third party independent non-profit because issues like self-dealing and lining your own pockets with tax benefited capital goes away. Like we absolve you of that risk.
Jason Jacobs: So here's another way I'm going to test my understanding of the issue which hopefully will be helpful for anyone else out there that's listening and also trying to understand. So let's say I have a donor-advise fund, which is essentially it's like a minifoundation without all the overhead right. So if I have a donor-advise fund, there's the grantees that I'm supporting from that fund, so I might support the American Cancer Society or the Horizons for Homeless or other causes that important to me, but the assets themselves are invested much like they would be if I own a mutual fund. And so Prime is not necessarily a grantee but it's more of what do you do with the assets when you have them and that could be then part of the portfolio. So, I might have part of the portfolio invested in publicly traded blue chip stocks and might have part of the portfolio that's more speculative. And so, it's not actually my money it's donor-advised, it's money I've earmarked for philanthropy, but I can earmark a portion of it to "invest." Well, really to invest the assets from the fund, which are not mine anymore, into supporting these catalytic breakthrough technologies that need to build a bridge before they are ready for market based capital. Is that ...
Sarah Kearney: That is, close but inaccurate.
Jason Jacobs: Oh, what, I had it.
Sarah Kearney: So good, but your description of how donor-advise funds work was really good, the description of how donor-advise funds interact with Prime was just slightly inaccurate. But before I dive into that I would like to give a shout out I would like to give a few of the donor-advise sponsors that have done this with us early and first to help me know how to correct you. Because when we started Prime we originally stood for, program related investment makers of energy, that is exclusively for foundations. It's only getting in getting into this work-
Jason Jacobs: That is the Prime acronym?
Sarah Kearney: Yes.
Jason Jacobs: Wow. That is not consumer facing at all.
Sarah Kearney: It's so nerdy. Yeah, yeah, yeah. I very rarely share that insider secret with anybody. We don't say it anymore.
Jason Jacobs: Prime is just so catchy, so easy to say.
Sarah Kearney: Thanks, we feel good about it feel strong. But we named it that because I was coming from having run a private foundation. We knew that program related investments which are only related to foundations were theoretically relevant here. What we didn't know is that there was this other hugely growing asset called donor-advised fund. And so as we got into this some very courageous and creative donors with donor-advised funds were inbound to us and said "Hey we see you doing this with foundations can you also work with me and my donor-advised fund?" And so, The Boston Foundation was the very first donor-advised fund sponsor to do transactions with Prime.
Jason Jacobs: So The Boston Fund is a fund that actually manages donor-advised funds on behalf of high net worth individuals and families?
Sarah Kearney: Yes. And so there's multiple types of donor-advised fund, there's community foundations like The Boston Foundation. We've done transactions with other community foundations like The Charlottesville Area Community Foundation and The Silicon Valley Community Foundation, they sponsor donor-advised funds. There are kind of national institutions, so we've done transactions with Fidelity Charitable, Schwab Charitable, Vanguard Charitable, National Philanthropic Trust. And there are kind of boutique impact investing donor-advised fund sponsors like ImpactAssets, we've done transactions with them as well. So no matter where your donor-advised fund is sponsored the slight adjustment that I would make to your very nice description of how donor-advised funds work-
Jason Jacobs: Don't coddle me, just let me have it.
Sarah Kearney: Is when you do a transaction with Prime, which itself is a public charity, it's exactly the same transaction that you have been doing to the American Cancer Society or to any homeless shelter. In this case you're making a recoverable grant to a public charity, so under a certain set of circumstances we would give the money back to your donor-advised fund. And in our case it's structured a little bit like a loan that only comes back to you under a certain set of circumstances that it's kind of contingent on the performance of the company. If you've done it for one company at a time in our deal by deal syndication era, or on the performance of the whole portfolio of the Prime Impact Fund.
Sarah Kearney: So it's a recoverable grant, it is a grant. It's easier in a sense, you don't have to work with the donor-advised fund sponsor which typically has very strict restrictions on what they will put on their investment platform. So each donor-advised fund sponsor has their own set of internal policies that governs what you can consider an investment for donor-advised fund and often times. And in our case by definition these for-profit, very high risk for-profit, investments would not qualify to be on that platform. And so in our case recoverable grant is a way for donor-advised fund donors to scratch their impact investment itch without having to move their whole sponsor to putting more impact investments on their platform.
Jason Jacobs: Uh-huh (affirmative). And then is the return capped at the amount of the initial grant?
Sarah Kearney: So in our case, in deal by deal syndication land, we structure our recoverable grants one company at a time as a 15% interest rate loan that was subordinated to everything, so it's pari-passu with common. So it's like a loan but you get paid back last. So it's very grant-like, but if the company that you're supporting is successful we really want our donors to participate and enjoy in that financial upside so-
Jason Jacobs: You mean their fund, their donor-advised funds.
Sarah Kearney: Their donor-advised fund. We want you to be able to regrant to other good causes wouldn't that be wonderful.
Jason Jacobs: Exactly. It's just a key distinction it's still about return. But it's return to facilitate more granting, it's not return to facilitate Nantucket house.
Sarah Kearney: Yeah, oh yeah. It doesn't go back into anybody's personal pocket to like buy your private jet. But it could go into your donor-advised fund to support more homeless shelters, wouldn't that be lovely.
Jason Jacobs: That's one of the things about donor-advised fund is that you have a vehicle not only to make grants from, but you have a vehicle if invested properly could grow an enable you to be more philanthropic and actually ... So Tim from ImpactAssets he is an alum from the same college as me and we had breakfast a few months ago but that was one of the things he was educating me on, so I'm also grateful to him, but he was educating me on the fact that these funds are not just about making grants but there's not enough attention put on how the assets themselves are invested. And sometimes they are invested in ways that aren't aligned at all with philosophically the causes you care about. For example maybe they're invested in fossil fuels when the causes you care about are climate causes. And so bringing more transparency to that and more control is empowering.
Sarah Kearney: Yes I will give a shout out to Tim and his team who have been wonderful partners to Prime. And three of their donors have participated in the Prime Impact Fund, the Blue Haven Initiative, which is Liesel Pritzker Simmons and her husband Ian. And the Autodesk Foundation has used the donor-advised fund at the ImpactAssets, and the [Rolf 00:29:47] family has recently done a customized investment with Impact Investments. And so I read an article, and this is my little shout out to ImpactAssets, some of their donors with their investments in their donor-advised fund at Impact Investments supported Beyond Meat in their early days for around a million dollars. And then with the IPO that million dollars turned into $30 million dollars which went back into their donor-advised fund, pushed ImpactAssets today over $700 million dollars in assets. It's a really big deal and all of that money is going to be redeployed into other good causes. I think an interesting time for donor-advised funds as a category and I applaud ImpactAssets for being at the cutting edge.
Jason Jacobs: Huh, yeah it's a new world. And it's definitely an area that I'd like to continue to learn a lot more about. But switching gears for a moment. One question before we do. Which is, is Prime Coalition does it feel to you more like a non-profit or an impact investing firm?
Sarah Kearney: Our goal is to achieve both and achieve both in purpose built ways. So I will answer from my personal perspective which is, I am a nonprofit leader employed by a nonprofit, my compensation is benchmarked against other executive directors at nonprofit's. When we build the Prime Impact Fund we need that fund to behave in many ways like a hard nosed investor, oftentimes people use the words patient capital I'm like, "No, No, No, We're really impatient we need these companies to achieve commercial scale fast." And in order to do that we need to drive them like for profit investors, because we all know kind of like the SBIR story of good ideas laying fallow because they don't have the right forcing functions getting them to scale. And we need to be taken seriously by our coinvestors and our follow-on investors it's our ultimate end goal that Prime companies are as attractive to follow-on market rate investors as possible. So we don't want them to be branded as kind of charity cases, they are not, they are what we think are the best ideas they just happen to be a poor fit for traditional asset classes right now.
Sarah Kearney: That was a long way of saying, our investment fund is a single-member LLC that is owned by Prime the non-profit and it inherits the non-profit status and that's important for donor-advised fund or foundations that want to come in using philanthropic capital, like transactionally it's easier for them to do that into a non-profit entity but the for-profit fund functions a lot like venture capital funds firms that you're more familiar with. It has a management company that employs investment managers. They are compensated based on a budget that's drawn from the fund. We have manager performance incentives. In our case because its a non-profit fun their incentives are gated by climate impact milestones. And so if so companies we support are not achieving the gigaton scale emissions reduction or working their way towards the products and services that could achieve gigaton scale emissions reduction our managers don't participate in financial reward even if those companies are very lucrative.
Sarah Kearney: So I think there are kind of corporate form and business strategy choices that we've made to imbue the whole thing as non-profit while also being thoughtful about what are the aspects of what are the aspects of what we're doing that need to lean very for-profit. And I will say the hardest and most important thing that we do is in the selection of the people that are making our investment decisions. They have to be really talented, deeply knowledgeable people that also have climate change mitigation in their heart. Its hard, hard to find those people, they are unicorns. I feel very very fortunate with the team that we've built so far.
Jason Jacobs: If you had to chose between the purity of mission orientation with maybe mediocre investing skills from a market based standpoint or steller based market based investing but with a bit more of a green washed perspective with the right words but maybe not authentic to the mission, where would you come down?
Sarah Kearney: We're fortunate we don't have to make that choice.
Jason Jacobs: Oh.
Sarah Kearney: It's a false dichotomy. No I really, I can say that now because we're in midst of recruiting and building the team and we've just been inundated with totally badass investors, like you and are kind of scared like, "How do we solve this global problem?"
Jason Jacobs: Just switching gears for a moment if you look at overall philanthropy I've been told, actually I was told yesterday from your college Nicole that you introduced me to, that climate philanthropy it's not a very dense ecosystem of climate funders. I mean it looks more in the dozens in terms of the total number of meaningful funders in the space. So I guess one question, is why is that?
Sarah Kearney: That's a difficult question to answer.
Jason Jacobs: Because Yale, didn't Yale do a study that said "51% of people in the U.S. are concerned about climate change" yet there's only a few dozen climate funders?
Sarah Kearney: Oh man, I view this a little bit in a Game of Thrones light. We have the existential risk of the white walkers but we also have all the political goings on of the realm. And history of philanthropy comes from relief of the poor. And I think given that history combined with human nature which is myopic, like you want to see that the good that you intend to do is happening you enjoy seeing immediacy in impact.
Sarah Kearney: Climate change is this difficult perfect storm of the consequences are very long term, they are uncertain in some ways, and complex, and yet the interventions to address it need to happen immediately with urgency at large scale and are also complex. So I think the dynamics of the problems and the needed solutions makes this a very difficult area. I don't think that there's a lot of people that need to be converted to be highly anxious about the threat of climate change. I just think a lot of people feel powerless or just don't actually have the resources to do what is needed.
Sarah Kearney: So it's not a first order problem of convincing people that climate change is important. It's a second order of, order of "Okay once you believe that climate change is an existential threat that needs to be addressed, what are the levers that need to be pulled and who has the resources to pull those levers?" That didn't really answer your question about why there aren't more philanthropic funders but ...
Jason Jacobs: But the obvious followup question to that is, if a high percentage of people are anxious about it and a low percentage of people are mobilized what do we do to change that?
Sarah Kearney: My personal take is that there needs to be a better market segmentation of who has the resources to do what. And better tools to help those with appropriate resources appropriately and probably work together. So one thing that I think has been special about what we've done at Prime is, given the context of having relatively few funders already committed to climate as a category, is that we've measured our success by the number of first time philanthropic investors that we've mobilized. People that have never made a program related investment or recoverable grant before and by the number of first time energy or climate investors, so people that had never done a grant or an investment to anything related to climate change. And so now of the 90 some parties who have participated in Prime transactions, at least 40 of them had never done anything in climate change before. That to me is meaningful, we need easy on ramps.
Sarah Kearney: But what we're doing that is also, very few kind of traditional philanthropists do, is recognize the power of science and engineering innovation as a lever to pull. I think historically in the same way that philanthropy came from a place of poverty alleviation, the kind of default levers to pull for philanthropists are policy advocacy. And in a lot of cases here to achieve scale the power of markets needs to be harnessed. And so, power of markets can be early stage innovation, it can be later stage deployment, there's all different stages of the innovation and deployment pipeline but it's exciting to me that we're pulling in the non-usual suspects to do that.
Jason Jacobs: Well given that you're focused on the breakthrough technology segment one of the things I've heard from the I'll call the deployment crazies is "We already have everything we need from an innovation standpoint and we just need to deploy what we've got. And oh by the way even if we don't have what we need we don't have time for breakthroughs because deployment takes so many years that we should just work with whatever we've got already given the timescale that we're working on."
Sarah Kearney: I find that to be another false choice. I was fortunate to write a paper with Professor Fiona Murray from MIT and a gentleman named Scott Burger who is just finishing up his PhD at MIT and Liqian Ma who leads the Mission ...
Jason Jacobs: Cambridge Associates right? Yeah, I met Liquian.
Sarah Kearney: Yeah, he leads the Mission investing team at Mission Associates. So the four of us together kind of basically put forth this thesis that early stage innovation all the way through late stage deployment is like a succession of feedback loops. Right, if you have a proven solution it still benefits from innovation in place and aspects of it go back for new invention. It's a more complex system then kind an oversimplified take that it's innovation versus deployment. So I suggest the Stanford Social Innovation Review article on the subject. It's a false choice.
Sarah Kearney: And it's also a little oversimplified in terms of different asset owners that have the capacity to participate in different parts of the innovation and deployment pipeline. I think a lot about a single family office that we work with that has a donor-advised fund, a foundation, a direct investments team, and a wealth advisor. And So for them, through their wealth advisor they're probably Lps in project finance vehicles that are deploying the proven solutions of today. Through their direct investments they're supporting kind of growth stage equity in the developing world. Through their donor-advised fund they're doing Prime transactions and through their foundation their advocating for political leaders that have the will to someday put a price on carbon.
Sarah Kearney: And so I think this idea one solution, prioritized over another is not nuanced enough in terms of the asset owners and their own priorities and constraints and how it might fit across that whole pipeline.
Jason Jacobs: So for the people out there that are concerned about climate change and maybe not mobilized yet as you said feeling anxious about it, what advice do you have for them in terms of where to start? Because you mentioned there's the Prime route, there's the traditional climate NGOs, there's the policy realm, there's probably a number of other places I'm not thinking about right now so I guess how does one get going and how do they go about where the right place is for them to anchor.
Sarah Kearney: I would say the right place to start, as with anything is kind of to know yourself, what are you bringing to the table. Is it your time? Is it your own expertise in a relevant field? Is it your charitable dollars? Is it your investment dollars? Do you have a huge family and you can change their behavior? Are you a particularly persuasive person and you can influence? Do you get really fired up and you want to take it to the Hill?
Sarah Kearney: I think just think about your strengths and I would say whatever assets and strengths you have then go on a learning journey to figure out how to bring those assets and strengths to bear. This is the biggest challenge of all of our lifetimes and we need all of it going to all of these things. It is not an either or. Do I think there is more efficient things that you can do? Yes. Do I think that any of it is not valuable? No. The scale of the problem and the scale of require solutions can not be overstated.
Jason Jacobs: So if you take out any individual personalities and skillsets and you only just talk about a hundred billion dollars, if you had a hundred billion dollars in your hands right now and you could put it towards anything to help with the climate fight how would you allocate that for it to have the biggest impact?
Sarah Kearney: Personally, I wouldn't want to have a hundred billion dollars. Just having the personal experience of seeing how small dollars when allocated thoughtfully that have special ability can be almost more powerful. You don't need a special allocation of a hundred billion dollars if you can catalyze and unlock all of the global assets toward this. And so to me, what's much more valuable would be $500 million dollars of philanthropic capital that I can apply surgically to then unlock all of the global markets to run in the direction that we want them too.
Jason Jacobs: So is climate then properly funded then with the few dozen donors that we have?
Sarah Kearney: A few dozen is not quite the scale that I'm talking about. But I think if we can get of the 86,000 foundations of the U.S. if we can get even 5 or 10 percent of them substantively committed to this it would be very meaningful. 1% of all the assets in U.S. private foundations outsizes all of U.S. based venture capital. So there are scale questions and fit questions that are more relevant then an allocation of a very large fund.
Jason Jacobs: I guess one final question that comes to mind is just, you alluded at the beginning of this discussion to the ambition of Prime beyond climate and that the model could apply in a number of other places. I find myself with two reactions to that. One reaction is, that's awesome because if you prove it out on climate and the same loophole but whatever, the white space you found with the tax codes to enable this kind of philanthropic investing in innovation could be not just applied to climate innovation but a whole bunch of other innovation I think that's awesome. But the other side of me says climate is such a huge problem and we're so woefully unequipped to tackle it and I would hate to see Prime lose it's focus when it could be driving ruthlessly to make as big a dent as possible on this problem. So how do you think about that trade off?
Sarah Kearney: Yes I think about that trade off all the time. Prime itself as an organization is committed to and will remain committed to the sole mission of climate change mitigation. So organizationally everything I'm about to say I will not allow to be a distraction from that mission. That said if we can share ...
Jason Jacobs: We have the proof on this recording.
Sarah Kearney: I know, that's great. But if along the way as we built out our additionality rubric and our investment advisory committee to establish additionality, and we built the corporate form of a fund that is unabashedly impact first, and that took a year and a ton of attorney time. If we can share what we are learning about surprising aspects of impact first investing, best practices, things we could have done better and saved other people time, energy, and avoid potential abuse by others that would make a black mark on the whole market place that's something that I am interested to do.
Sarah Kearney: One step that we've taken so far is that we share our fund formation documents with anybody that is interested in building an analogous vehicle.
Jason Jacobs: I heard that, and that spirit is so important. And the funny thing about that is not only is it so important given the scope of this problem but just in business in general even if you're building an ad network or something. I just think that collaborative spirit is better business, selfishly, it's better business as well.
Sarah Kearney: I find it to be more fun.
Jason Jacobs: That too. Life's too short. And that's the other thing, if you're living paranoid looking both ways and whispering everywhere that you go that's no way to live either.
Sarah Kearney: Yeah I will say that it's become easier over time to live that value myself. When you're starting something you feel like the world is small and you kind of have to defend your territory and your network to benefit what your building. Just in the last couple months, our goal at Prime of flipping philanthropists from being afraid to go first on something that's new and hard to now being afraid to miss out on something that makes a lot of sense. That is a win, win, win, win, win, all around, that tipping point is just happening now. And the universe is so much bigger then even I knew and I've been the one beating the drum on how big this opportunity is. And so I don't mean to toot my own horn and say that I've always been able to be that open and sharing but I'm just understanding the depths of the opportunity here for humanity and it's going to need a lot of people in the army. Let's get all the soldiers up to speed so that we can solve some of these problems.
Jason Jacobs: It's funny, you know I mean, I'm just building a humble podcast over here. But when I think about the podcast listener I'm thinking about it similarly in the sense that, I mean I want the insiders who have been doing this for 20, 30 years to respect the efforts and to tune in. But this is really not focused on them, they already know all this stuff. And to be honest it's also not focused on the other extreme Of the skeptics and people that just think this is all annoying paranoia and should go away.
Jason Jacobs: It's focused on the people who are thoughtful and intentional about how they live their lives. That are out accomplished in whatever their field of pursuit is but who are not mobilized in this area and who's conscience is just weighing on them because this issue is just getting in their brain more and more and more and more. But their not doing anything about it yet. They don't know how to think about it. They don't know where to help, how to help, where to start. So if we could give them a little nudge to get them over the edge then we could get them up the learning curve faster and figure out what their piece should be. Then in our own weird way that's helping the cause.
Sarah Kearney: I will in my suggestion to kind of understand your own assets and strengths and what you can bring to bear on the problem, I would be remiss not to say if charitable capital is one of those resources please come and talk to us at Prime we would love to have you in the tribe.
Jason Jacobs: Awesome. Well I'll definitely keep that in mind and I will take you up on that and talk to you more about it. And I guess the last thing is just what haven't I asked you that I should of, or what parting words do you have to our listeners?
Sarah Kearney: If you're still with us at this point in podcast thanks for being interested in our story. I think of it as kind of this amazing Cracker Jack team of badasses toiling away. We work really hard day in and day out and we are very appreciative of other people who share this mission. So thank you for being interested in the topic and digging in and listening in to our little story.
Jason Jacobs: And where do people go with they want to learn more about Prime Coalition?
Sarah Kearney: You can visit us at www.PrimeCoalition.org and if your a philanthropist you can enter your email address and we'll be in touch with you. You can also just sign up for general email updates which we send once every six to nine months. So we do not inundate you with stuff. But if you want to be in the know about with what we've been up to we do send out updates every so often.
Jason Jacobs: Okay Sarah Kearney thanks a lot for coming.
Sarah Kearney: Yeah. Thanks for having me.
Jason Jacobs: Hey everyone. Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey you can visit us at myclimatejourney.co note that is .co not .com someday we'll get the .com but right now .co. You can also find me on twitter at @jjacobs22 where I could encourage you to share you feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, please share an episode with a friend or consider leaving a review on iTunes, the lawyers made me say that. Thank you.
