Public Management

Real Business, Real Results

Eric Weaver, MBA ’92, treated an East San Jose neighborhood like an emerging market and successfully persuaded traditional banks to invest in the community.

BY BILL YOUSTRA, MBA '92

In the broad spectrum of businesses, the category of nonprofits is stereotyped as one run by well-intentioned believers, champions of the underclass, and visionaries for virtuous causes that would go unrealized if left to the sterile strategists of corporate America. These are ventures that seek social good rather than financial profit as their principal goal, and therefore are assumed not to be able to meet requirements of “normal” business.

This was the subtext of a phenomenon in the late nineties, when some of those who had achieved fabulous success in the for-profit world spread their wealth and advice to the nonprofit sector. The former was certainly welcomed. The latter was also welcomed, principally due to its tidy bundling with the former. Thus burst forth the notion of venture philanthropy, in which hardknuckle neo-titans introduced metrics and accountability to their virtuous yet soft-bellied cousins in the nonprofit sector.

That was the idea, but the sources of money and of needed insight are not necessarily the same. This is the story of how one GSB graduate, drawing on a broader, sustained infrastructure supporting venture philanthropy, built a successful nonprofit dedicated to improving the quality of life for thousands in Silicon Valley. In doing so, he consistently relied on the resources and expertise of other successful managers—from both the nonprofit and for-profit sectors—often facilitated by other GSB alums.

BETTINA SALOMON

Eric Weaver, MBA '92

In 1992, a group of Silicon Valley bankers met with Peter Hero, MBA ’66, of Community Foundation Silicon Valley (CFSV) to discuss the challenge of a new federal law, the Community Reinvestment Act, which required banks to invest in low-income communities. While the banks supported the spirit of the law, they struggled with how to put bank dollars to work with maximum community development impact while maintaining alignment with the banks’ business practices and low appetite for risk.

In typical Silicon Valley thinking, the group decided that a startup would be their best course. They hired Eric Weaver, MBA ’92, who had just graduated from the GSB and had experience working in low-income communities. The original steering committee included then-Bank of Santa Clara president Bill Scilacci, MBA ’49, who would mentor Weaver. Hero offered a cubicle, office support, and the good name of CFSV. Silicon Valley Bank offered to pay Weaver’s salary while he wrote a business plan for investment in affordable housing and small business.

More than two years of planning, financial modeling, and market analysis went into the original plan. “I wanted to look at underserved neighborhoods like East San Jose as emerging markets and figure out what sort of demand they represented,” Weaver explains. “There was a credit gap. Dollars were flowing out of these communities. They showed classic signs of decay: deteriorating commercial strips, vacant lots, and abandoned buildings. Clearly, there was the opportunity to bring in some outside capital. The trick was to make it worthwhile as an investment for local banks.”

Weaver proposed a financial intermediary called Lenders for Community Development (LCD), incorporated in 1993 by 15 member banks. While the banks never intended to earn a profit from LCD, they hoped to receive regulatory credit from the federal government for participation. This credit would afford them the flexibility to open or close branches and to merge with other financial institutions. The banks had one other requirement: LCD was to preserve the banks’ principal. They were willing to sacrifice some rate of return in exchange for community development impact but did not want to create a pattern of grant making disguised as loans that would inevitably be written off.

Weaver counted on this businesslike philosophy to build confidence in LCD. Though his “product” was a community benefit and regulatory flexibility, he nonetheless competed for the banks’ investment capital, which could be invested elsewhere for a higher return. “We ended up applying basic financial principles to meet our investors’ requirements: sharing risk through pooled funds, creating backstops for losses, and finding philanthropic subsidies to fund operations,” Weaver explains. “Beyond these mechanisms, we’ve attracted investors who are interested in social as well as financial return. We offer them specific, measurable goals—for example, number of units of housing built, number of loans made, number of low-income entrepreneurs funded, number of jobs created and retained—and we monitor and report on our results.”

Since its first loan in January 1995, LCD has originated more than $17 million in affordable housing and community facilities loans, financing 1,700 units of housing and five new facilities.

How has it worked? East San Jose is host to a working-class, predominantly Latino neighborhood called Mayfair. Plagued by poverty and unemployment, Mayfair has long been a community revitalization project for both the city and CFSV. In 1996, LCD financed a 34-unit town home project that ultimately extended home ownership to families earning 65 percent of area median income and less. Four years later, thanks to LCD, the Mexican American Community Services Agency acquired a commercial building for its youth outreach programs.

Most opportunities require “predevelopment” loans. These provide nonprofit developers with the seed capital they need to perform the necessary feasibility studies and tie up available parcels of land. Typical banks are unwilling to provide this early financing because of the uncertainty of the development outcome. Despite this risk, LCD has not experienced a single loan loss on its housing lending activities.

Through its Small Business Program, LCD has provided $2.4 million to more than 100 entrepreneurs, with 75 percent of loans going to minority-owned businesses, 52 percent to women-owned businesses, and 87 percent to businesses owned by low-income people. The demographic profile of LCD’s borrowers is clearly different from the borrowers reached by a typical commercial bank. LCD does not offer below-market interest rates but may bend on other key factors that determine loan profitability, such as loan size, transaction costs, or repayment risk. Its focus on community lending allows LCD to offer loans as small as $1,000 and to work diligently and creatively with the borrower to make a deal work. It also allows LCD to lend to those with limited track records and no collateral.

Robin Hunt is an example. Operating a growing hair-braiding business in East San Jose, Hunt sought financing to expand. The banks turned her down, citing a lack of collateral and insufficient borrowing history. After thorough due diligence, LCD lent Hunt $10,000. Two years later, she has opened a second location, and business is booming.

LCD has borne losses of approximately 3 percent on its small-business lending. This is slightly above what commercial banks experience but substantially below the 10 to 15 percent that similar community investment programs typically experience.

There are two possible reasons for the low loss rate: LCD does an excellent job managing their loans, or they’re selective. But there is a danger in the latter. Because LCD’s charter is to accept risks where commercial banks would be less comfortable, one should notice a difference in loss percentage. LCD claims the difference is small because of sound underwriting and long-term follow-up with borrowers.

On even modest loans, due diligence is performed not only on behalf of LCD but for the prospective borrowers. “It’s never in a borrower’s long-term interest to undertake a loan they will be unable to repay,” Weaver says. “We owe it to ourselves, our member banks, the community, and our borrowers to make sure everyone is in a manageable position.” This painstaking process is buttressed with creative use of government and foundation funds to provide guarantees and reserves as a backstop against loan losses.

LCD’s third program area is truly on the cutting edge of community development in America. Borrowing a concept from 401(k) retirement programs, LCD and partners match a family’s savings. Participants take a five-week money management course and then begin saving an average of $50 per month over a two- to three-year period. Every dollar that a family adds to its savings is matched two-to-one. At the end of the period, the savers can use their own funds plus the match money for one of four investments: home purchase, buying or investing in a small business, paying for education, or opening a retirement account.

More than 500 participants are enrolled in this program, which is operated by LCD in partnership with the Center for Venture Philanthropy, Citibank, and several other area nonprofits. Despite the typical savings obstacles for low-income families (the average saver’s income is $23,000—desperately low for Silicon Valley), the participants have saved a collective $750,000 in less than three years. Eleven have become homeowners. Robin Hunt—the borrower with the hair-braiding business—used some of her savings to buy inventory and equipment for her new business location.

Once merely a beneficiary of CFSV’s infrastructure, LCD, with a staff of 15, is now a supplier as well. Weaver has become an expert that Hero taps for philanthropists and new nonprofit ventures. Weaver’s experience and GSB education provide a solid foundation for both the nuts-and-bolts demands of LCD as a financial institution and the requirements to fulfill its social mission.

“The dramatic growth of our programs has forced me to deal with the same challenges any successful entrepreneur in the private sector would face,” Weaver says. “Attracting, developing, and retaining the right people to make these programs work is a top priority. This work is highly satisfying, as it offers all of the challenges of any fast-paced, high-growth business environment. Those who join us want more. We offer the chance to make a difference.”

The Silicon Valley nonprofit scene is well populated with alums like Weaver, who deliver on the sustained promise of venture philanthropy rather than the short-lived worship of Internet riches. The promise is being delivered day by day, as talented executives manage growing businesses that feed into this local network.