GIIN: You run a $100 million impact investing program at the W.K. Kellogg Foundation. What motivated Kellogg to allocate these funds?
TR: We first began to talk about mission investing in January 2007 for a few reasons. First, we wanted to see if we could more directly fulfill our mission by investing endowment dollars - the 95% of our assets that aren't used for grants. Second, we were seeing more social innovators using business models and we needed new capital tools to engage with those people. At the same time, we had been discussing the inherent limitations of grant-making, particularly around scaling and exit.

GIIN: How did Kellogg move from these ideas to an investment strategy?
TR: The consensus was that we needed to move to action to learn and to test the hypothesis that mission investing would lead to answers about scale and exit, how to use resources better, and how to engage these new social innovators. We did our homework for six to eight months, talking with the pioneers in mission investing, hearing about what works and what doesn't, getting advice about how to structure our program, and discussing implementation. It was during this process that we began what has developed into a full operating partnership with Imprint Capital Advisors. They worked with us on initial landscaping, which led to a set of recommendations and a structure for execution. In August of 2007, the board of trustees formally approved a $100 million allocation for this "ten-year action learning experiment".

The senior management and trustees also decided that our impact investing must directly drive the Foundation's mission, which is to propel vulnerable kids out of poverty. We see this as different from another growing and important practice - what many foundations call "mission-related investing," which often includes investing in any companies that do good, for example in clean technology or green energy. In addition, the trustees asked us to target market-rate investments, which reflected the decision to use the Foundation's endowment dollars, rather than the grant-making budget.

GIIN: How did you implement this strategy? Where did you start?
TR: The first challenge we faced was in putting together the team to execute this work. We saw many foundations either under-resourcing mission investing programs, thus necessitating a focus on opportunities with funds and intermediaries which are easier to execute, or trying to hire new team members to drive these programs without sufficient "organizational culture" background to be successful in what can essentially be an organizational change process. At WKKF, we wanted to have our cake and eat it too - leverage experienced Kellogg staff to drive the process, while having a dedicated implementing team focused on our needs via our partnership with Imprint Capital. On a day-to-day basis, this means we have a hybrid Portfolio Management Team that consists of both internal and external human resources.

On the investing side, we decided to start by parking money while we worked on building out our portfolio. So, for the first six months, most of our investments were in federally-insured CDARS cash investments in small innovative banks and credit unions, which is an easy way to get going. We identified these types of financial institutions in states where Kellogg is most focused, and we did a lot of due diligence on the work these banks did. We started by looking at approximately 380 banks and we eventually made cash deposits in 13.

GIIN: What criteria do you look for in prospective investments?
TR: We start by evaluating a potential investment's social bottom line, which must directly meet our mission to help vulnerable kids and their families move forward. If a prospective deal makes it over that hurdle, then we must be convinced that we can make market-rate financial returns, adjusted by asset class. We don't believe that we need to sacrifice financial return to meet our mission.

One early challenge was that, while we had hoped to invest in many funds, we found that very few matched our mission across their portfolio, and partial overlap was not enough for us. It became apparent that we were going to have to do a lot of direct investment if we were going to hold true to our objective of mission driven investing, which is much more work in terms of due diligence, terms negotiation, documentation, legal closing and portfolio management.

GIIN: How did you find the investee companies in your portfolio?
TR: To source direct deals, we did market scans in our mission areas. For example, at Kellogg we believe education holds promise to help propel vulnerable kids forward. So, Tony Berkley, a Kellogg Program Officer and member of the MDI team, and Imprint Capital did a four-and-a-half month market scan of investing opportunities in education. We started by working to align our criteria with grant-making strategies. We then narrowed from 580 education enterprises we initially identified to about seven potential investments based on mission-fit and invest-ability. So far, we've invested in three of these opportunities, and two more are in the pipeline.

We used that same methodology for investments in healthy food, and we're in the midst of a scan on investment opportunities in family and economic security, which includes banking the under-banked. This is a lot of hard work, but we're committed to the process of experiential learning. Our investing so far has not been about efficiency, it's been about effectiveness. Moreover, these scans have driven other benefits, both for our programmatic thinking and for other mission-investors interested in these areas.

GIIN: Has this process led to the development of any additional investing criteria?
TR: For now, we have decided not to invest in startups. Similarly, we are typically not going to be the first institutional investor. Generally speaking, we look for at least $5 million in recurring revenue.

We've developed these criteria by looking at the marketplace. For instance, when we scanned investment opportunities in education, we found about thirty companies that already had an institutional investor, aligned with our mission, and had $4-5 million in recurring revenue. Thirty opportunities felt like a reasonable universe because we were hoping to make three or four investments.

If things change, we will absolutely be flexible on these criteria. I think we will eventually invest in startups, for example. But, we were starting from scratch, and we didn't want a portfolio of extreme financial risk with the initial investments. We are trying to build a reasonably diversified portfolio. That dynamic was also at play as we made these decisions.

GIIN: Kellogg is three years into this program. How many investments have you made? How much capital have you deployed?
TR: Our action orientation has helped us, so we are about a year and a half ahead of schedule. The $100 million allocation is about 90% committed. We designated $75 million for investment in the U.S. and $25 million for investment in the southern region of Africa. Three years in, we are fully committed in the U.S., where we have made 23 investments and deployed more than $50 million. Out of the African allocation, we've committed about $18 million, with about $8 million deployed.

GIIN: Will you please walk us through both the financial and mission-oriented details of an investment you've made?
TR: Let's look at Revolution Foods, an Oakland-based company providing healthy, mostly-organic school lunches to poor students that is locally produced when possible. About 80% of the kids they serve qualify for subsidized lunch programs. The problem is that most kids getting free meals at school are eating fish sticks and pizza, and these foods account for 65-70% of their daily calories. Revolution Foods addresses issues like childhood obesity that impact vulnerable kids disproportionately by providing these same kids with more locally and sustainably-grown healthy meals. This is a mission bull's eye for Kellogg. Revolution Foods' impact goes well beyond the meals it serves - by showing that better school food is possible, it changes the debate within our schools, with mainstream vendors, and in Washington DC. Additionally, Revolution Foods was founded by two women, which meets yet another criterion of our mission investing, which we use to promote race and gender equity in business.

Financially, Revolution Foods is not a startup. Its revenues are almost doubling every year and the company has expanded from their Bay Area launch to Southern California, Washington DC, and Denver. It is looking at opportunities in Newark, New Orleans, and New Mexico. When we engaged with Revolution Foods, they had just closed a round of venture capital, and they wanted additional expansion capital in the form of mezzanine debt to help them expand into new markets and buy additional equipment.

So, after extensive due diligence, we came to a set of terms for a loan at essentially 12% interest for seven years with some upside potential. There were some tense conversations in the negotiating, and it was not easy, but we came to this agreement through a lot of good will from both sides.

GIIN: Does Revolution Foods receive any other financing from Kellogg?
TR: No, nothing to date. They did ask about grant funding, and we told them during our initial conversations, "we never say never, but grant funding is very unlikely."

GIIN: Do you require your portfolio companies to report on their social performance?
TR: Yes, on each of our deals, we negotiate a signed side letter that lays out explicit, specific social metrics. In other words, the closing documents include both the financial terms and the social terms of the investment. The investee companies are then required to report back on these social terms annually, at least.

After two-and-a-half years relentlessly building a portfolio and going through struggles similar to those of others in social reporting, we are now taking a breath and thinking more systematically about portfolio management. We have a social metrics dashboard that tracks targets and performance across a set of standard outputs across investments. While we recognize there are a lot of assumptions required to get these common metrics over a diverse range of investments, the discipline of driving to this has been a helpful tool in pushing our thinking and practice.

However, beyond the key outputs of our investees, we are finding additional mission dividends to MDI. By targeting opportunities deeply aligned with our programs and integrating key staff, we are finding that MDI can enhance our programmatic thinking and push our "core business" of philanthropy with new models, partnerships, ideas, and approaches.

GIIN: What other challenges have you faced while developing Kellogg's mission-driven investing program?
TR: The most apparent challenge is whether you can really do good and make money. Once people see that there are real opportunities in this space, they often dive in with inadequate human resources. But, staffing the right talent for mission investing is the key challenge in my opinion, for two main reasons. First, people doing this work need to understand both investing and social change-making. People with this hybrid skill-set are hard to find. Second, the two sides of building and managing these programs - the internal process of building ties with the finance and program teams and the external process of seeking out and executing the best opportunities - are both full time jobs that take focus and a distinctive set of skills.

At Kellogg, we have a small staff team with many of those skills, and we rely upon Imprint Capital for much of the day-to-day heavy lifting across all the elements of our MDI program. This hybrid model works well for us as it lets us manage the critical internal processes, drive the deep organizational ties and learning that are among the key benefits of mission investing, while also getting strong, consistent, externally facing execution that would be difficult for us to do solely with internal resources.

GIIN: What types of things about impact investing have resonated with the traditional philanthropy mindset?
TR: The key for me has been to tell the stories of our investing through the people who run these for-profit enterprises. The people we invest in are just as mission-driven as the nonprofits Kellogg awards grants to. So, we have brown bag lunches with our investees and my colleagues, where they can just talk. My colleagues start to see that these really innovative people just happen to use enterprise to change the world, as opposed to a nonprofit model. Bringing in our investees to tell their stories allows my colleagues to kick the tires on mission investing, so to speak.

GIIN: With three years experience in this new industry, what do you find most exciting about impact investing?
TR: The whole proposition of mission investing pushes foundations to think in a more sophisticated way about capital, and to recognize the different types of capital we can use to achieve our missions. Until now, philanthropy has been about making grants with five percent of foundations' resources. Given today's seemingly intractable societal problems, and a hundred-year history of institutional philanthropy using just one form of capital to address them, it's clear that grants are no longer enough. Grant-making is always going to be a legitimate tool, but right now it's the dominant tool. Fifty years from now, philanthropy could be about investing 50 or 60 percent of its overall resources toward achieving mission impact while also maintaining or growing endowments. I believe the potential for change is that big.