The Next Generation of Family Offices with Integrated Capital Strategies

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Jan 20

Sharon Schneider is the Founder of Integrated Capital Strategies, a consulting firm that helps founders and family offices drive positive social change. Her firm specializes in setting up or realigning family offices to better align with the values and evolving priorities of individuals seeking a more integrated approach to life.

We invited Sharon on the show after being inspired by one of her posts, where she highlighted a growing trend: younger generations of high-net-worth families are rethinking their relationship with family wealth, especially in light of climate change.

In this conversation, we explored the distinctions between impact capital, aligned capital, and catalytic capital, and how family office strategies can incorporate these concepts. We also discussed key considerations for entrepreneurs and fund managers when engaging with family offices, how family offices can structure loan guarantees to address the first-of-a-kind project finance gap—and much more.

Episode recorded on Dec 19, 2024 (Published on Jan 20, 2025)

In this episode, we cover:

[2:13] Sharon’s journey to founding Integrated Capital Strategies
[8:42] Her perspective on catalytic capital
[12:27] Feedback from family offices: privacy and urgency
[16:14] Fiduciary duties of family offices
[19:25] How Sharon collaborates with family offices
[23:30] Tips for high-net-worth individuals
[27:23] Guidance for founders approaching investors
[28:53] Advice for GPs raising capital
[32:55] Underutilized tools in catalytic capital
[37:40] More advice for founders seeking funding
[41:57] The role of corporate strategics in startups
[44:11] Sharon’s outlook on the future of family office investments

Cody Simms (00:01):
Today on Inevitable. Our guest is Sharon Schneider, founder at Integrated Capital Strategies, a consulting firm that helps founders and family offices create positive social change. Her firm helps set up or realign family offices to meet the changing needs of individuals seeking a more values-integrated life.
(00:23):
I was inspired to bring Sharon on the show when I saw a post from her a few months ago talking about how she was frequently hearing from younger generations of high-net-worth families that they want to think about the relationship with the family's money in a different way, and in particular how climate change plays a role in that. We covered a lot of ground in this conversation talking about the differences between impact capital, aligned capital and catalytic capital and how a family office strategy could or should think about these. We also discussed considerations for entrepreneurs and fund managers when engaging with family offices, and we talked about how family offices can structure loan guarantees to help with the first-of-a-kind project finance gap and so much more.
(01:09):
But before we start, from MCJ, I'm Cody Simms and this is Inevitable. Climate change is inevitable. It's already here, but so are the solutions shaping our future. Join us every week to learn from experts and entrepreneurs about the transition of energy and industry.
(01:37):
Sharon, welcome to the show.
Sharon Schneider (01:39):
Thank you.
Cody Simms (01:40):
You and I met a few years ago through a mutual connection and then I reached out when I saw a post you did on LinkedIn earlier this year where you basically were saying we need a new framework for family offices and how family offices think about the idea of legacy, I think was kind of the overarching theme. So I want to spend some time digging in on this, but maybe before we do that, let's hear a little bit more about you and your background and the work you do. Take a few minutes and introduce yourself.
Sharon Schneider (02:13):
Thank you. I started right out of grad school in pure philanthropy, so I worked for The Pew Trust doing strategy and evaluation, social change. How do you increase the voter participation among 18 to 24-year-olds from the historically pathetic 16% up to, let's say, 20%? And you do a series of grants to try to encourage that. So, DoSomething, for example, if you remember that organization from the '90s. I was doing strategy and evaluation and I was recruited out of there by a startup called Foundation Source that was administering private foundations and lots of our clients were entrepreneurs. You know how entrepreneurs are, they a crazy idea and say, figure out how to do this. And got really good at the creative grant making and using that budget, that 5% that foundations have to give away.
(03:11):
I then said, well, I love what we're doing with the 5%, but what about the 95%? Because that's 20 times more money and it's kicking our ass. And that became the field of impact investing, and this is the early aughts. It really wasn't a mainstream idea. And then for me, the next question was how'd you make this money? And again, realizing that a lot of times the source of the funds was creating the problems. And then you took a little bit of the money you made, put it in a foundation and then took 5% of that and were trying to solve it. And it sort of felt like, well, this isn't going very well. Maybe we should start working with those other two much larger buckets of money.
Cody Simms (03:56):
By the way, that phenomenon holds through in lots of things. Big corporates get that same feedback for their corporate venture capital efforts. They make their money doing this stuff that isn't that great. But then, oh, but they're investing in innovation over here. It feels like a persistent trend across the capital stack, to be honest.
Sharon Schneider (04:12):
Absolutely. We're often told to give people a gold star and a pat on the head and the title of philanthropist for doing something with the 5% while they might be doing much more damage with all the other stuff. And so I just was really uncomfortable with that. I left to start a for-profit social enterprise. We actually went through Accelerate Labs, now Techstars Chicago, raised a couple rounds of venture capital, scaled to a certain amount and then sold to a competitor that had much better business school contacts than I did and had raised $50 million from their buddies or whatever. So not the kind of exit that made me wealthy, but boy did I learn a lot. And so now I had added to my social change toolbox having been an operator, having been through venture capital term sheets and due diligence and the tech startup world. Which I was like, hey, 90% of this is hot flaming garbage. There's a couple of really great concepts like rapid feedback loops and human-centered design.
Cody Simms (05:18):
Let me give a quick shout out just to Troy Henikoff from Techstars Chicago. He doesn't run Techstars Chicago anymore, but he's a mutual friend you and I both have and he's an amazing human. So Troy, if you happen to be listening to this, thanks for all the impact you've had on my life and on Sharon's it sounds like as well.
Sharon Schneider (05:32):
Yes. He was not part of the hot flaming garbage. He was one of the great parts for sure. Having had this new tools in my toolbox, new skill sets, combined with all the social change work, I was recruited then by the Walton family to help their individual family members set up support, strategize, structure with their social impact work. So they have the Walton Family Foundation, that's their joint vehicle that they do together, but each individual family member was like, well, I'm interested in something slightly different. And so it was sort of like creating an internal consulting firm.
Cody Simms (06:13):
And the Walton network, while it has one name Walton, they all operate somewhat independently but then have this common entity across them to help coordinate activities. That's sort of my understanding of how the Walton Family groups work together. I don't know if that's accurate.
Sharon Schneider (06:29):
Well, you didn't hear that from me.
Cody Simms (06:30):
Okay.
Sharon Schneider (06:32):
It's a complicated ecosystem is what I would say. But now there's lots of individual family members have their own entities, but that's exactly what they didn't have in 2016. And so, what we were mutually attracted to was this all of the tools in the toolbox. Not being told you're a grant maker, which you have is grants or you're a market rate investor, what you get to work with is market rate investments. But instead of like, hey, if you care about ocean health or if you care about early childhood education. Sometimes the right capital is going to come in the form of a grant, maybe it's super early in high risk, maybe it has no chance of earned revenue to pay anything back. Sometimes it's going to be a loan. Sometimes it's going to be equity. Sometimes what's needed is advocacy, actually advocacy dollars like 501(c)(4).
(07:23):
But the ability to integrate all of those kinds of tools and align all of your capital, different buckets have different return profiles. So usually philanthropy has no return profile. Usually you have some investments that you want market rate growth kind of thing. Maybe you have an operating business, maybe you own different properties. You want all of these things to have some kind of impact profile even if they don't have the same return profile. We worked together and I kind of helped incubate the beginnings of their organizations with structure and strategy and hiring some early staff people. And then they've all spun out and they are independent, and so I am now a consultant that helps other families with that same work.
Cody Simms (08:17):
What I'm hearing you say is the idea of what is your cause, what is the thing you care about, what is the impact you want to drive? And then how do you apply that strategy against both your philanthropic efforts but also your for-profit investing and other things you want to use your money as a lever on, whether that's advocacy, giving to foundations, et cetera. Am I following correctly?
Sharon Schneider (08:42):
The term that's come into popular use for this bucket is catalytic capital. The idea is you're willing to be flexible about how you deploy it, but essentially you're also willing to part with it. It's not the bucket of money that you're trying to grow, pass on. It's almost like in the past it would've been your giving budget, it would've been pure grants. But we're expanding the toolbox. In the past, maybe you gave 5 million in grants. Now we're talking about 5 million, some of which might go out in grants, some of which might go out in loans or equity investments. It's all intended to be catalytic. It's not growing your own wealth. That's not the purpose of this capital. There are different buckets that then are what you kind of alluded to as your return seeking investment capital.
Cody Simms (09:30):
And that may still have some kind of lens on it, right? An impact lens or this, that and the other.
Sharon Schneider (09:35):
And I call that aligned, it's values aligned. You're not really impacting things because if it's market rate returns, the market will fill that need. You are not playing that role. You don't get a gold star for that. It's aligned to your values, which is better than not being aligned. But that's not impact investing that's aligned investing in my parlance.
Cody Simms (09:56):
It's interesting from where I sit in terms of thinking about clean energy and climate change because many would argue that the only way this stuff works is if you get it into that aligned bucket, you get it into the world where it doesn't need impact capital, it goes out and wins on the market side. Solar is now cheaper than natural gas, for example.
Sharon Schneider (10:17):
That's right. So the people that invested to get solar to this point, those were impact investors. If you today are doing solar, you're not. Those people sacrificed something and they get the title impact investor and you get the title today. That's the whole issue is if you look at a Project Drawdown, they've mapped out all the different things that need to happen for the climate environment saving us from the one and a half degrees stuff and then they map where the money is and where the vast majority of the money is in the things that will produce a market rate return, not where we need it, but where people can get the return.
(11:03):
So it's in electric cars and it's in solar and there's so many other needs that aren't profitable yet or that just are never going to be market rate returns. And so, it's putting your money in those places I think is where you can truly say I'm having an impact versus I'm standing on the shoulders of impact. So I'm a little crabby about this topic because I just think everybody wants to claim a certain moral superiority of being aligned or they say you don't have to sacrifice return for impact. If you're not sacrificing anything, is it really impact?
Cody Simms (11:40):
Interesting. Even in the little slice of the world that I live in, in venture capital, early stage venture capital in particular, you can have funds that are impact funds that are investing with the hopes of getting some return, but also are driven by some other kind of metric or KPI that they're trying to move. And then you can have market rate venture firms that are investing believing that their thesis is going to outperform because the tipping point is kind of already there for the thing that they invest in.
Sharon Schneider (12:12):
So impact is just the source of alpha and I think that is the bigger pool of money for sure, and that's where a lot of people choose to place themselves in the capital stack.
Cody Simms (12:23):
But you would call that aligned capital not impact capital?
Sharon Schneider (12:26):
Yes, I would.
Cody Simms (12:27):
Okay. It's good definition. That's super helpful to hear. So let's come to this world of family offices and some of the generational feedback you are hearing that prompted you to write this post a few months ago. You said the current worldview in the family office space is to grow and preserve wealth in order to pass it on to the next generation to protect wealth from downside risk and minimize taxes. You said, hey, I'm starting to hear from a lot of principals who maybe are the next generation of the family or whatnot, and they're basically saying, what if seeding a multi-generational dynasty isn't my goal? Thanks dad or thanks grandma or whomever it was, appreciate you, but I'm looking down the line and maybe that's not what I care as much about. Tell me more.
Sharon Schneider (13:13):
At this point, I've worked with dozens of family offices and sometimes it's the first generation wealth creator and sometimes it's a subsequent generation. For so long the primacy and assumption that the only smart thing to do of course is to grow, preserve, pass on, maximize your own wealth at the expense of everything else, and avoiding taxes is just a subset of that. What I started to find was that that assumption just isn't as reliable as it used to be because there are other factors that people want to take into account.
(13:54):
For example, it could be something like privacy. If privacy is more important to you than tax deductions, for example, this is one of the reasons you end up with an LLC as your charitable managing vehicle over, let's say, a private foundation or a DAF. You don't get a deduction when you put the money in the control of an LLC, that's not a tax-exempt entity. But you don't have to report on what it does, you don't have to report on how much it's paying in salaries. There's so many more elements of privacy. And the trade-off is you don't get the tax deduction until you actually give the money to an operating charity, which you might argue is how it should be anyway, instead of tucking it away in your own account there.
(14:36):
It could be something like privacy or it could be urgency. Again, a lot of younger people, and by that I mean 50 and under, feel the urgency particularly around climate is such an existential threat today that preserving a foundation or other endowment and doling it out 5% at a time while investing in God knows what climate damaging technologies to make sure that it grows at 8% because you have to keep up with both your distribution requirement and inflation. So most foundations, it's like an 8% return. They can't justify that in the face of inequality, in the face of the planet is literally on fire. And yet their advisors just are used to not asking. It's the only logical way to feel, you preserve and grow your own wealth.
(15:32):
I think family offices are often established by very smart, very capable professionals that have been trained in what I'm increasingly hearing called the wealth defense industry to set up structures and put people in place and incentivize them all about preserve, grow and pass on the maximum wealth. It doesn't fit. It doesn't work for these next generation.
Cody Simms (16:01):
Is there a oath of office kind of thing you take around fiduciary duty or something that is requiring you to make certain types of recommendations if you are a chief investment officer of a family office?
Sharon Schneider (16:14):
Yes and no. In that fiduciary duty itself, you have this legal and professional obligation if you're in certain positions as a fiduciary, and that was traditionally defined as doing what is best for the beneficiary, which is the next generation family member or the foundation. But how do you decide what is best is where you see the split.
(16:41):
So the IRS a number of years ago said for private foundations or for donor advisements, for charitable entities, that your duty, your fiduciary duties, you owe them actually to the mission of the organization, not to its perpetuity or to its checkbook. So that for example, if you make investment decisions that might ultimately be concessionary or just in some way not market, but you're doing it for the purpose of the mission, no problem. You're absolutely exempt from any prosecution of jeopardizing investments or failing in your fiduciary duty.
(17:14):
The problem is that leeway has not been officially extended to fiduciary duty outside of the context of a charitable entity. So if you have set up just a trust and there is a trustee and they have fiduciary duty to what is best for the beneficiary and the beneficiary says, well, it's not my best interest to have the planet on fire. They say, oh, sorry, that's not what we mean. But who says that? Who says that does or doesn't count?
(17:43):
And so where I also see innovation... I just talked to someone this morning that both got out of a trust that her grandfather had set up, thankfully her grandmother was still alive and was able to help in that legal wrangling, but is looking at how do you create professional trustee services that accept this expanded definition of what is in the beneficiary's best interest to include a healthy planet society, a broader definition of best interest.
Cody Simms (18:17):
I mean it sounds similar in the company formation framework to a public benefits corporation sort of thing where you actually bake the mission into the bylaws of the company so that the shareholders of the business are obligated to continue to keep the business on track for fulfilling that mission.
Sharon Schneider (18:37):
More specifically, what those legal forms usually do is release you from being able to consider only what's best for the shareholders and say, you may take into account also what is best for the vendors, the employees, the community. Because people had argued that by law a company could only take into account what made the most money and that's how we got to where we are. And so releasing you from that restriction to say, actually it only makes sense to consider you have to have a healthy society, a healthy community, to have purchasers you need consumers. And so constantly maximizing only for your own benefit is a short-term play and let's think of a long-term play, how we can all benefit. Then that ultimately benefits the company.
Cody Simms (19:25):
You started out with this context of 95% of the wealth is invested in a market rate context and you've got this little sliver over here of 5% that's philanthropy or maybe even impact capital that is sort of mission oriented. Is the work you're doing helping people figure out how to grow that 5% pie or is it creating new structures in addition to the existing 5% pie that already exists over here?
Sharon Schneider (19:50):
It's both. If this 5% is your giving budget, let's be more creative in using all the financial tools in the toolbox to accomplish your mission.
Cody Simms (19:59):
As opposed to just doing grants. This is where you said, hey, there's these other things you can do like loans or advocacy work or whatnot.
Sharon Schneider (20:06):
Or loan guarantees or equity investments or whatever. There's a lot you can do. Let's also then turn to the other buckets that might have a different return profile, so again, you probably do have or you might, not everybody does, but sort of a bucket or an amount that you wish to grow and so that has a different return profile. It can still have an impact profile. Again, aligned investing, it's not bad. It's better than not being aligned.
(20:32):
And then there's your operating business. And so I work sometimes with management teams and the operating business to say, what does this look like in our context? We have property teams, so they might own five properties and maybe one of them is a working farm and they want that farm to be operated in alignment with their same values and principles. And so I call this an integrated life to bring the same values across all of your assets, whether you're a regular person like me or whether you're a billionaire. It takes a little bit of work and alignment and if you're not trying, you're probably violating your own values 10 times a day.
Cody Simms (21:09):
I recorded a few months ago with Tom Steyer of Galvanize Climate Solutions and I knew Galvanize mostly as a growth equity investment firm, but one of their three strategies is a real estate strategy and in that real estate strategy they are buying legacy industrial properties and basically greening them. They're investing in the technology of those properties to make them more oriented toward cleaner technologies. That strikes me as a kind of strategy that many family offices could do given that many of them have pretty substantial real estate holdings.
Sharon Schneider (21:43):
And again, in every asset class there's opportunities. Whether it's real estate bonds, commodities, private equity, VC. I mean the funds that you mentioned that will be impact-themed venture funds, yeah, they fit into a diversified risk-adjusted market rate portfolio in the sleeve of VCPE. Which might be 15% of your overall liquid assets you have allocated. And then you look for VC funds that are impact-thematically aligned to your values and you do the same in real estate and you do the same in bonds and you do the same in stocks, that's what SRI or ESG screens are. That's just that one asset class.
Yin Lu (22:28):
Hey everyone, I'm Yin, a partner at MCJ, here to take a quick minute to tell you about the MCJ Collective membership. Globally startups are rewriting industries to be cleaner, more profitable and more secure. And at MCJ we recognize that a rapidly changing business landscape requires a workforce that can adapt.
(22:48):
MCJ Collective is a vetted member network for tech and industry leaders who are building, working for or advising on solutions that can address the transition of energy and industry. MCJ Collective connects members with one another with MCJ's portfolio and our broader network. We do this through a powerful member hub, timely introductions, curated events, and a unique talent matchmaking system and opportunities to learn from peers and podcast guests. We started in 2019 and have grown to thousands of members globally.
(23:22):
If you want to learn more, head over to MCJ.VC and click the membership tab at the top. Thanks, and enjoy the rest of the show.
Cody Simms (23:30):
What I want to do with you is go down a few different actor types, people in our world. We'll start with high net worth individuals in particular, but I think we'll talk about how should entrepreneurs think about this, how should venture fund managers think about this, et cetera, et cetera. And what I want to do is hear from you what steps to take, what these interactions look like.
(23:50):
If I'm a high net worth person, I'm planning to inherit a lot of money from a family business and my brother and sister are equally probably in that pie. And I know I want to do something different with my family's money than has been done before, where do I start? What do I do?
Sharon Schneider (24:07):
Set yourself up to get a seat on the board. As a former entrepreneur, it's funny because some of my investors were self-identified impact investors and one of them wanted to create a whole side letter around my impact. And I said, sure. I mean that's fine. I'll do a side letter, but what you need to understand is when the next round comes along, if, I don't know, Andreessen Horowitz is coming in, they're going to laugh at your side letter and rip it up and dominate things. What you can really do here is continue to lead my future rounds or be highly influential and take a seat on the board so that when the decisions are being made about how to operate and when the trade-offs come... The good news by the way about environmental issues is a lot of them are cost saving, and so it's actually the easiest thing to do because it usually saves the company money.
Cody Simms (25:00):
You're saying a seat on the board of the actual business, the operating business?
Sharon Schneider (25:06):
Yes. Again, we tend to skip right over that and go to the philanthropy, which is such a tiny portion. And I'm like, go get on the operating company.
Cody Simms (25:14):
In many of these families the vast majority of the wealth is the equity they own in the operating business.
Sharon Schneider (25:19):
It's still the source. And again, comparatively speaking, what is liquid is much smaller than what's tied up in the operating capital.
Cody Simms (25:29):
Everyone listening who wants to see the inner workings of this should all go watch Succession I guess, and really understand the dynamics involved in being on the company board.
Sharon Schneider (25:43):
And that's what I mean by set yourself up, get educated about how to be a board member and get the credentials or whatever it is. I often think of myself as a Trojan horse that comes in and once you're in the door and then, oh, look at these ideas. In some ways you have to play the game a little bit of how do you get yourself in that position to really have an influence. And if you're a family member, you're halfway there, but you still got to do the credentialing.
Cody Simms (26:07):
And boy, I'm sure if you're a family member who never operated in the company and you're trying to sit around the table with the CEO and the CFO and senior execs and these big wig other board members who are CEOs of other public companies, they look at you a little askance I would guess. Is that true?
Sharon Schneider (26:27):
Yes. Well, they won't even let you on the board if you don't demonstrate, sometimes you get the board seat just because you're the family member, but if there's multiple family members to choose one, it's the one that went to business school and the one that was in some business field. I've increasingly heard the term the wealth defense industry. And I think that again, it's sort of this orientation that the way that wealth protects itself is that it also recognizes threats and neutralizes them before it can get too close.
(26:58):
If you're a family member that was picking daisies all these years and then you're like, I'm going to be on the company board, they're going to pat you on the head. You really do have to some extent to get that seat, learn the terms. A great writer they'll tell you has to learn all the rules of grammar so that they can break them in a way that is meaningful and make sense and doesn't just look like a collection of mistakes.
Cody Simms (27:23):
Let's go to a different actor in the system. If I'm a startup founder and I'm trying to pitch a family office to invest in my startup, what should I know in particular around... If I somehow networked on LinkedIn to a 25-year-old principal in the family who's been posting about climate change and I'm like, oh, I know this person cares about my issue. Maybe I can get them to angel invest personally, I don't know. What should I be thinking about?
Sharon Schneider (27:49):
I think you should be thinking of them like an angel investor. The thing that again is almost a dirty secret of wealthy inheritors is that most of the wealth is tied up in institutional structures and with managers and it ain't them, they essentially get an allowance. Again, if they are the chair or they are the business one in the family, they may have access. But they have professional managers and those managers are probably looking for funds. If you're an individual company, it's very hard to get a family office to do anything because there are layers of people between direct investments and a family office principal. Sometimes you can get someone to write a direct check, but usually more like an angel investor. They're looking for funds or managers and the manager select funds and then the funds select investments, so there's a lot of layers in between.
Cody Simms (28:52):
Well, let's go to the next class then. If I'm a general partner at a venture fund and I'm raising my next fund. Let's say in this case I get introduced to the principal, where do I go? What do I do?
Sharon Schneider (29:04):
What'll be really telling is, again, the principal might be the door opener, but then there's probably a chief investment officer. There's either the aligned capital side or there's the catalytic capital side. So which side are they thinking of you? The problem that I often see is people aren't sure. These are often two different buckets with two different staffs, two different mandates, and you got to fit into one. And a lot of times both for entrepreneurs but also for funds is they're in between or they're just not a clear fit for one mandate or the other.
Cody Simms (29:42):
Particularly climate funds, I feel like, because they probably get sent over initially to the impact side. But if they're not driving impact metrics or reporting on specific impact KPIs, they may not be a fit and then the market rate, quote-unquote, side maybe say, oh, we don't have a climate strategy over here. You're kind of stuck there.
Sharon Schneider (30:05):
Exactly. Again, it's just alpha on top of meeting all of our other investment criteria. So you don't meet our other investment criteria, so sorry, we love what you're about, but it won't fit for us. So I think figuring out which one, are you going after the catalytic capital allocation or the aligned capital allocation? Is critical step number one, and then making sure that all of your materials back that up. So for aligned investments, you have to meet all the standard criteria and then also be thematically climate. I mean the good news if you're going after the aligned capitalists, their idea of impact is usually not that deep, it's sort of thematic. And if you're in the right theme area, great.
Cody Simms (30:49):
You're investing in clean energy, not oil and gas, check.
Sharon Schneider (30:52):
Yes, exactly. Or like ed tech. Oh, it's educational. That's good. That's positive. Versus on the catalytic side, they're like, we're trying to raise test scores specifically among underserved or historically excluded populations, you're not on target enough. It really is about picking a lane and then meeting the criteria of that lane.
Cody Simms (31:15):
What I'm hearing you say is then generally the individual family member's personal passion or personal interest was more important at the formulation of the strategy is probably less important at the decision point of is someone going to write a check into this company or not?
Sharon Schneider (31:32):
That's a good way to put it. I mean, if you have a personal relationship, I've certainly seen many, many times where the wealth holder is like, I really want to do this, it's my friend, and they kind of don't expect a lot. I don't want to say that doesn't happen, but if you don't already know those people, it's not like you're going to meet them at a cocktail party and they're going to write you a check three weeks later. That is very deeply relationship-based. And so it is at the moment of the investment policy statement, when that's being formulated, is when hopefully they have advisors who take into account and guide them to incorporate those ideas at that moment.
Cody Simms (32:13):
And this is where the work you do comes into play and that you're helping to understand the interests of these family members and then figure out how the overall investment program tries to better represent those, if that's what I'm hearing you say across your work.
Sharon Schneider (32:30):
Yes. You can imagine the aligned capital comes with people with an investment finance background and the catalytic capital is led by people that have the topic area background or social change background, and they are taught the tools of finance or they're using the tools of finance and these people have a finance background and they're dabbling in the topic areas of impact.
Cody Simms (32:55):
On the catalytic side, since that's where you focus most of your efforts, what tools are under leveraged today?
Sharon Schneider (33:02):
One that I think is really interesting is what's called loan guarantees. Foundations and family offices have a massive, massive balance sheet. Sometimes without putting a dollar out the door, they can actually be the guarantor on let's say one of their grantees that wants to build a building and they need a construction loan and the bank wants to give them a 6 or 7% loan. And they say, look, if we co-sign it basically with our balance sheet, we give them a 2%. Because that saves their nonprofit partner or just their partner, a lot of money in interest over time and they don't even have to put the money out unless they default and they hopefully have a better reason to do that. And just loans in general.
Cody Simms (33:50):
This is what the Department of Energy is doing with the Loan Programs Office. That is their whole game.
Sharon Schneider (33:55):
Robert Wood Johnson did a guarantee facility where they basically got a number of foundations, a dozen or maybe less, that collectively agreed to guarantee loans for affordable housing developers. The cost of capital is part of what drives the eventual rent for these places. So if we can make the cost of capital as cheap as possible, then we can help maintain the affordability of the eventual apartment buildings. I love that kind of stuff.
Cody Simms (34:26):
Now, in this case, the loan guarantee model, this is a financial underwriting of this project. It's not being done for charitable reasons. The project needs to have a true return profile and presumably has some kind of financial history to be able to point to and say, look, we've done this before, we can do it again. Or are you seeing this happen for things that are basically a good idea, first of a kind project, let's see if we can make this work?
Sharon Schneider (34:51):
I advocate for the second approach. And the reason is that I say, look, the alternative is a grant and a grant is a total loss of capital anyway. In the worst case scenario, it was a grant. And in the best case of scenario, you get your money back and you can use it again. And so, when it comes to using something other than a grant tool we suddenly up our analysis, up our requirements in a way that can artificially rule out because philanthropy is best used as risk capital, that's what it is. You're trying to figure things out. You're trying to prove the case.
(35:28):
Most foundations, I would argue, or DAFs or whoever, like philanthropic capital should be way more risk tolerant because let's say you half of it, great, that's better, that's still 50% better than a grant. We tend to have a huge gap, if you think of it as a return spectrum from total loss of capital, aka a grant to market rate returns, and in between you have below market concessionary, you have return of principle only, meaning you get the money back but make nothing and then a massive gap. Nothing, from zero to 100. Why can't we play in there?
Cody Simms (36:02):
Back to your original comment that one of the motivators could be moving away from just trying to minimize taxes and whatnot. With a grant, you are getting a tax credit or tax break for the grant, it's a tax write-off that you've issued this grant. With a loan guarantee for a loan that then doesn't get returned, do you get the same kind of tax benefit?
Sharon Schneider (36:24):
Yes, if you already put the money into the charitable vehicle, so if you put the money in a foundation, you got all the tax benefits you're ever going to get at the moment you put it in.
Cody Simms (36:33):
So this helps evergreen the foundation and that it returns capital back to the foundation if it returns capital.
Sharon Schneider (36:39):
Exactly.
Cody Simms (36:40):
In the world of clean energy and climate technologies this is a big deal. I have heard it referred to by some people as, quote-unquote, first lost capital, and I guess that's kind of what you're saying, which is if you think of it as a grant, you just kind of assume it's nothing. But if it does return and you expect it to return, it's great. It brings money back into the foundation. So if you were already planning to give, why not do it in a way that helps the project also establish credit history is a co-benefit there too.
Sharon Schneider (37:09):
Exactly. I like to think of it as the driving question is what's the best way to structure this transaction to benefit the project, to benefit the impact you're seeking. Not what's the best way to structure it to benefit me, which again is the default.
Cody Simms (37:24):
The fact that you're establishing credit worthiness for a project that you want to see more of in the world is wonderful.
Sharon Schneider (37:29):
Really helpful. Exactly. Sometimes the reason you do a loan or you do a loan guarantee is not because you want your money back, but because it's establishing credit for the next financier.
Cody Simms (37:40):
So let's go back to that actor of the entrepreneur and when I first asked the question it was like, how do I raise money for my company? And you're like, ah, well, you got to get to the family office manager and then they'll figure out if you fit their strategy, and they're mostly looking for funds anyway. But in this case, a physical infrastructure project, I can tell you it's one of the biggest blockers in the industry I work in, which is these companies that kind of get to, call it, series A stage, they've got good working technology, they need to go raise 50 million or $100 million to build their first real facility. But they haven't done it before, so they can't get a bank loan for it. They're not big enough yet to get a Loan Programs Office loan from it from the DOE.
(38:22):
It's hard for them to find this money. I'm seeing corporations actually being one of the main contributors of project capital into these areas. But this is tricky and I don't know a way for founders today to navigate this, what it feels like venture capital did in the 1990s before every VC firm had a website and pitch book and Crunchbase and AngeList existed, and now you can kind of figure out who you want to go talk to. But in the '90s it was all very opaque and hard to navigate, and this exact problem feels that way for founders today to me.
Sharon Schneider (38:53):
You're not wrong. My advice would be find the people who are doing grant making in the area that you're interested in because if they're comparing you to a grant, which is total loss of capital, it looks like a good way to recycle their capital and maybe do something good if it goes well. Because if they're comparing you to their market rate return, it just looks concessionary like a bad investment. I think actually positioning yourself as complimentary to, and in the same vein. The challenge can certainly be you're a for-profit, how do you do that? And that's where they often, the internal capacity of that foundation or that family office to do those things is not that sophisticated. So it's a fairly small world, I'm sorry to say.
(39:46):
But that is often how I encourage family offices and foundations to start is to actually look at their existing partners or their existing projects and say, is there a place for capital other than grant capital that could assist achieving the impact that we want or the long-term objectives of this project? But I mean, I'm not going to lie, there's not a huge portfolio out there.
(40:14):
The one thing I might point out that you could go to look at, there's two places. One is if you're looking for these impact funds, there's something called the ImpactAssets 50. ImpactAssets is a donor advice fund sponsor and they do a list of 50 funds. Are you on it?
Cody Simms (40:32):
MCJ is an IA 50 firm. Yes, we are. Proud to say.
Sharon Schneider (40:35):
So go look at the other 49. And then similarly, there has been an effort to say, look, if we have the same due diligence underwriting criteria for venture firms that we've always had, we're going to keep getting the same results that we've always gotten. Which is white guys from wealthy backgrounds that went to Stanford or Harvard. So if we say we want different results and there's alpha to be had in diversity, which I think is proven beyond a doubt with business results, then we have to change our due diligence criteria. It's not that we're not doing due diligence, it's that instead of substituting Harvard or Stanford for actual experience and knowledge. Because that's essentially what we're doing is saying, oh, a college degree is shorthand for you have all these skills and experience, like we're saying a Harvard MBA or whatever. What else could we use for due diligence?
(41:30):
People have signed on to something called Due Diligence 2.0, and you can Google that, and there's hundreds of family offices of firms of venture funds that have committed to this new approach, and it actually lists what they look for instead. So Due Diligence 2.0 has this public signatory list that I think could be another good place in the absence of a Crunchbase for catalytic capital.
Cody Simms (41:57):
It seems as well one thing that entrepreneurs should think of is in their own industries, what are the big companies and who are the families of those big industries? What are the big cement companies in the world and what families actually started and ran those cement companies? And potentially their family offices might be more receptive to doing a thing in your own industry sector as an example.
Sharon Schneider (42:23):
They might be more or they might be less. They might be more if they recognize their own disruption is coming and they know a lot about the industry and what will work. So sometimes that knowledge can work for you. I will say I've also seen families that have absolute compartmentalization.
Cody Simms (42:43):
They know where all the bodies are buried and they're like, you know what? We don't want to do that anymore here.
Sharon Schneider (42:43):
And they don't want to face uncomfortable truths about their own company and the source of the wealth. And so it's like, we're not going to upset the apple cart within our family ecosystem.
Cody Simms (42:53):
Is there a conflict of interest concern too? They don't want to do something that could be conflicting to the core business?
Sharon Schneider (43:00):
Well, that's definitely one of the things that can happen when you're grant making and investing in the same area. Usually again, the cure for that is to do it both from inside the charitable entity because if the investment, any returns come back to the foundation for example, instead of back to you personally, it blunts some of that conflict as well. So again, if you saw that let's say family member from the cement company that was posting about it, that actually might be a good like, hey, you guys can evaluate this. You can see the value proposition in a way that many people can't. And hopefully will have again, more of those next gen disruptors in business and it trickles down to the way they invest and the way they give and the assumptions and the family office at every level.
Cody Simms (43:48):
Sharon, it feels like the whole family office phenomenon, they've been around for a long time, but it's really in the last 20 years that family offices, it feels like to me became this powerhouse force for managing capital. I don't know if it's just more people professionalize their wealth essentially. I'm curious what you think the next 20 years looks like, what trajectory are we on and how do things change?
Sharon Schneider (44:11):
I don't know if you have a lot of listeners in Europe, but they would say, oh, we've had these-
Cody Simms (44:15):
Family office has been there for a while.
Sharon Schneider (44:16):
Yeah, like 11 generations. But in the US I think you're right. It's a much more recent growth industry, and part of this is what I'm trying to create, which is an alternative to embedding those assumptions and just giving people space to take different paths. So instead of locking up all the assets behind trusts in the first generation, to the point where your third generation becomes passive beneficiaries who are infantilized and kept away from any real influence or say, how could we change everything about the way that the structures work, the incentives for the advisors? Because by the way, just like in venture capital family office executives are mostly compensated based on growth of assets. So why do you think they keep pushing growth of assets? So we have to change everything, the way they're compensated, the way that they're legally set up, the advice that they're giving just to allow for a much greater diversity.
(45:21):
Right now, it's innovation at the edges. Again, I'm seeing some experimentation with compensation for the family office executives and the chief investment officer for the family, some experimentation with impact investing or with services, but that's still that fundamental, almost original sin of the assumption of growth at all costs. Eventually, we'll have more of a revolution. But the trends that I see are women controlling more of the wealth, whether through inheritance or entrepreneurship or again, there was a very real glass ceiling for achievement in the corporate world for women, and the great wealth transfer is first going to go to women. Women are often more interested in giving and activating, in spending down, all of those things than continuing to run up the score.
(46:15):
The breaking up of some of these family foundations as institutions that were imagined to be going to last forever. But what I find is that what family members really want is autonomy. So they want to be philanthropic, but they don't want to have to do it in the context of joint governance and joint decision-making, and it just feels like more the juice isn't worth the squeeze. And so I think single family offices beyond, let's say the second generation, really have to evolve much more to a multifamily office. Treating their branches as separate clients rather than pretending they're all one family. They're very different at that point.
(46:50):
And then the desire for an integrated life. Taking those same values that inform the philanthropy, we've seen them spread to the investing in the form of aligned investing and then keep going to the operating company, to the lifestyle services, to the estate planning advice, every single aspect really informed by those values, it would look quite different. That's going to lead to a very different looking family office industry in the next 20, 30 years.
Cody Simms (47:22):
Sharon, I so appreciate you taking the time to join and share your thoughts and your work and the impact that you are having on this whole industry and space because it's a significant amount of potential capital out there that can be catalytic to climate change and to many other causes depending on what people care about. Anything else we should have discussed?
Sharon Schneider (47:44):
Thanks for having me. I hope I didn't sound too pessimistic.
Cody Simms (47:48):
Not at all.
Sharon Schneider (47:49):
I think it's ultimately an optimistic version of where we're going. It's just hard for individual people seeking capital to navigate. It's hard.
Cody Simms (47:59):
There's a lot of inertia to how the world works today, and entrepreneurs are in particular good at trying to break forces of inertia or ride them in new directions. So hopefully this is an instructive conversation for many people out there who are trying to navigate all these waters.
(48:15):
Inevitable is an MCJ podcast. At MCJ, we back founders driving the transition of energy and industry and solving the inevitable impacts of climate change. If you'd like to learn more about MCJ, visit us at mcj.vc and subscribe to our weekly newsletter at newsletter.mcj.vc. Thanks and see you next episode.