Michael’s main message of the episode is that it is really important to align all of the partners interests to the same outcome. In this case, that is the outcome of the Google Career Certificate Fund (GCCF). The purpose of the GCCF is to provide trainings, using an outcomes based financial structure. In this way, it is possible to create a fair allocation of the returns to education and training. Currently, financial services in the US have been predatory and unfair and career impact bonds did not always work out. Sometimes investors might have turned out okay, but learners didn’t or vice versa. Hence, the reorientation of those systems so that everybody is aligned, will create better outcomes. 

Intro: “The reorientation of the system so that everybody is aligned, to the outcome of increased incomes for learners, is really the most important lesson.”

Intro: “Welcome to Money Matters. A podcast by Social Finance NL where we discuss money and impact. By talking to politicians, investors, philanthropists, banks, social entrepreneurs and other specialists, we try to find an answer to the question how to best finance social impact.”

Ruben: “My name is Ruben Koekoek, co-founder of Social Finance NL. And joining me today as the co-host…”

Björn: “Björn Vennema.”

Ruben: “Welcome.”

Björn: “Thank you. In English.”

Ruben: “In English. I do my best. And good to see you again in the studio. Today we will discuss how you can scale in an innovative partnership with a corporate. To be exact, we will talk about career impact bonds, a payment-by-results setup created by our colleagues of Social Finance US. And we won’t be discussing this innovative topic by ourselves. Today, we have a very special guest. As you probably noted, we are speaking English. That is not just to impress my former English teacher. We are welcoming our first international guest in this podcast series! Björn, can you please introduce today’s guest?”

Björn: “Yes, my pleasure. Today’s guest has over 25 years of experience as a banker in emerging markets. After he started his career at Citibank in West-Africa, he worked at McKinsey and New Island Capital, where he focused on financial inclusion, renewable energy and inclusive agricultural development. Currently, he found his calling as the Managing Director Impact Investments at Social Finance US, responsible for Its impact investing proposition. And after evolving the Social Impact Bonds toolkit to the Career Impact Bonds, he is already contemplating the next evolution of outcomes-based-work. May I introduce to you: Michael Grossman!”

Ruben: “Hi Michael.”

Michael: “Thank you Ruben, thank you Björn. Thank you for having me. I am honoured to be here as the first English speaking guest.”

Ruben: “And you speak some words Dutch, no?”

Michael: “I speak some words Dutch. Just enough to embrace me and put me into trouble. So we are going to stay away from that.”

Ruben: “I tried to, but okay. Maybe later in the conversation. And Michael, we did our research and we read that you are chevalier in Senegal’s’ National Order of the Lion. What does that mean?”

Michael “Yes I was indeed honoured by the Senegalese government for work that City Bank did in the 1990s to support a small industry or a large industry in a small town in Senegal. And we thought about an innovative way to finance a business to keep it operating basically through elections. Because it was an employer in a relatively small town in rural Senegal. And so we figured out a innovative way to finance them and Senegalese honoured City Bank and the CEO of de City Bank of Senegal. So I am a chevalier. And I have to say, I do not know many other chevaliers. So I am pretty proud of that.”

Björn: “You are the one and only chevalier that I know.”

Michael: “I think in English you say knight.”

Ruben: “Knight, yes. Michael, in this podcast we cover topics of money and impact. That is why we always start and end the podcast with a personal question. First of all, our regular segment: “The financial fiasco.”

Ruben: “We have all kinds of guests with financial accountability in this podcast series, but they also sometimes make their personal financial mistake. That is why we would like to ask you the following question: ‘What is the most wasteful expense you have ever made?”

Michael: “Wow, most wasteful expense you have ever made that I can talk about on the world wide web. The expense versus investment, it’s a really interesting question right? And wasteful is also a really, it’s a big word. I mean like everybody I am sure, I have had evenings that didn’t turn out the way as expected. Last week, I went to have dinner in a restaurant that was expensive and disappointing. I call that a wasteful expense, but I wouldn’t say it is in any way significant. I once invested in a stock that I was really excited for and I got it from 5 dollars to 45 dollars and back to 5 dollars. So that was quite a wasteful investment I think. But most recently I bought a home outside New York City. That was in no way a wasteful expense. I am very happy with it. But I noticed in this little village I live in, that everyone has got daffodils.”

Ruben: “Daffodils?”

Michael: “Yes and it is beautiful, especially right now that it is spring and all the flowers are bloomy. So last spring I noticed everyone was planting flowers. And then last autumn, I decided to order flowers and plant them so that now in the spring they would come up. And I looked around and saw everyone had daffodils and I decided and I guess that I don’t have to explain you why, but I decided to plant tulips. So I spent a whole lot of money on tulips and I plant them over there. And last week I saw a rabbit hopping around and eat them all on a row, one after another. So it kind of stings right now.”

Ruben: “You know that one of the Social Finance board members, Jeroen Rijpkema, is also board of the Keukenhof? The most famous exhibition of tulips in the world.”

Michael: “Really? So maybe we should connect afterwards, because I need some replacement tulips.”

Ruben: “Definitely. He can help you out with some new tulips.”

Michael: “Thank you very much. I would appreciate that.”

Ruben: “Of course, we feel very close with our colleagues of Social Finance US. But what I see as a big cultural difference, is the way you tip. You give money in your restaurants. So I was wondering, when you went to the restaurant and you had not a good evening. Maybe the food was not good or the service. Do you still tip the restaurant?”

Michael: “So it’s a great question. Like many Americans their first job, or many Americans my age and the world has changed a lot in the last 25 years or so, my first job was waiting tables. So working for tips number one, I have an extraordinary appreciation for service and I appreciate really good service, because I give good service because of it. But I actually, it’s not the restaurant you are tipping, it’s the server. And the experience I had nothing to do with that person. And so my partner and I spent a bunch of times discussing this before. we laughed. We thought what is the appropriate tip? Because we felt this person shouldn’t be punished because of a bad experience. However, I also didn’t want to reward them either. And it was quite expensive. So yes, I tipped the guy, but not generously. Not inappropriately, but generously. But that’s unfortunately the way much of our labour market works. And you are seeing increasingly a number of restaurant groups, at least in New York or San Fransisco. The two markets I know best, that are doing away with tips. Tey are adding a service charge to the bill. I think, they just are increasing prices and say, we are going to pay our wage staff a living wage. I think it is a good thing overall.”

Björn: “They could just include it in the price itself and pay them a living wage instead of a service charge.”

Ruben: “I also worked in a restaurant in Amsterdam and everyone was cheering when Americans came into the room, because you knew you would get a tip of a whole week. Anyway we can talk about this for hours, but we have work to do, Michael. We have to go into our topic of today.”

Ruben: “In this podcast, we try to find an answer to the question how to best finance social impact. The topic of today’s episode is a career impact bond and the role of Social Finance US in the Google Career Certificates Fund. But first, can you explain to us, what is a career impact bond?”

Michael: “Certainly. It’s actually good transition of talking about waiting tables and that kind of employment. So we developed a product that looks very different than what people traditionally get, we developed a product number one that focuses on training providers and training programmes for which there’s data. So we say, we are only going to finance things for whom we can actually predict with some degree of confidence, the past is not a guarantee of the future, for which we can predict future outcomes. Our income levels for people graduating from the training programmes. We are only financing training that leads to jobs that leads to career pathways. You know, my mom used to use the expression dead-end job, and I never really understood what it meant. But it’s, you know, a job that you get, and that leads to absolutely nowhere. And we want to avoid those who are looking for jobs, we’re looking for career pathways, and we’re looking for opportunities where we can finance people to have a significant and sustained income increase over time. So the career impact on first focuses on outcomes. Then secondly, we align all of the systems within those outcomes, so that everybody is sharing the risk. Right? So students participate, learners participate in training programmes. If they get a job above a minimum income threshold, they pay back their loan. If they don’t, they’re not they have no obligation. So there’s an alignment of the performance. We pay the training providers in the same way we pay them, as investors like a steward, we don’t pay we provide other people’s capital, right. But we pay the training providers in the same way. We pay a bit at enrolment, to recognize the fact that our providers and partners have upfront costs, but then we make the larger payment when the learners get a job above the minimum income threshold. And then we make another payment at the end, based on longer term outcomes. So we’re aligning everybody’s interest. And finally, we built in a lot of services to help the people who have generally had these barriers to employment, to succeed. So in addition to pay any paying for training, the career impact bond frequently provide some kind of wraparound support services to support the learners as they go through the journey of learning and then engaging with the corporate sector.”

Ruben: “Great.”

Michael: “And then finally, the last element which is really important, sorry, is that we bring is we bring corporates and employers into the conversation. So much of the training programmes don’t really link the business sector directly with the training providers. And we are trying to make that link.”

Ruben: “Great. So the difference between you and a general credit loan company is you select the training providers who are who have proven track records. You finance based on outcomes. If you don’t get a certain salary, you don’t have to pay back. You provide other trainings, also to make sure they are fitted for the workforce, also, besides the technical skills. And you provide a network for them, which help them pursue their career. And then we, two weeks ago, we saw a press release and a video by the CEO of Google. So What’s Google doing in this in this deal? What is their role? And what’s the Google Career Certificate Fund?”

Michael: “So the Google Career Certificate, it is a certificate. Basically, we are seeking to finance training providers who can help learners achieve a significant and sustained income increase, right. And we’re only doing that on a data driven basis. So one of the channels that we have identified to achieve this significant and sustained income increase is people who pursue the Google Career Certificate. And the Google Career Certificate is a series of trainings, there’s a series of certificates, that enterprises use the Google architecture to run their systems. And all of their IT. This is basically a certification that Google, you have been trained in the tools of Google by Google. We observed this income increase, but that people pursue this. And so we started looking at ways that we could implement a financing program through it. And so in partnership with Google, and google.org, we have developed this, this investment fund investment partnership, that will train 20,000 people over the next five years. And, you know, we hope that leads to, based on our math, a billion dollars in wage gains. So again, these are people who will go through training providers we are excited about our initial partnership with two training providers year up and merit America. We are expanding that to additional training providers. But we are starting with these two and working with them to develop appropriate curricula and appropriate wraparound services to support people, underserved communities, in their ability to finalized the Google Career Certificate training and get jobs.”

Björn: “Right. And what’s the role of Social Finance US in this fund and in this process?”

Michael: “We are using our experience in workforce finance. So we launched the UP Fund, which is our 50 million dollar workforce Finance Fund The career impact bond fund a couple years ago, the UP Fund has four career impact bonds that are currently active, several and it and several in the middle skills. We are looking at this experience. We are using this experience and saying, okay, well, we have learned from it, we learned how to work with the training providers, we have learned learn how to work with students. So Google selected us to design and manage the investment program on their behalf. So we are doing that we are designing it. And now, you know, we are launching it through our training providers. I mean, we hope to actually train the first or recruit the first students in the weeks to come, let’s say months to come, but weeks to come soon. And it’s really exciting. And, you know, our objective is that overall, at Social Finance US right, our objective is to build these kinds of investment structures that can help people achieve the intermediate goals that lead them to long term income increases, so drive social change, and we hope that this is something you know, given the size of this fund, we believe that we’re getting to the point of with the up fund with our pay it forward fund structures, which are the public sector manifestation of the Korean backed bond, which we can talk about if you would like but between these three programs, we think we’re finally at scale, so we can see if this is a tool that can be applied more broadly than in kind of the niche use cases we have developed. But is this something that can actually be a tool that can be used across industries and across different kinds of learning environments to finance people’s access to higher income?”

Björn: “And has the process been the other way around? So the upfront you mentioned, came, maybe out of Social Finance US as this new methodology with a career impact bond. And now, you said Google has selected us to manage their investments? Or was this the other way around? That they decided to invest in people training with Google services? And then you use that methodology for that?”

Michael: “Yeah, no, that’s exactly right. So the Google career certificates are an existing product. And we were we have been having this conversation with Google for a while to figure out the best way  to develop a partnership. The I guess, the reason why we are able to have the conversation on the partnership is because of our experience managing and the career impact bonds that are in the UP Fund. And, you know, we suggested that here is a potential way of supporting your work and supporting Google’s desire to have a much higher, more highly skilled workforce as well.”

Björn: “And it can imagine, because Google has now best the benefit of people, more people being trained in using their tools and technologies. But they are also then an investor in this fund that can imagine. How does that work? And what makes them…?”

Michael: “Well, we there again, it’s like a great alignment of interest, right? So yes, we have support from Google. Google corporate lent money to this vehicle. That is that, you know, that is then financing the individual learners through this the through an outcomes based loan, right. So they only pay back the loans based on outcomes. And that outcome is achievement of a minimum income threshold. If you don’t achieve the minimum income threshold, or during the period that you are that the loan is outstanding, you drop below that minimum income threshold, you don’t pay anything. And it’s also a zero interest loan. So it’s, you know, no, no additional cost other than the cost of the training to the students. So it’s really aligned, right, because we’re buying a Google product, the Google career certificate. And it’s Google’s capital, that is at risk, so to speak, right as the lender to the vehicle. So if the Google career certificate does not provide people with a sustained or significant income increase, Google’s loan to this vehicle is at risk. So there is a really important alignment of interest. The same similarly, as we discussed earlier, with the training providers, we and you know, not every training provider details have been finalized yet. As I said, we’re going to be adding them, but our expectation is it’s the same kind of payment where we will pay people on outcomes, right? We will make sure that it’s fair and that people’s costs are covered. And we don’t want, you know, our partners to suffer by doing business with the markets that we are working with. But at the same time, we want to make sure that everyone’s interests are aligned. So we will spread the payments over way to align that further. So I think that’s the it’s one of the reasons why it makes it really exciting.”

Ruben: “And in our practice we see a lot of pilots hear Netherlands. And it is often very difficult to scale up pilots. It is great, great to start something but to scale it up is a different story. Can you share with us one of the main success factors like why? How did you close the deal? And why did it did you succeed here in scaling up the career impact bonds with together with Google?”

Michael: “The concept of the career impact bond make sense, right. We started looking for ways to say we want to finance outcomes. And what are outcomes that are measurable? So that the cost of measurement is not so high that it’s difficult to actually finance. And when one of the things we ended up on was income, and then started looking at what are the things that drive income? Well, skills acquisition. So skills acquisition is something where for which in the United States, the financing market is largely broken. Or broken is a strong word, has its specific characteristics and it does not work for a large number of people.”

Ruben: “That’s called broken no?”

Michael: “It is. Well, it is I mean, but it doesn’t mean if you are pursuing, you know, a university education or, you know, I got my master’s or my MBA, there’s financing available and it’s relatively frictionless and it’s probably priced appropriately. But that’s, you know, 60 percent the market, it’s for everybody else, or maybe 50 percent of the market and declining. For everybody else it is indeed broken. So trying to develop an innovative model, and then experimenting with that innovative model, and that really is and in many ways the upfront. We raise $50 million from impact investors, those impact investors expect to get their money back with perhaps a, you know, small interest rate. But certainly not, if we were really being cold hearted investors about it, probably not going to compensate them for all the risks that they’re taking, particularly around innovation and new products and new ways of doing things. So, you know, that is the laboratory. We learned some lessons. And we have been having conversations with a range of partners. And, you know, Google is a highly innovative company. Google has significant you know, very large number of employees, their workforce is really large. So they see this as a, you know, a global US challenge, and I’m sure a global challenge globally, but a US challenge around workforce. And so, you know, they are an aligned partner. And it made sense to pursue this together. We worked with them over months and months to identify the right kind of measures. Because, you know, everybody wants to be very, very focused on outcomes. And it is easy to make this kind of announcement, and then move on and actually not do anything. But one of the great joys, I think of having an organization like Google associated with us, is that it is a huge amount of accountability, right? Because when Google announces that it attracts attention and if we say, okay, we are going to drive a billion dollars in wage gains, people are going to come back and look at that. And so I am excited about the fact that this partnership will actually drive results versus just an announcement.”

Ruben: “And do you also think it will lead to systematic change in the US? So will change more than only the lives of the people involved?”

Michael: “It’s a great question. I hope that this model is replicable and sustainable more broadly, than in the US cases where we are working on. You know, conceptually, the idea  of an income share agreement, or an outcomes based loan makes a lot of sense, right? You know, I will pay you a percentage of my income, because that is fair. I am only financing what’s really needed, I am only financing what I am able to use. And there is an appropriate return on my investment, whether that investment is money or time. There has been challenges, because financial services can be very predatory. And they the development of students centric products and the development of a fair allocation of the returns to education and training, I think, are all things we can aspire towards. But system change. Let’s hope so. But I think it’s I think it’s a challenging and slow process.”

Ruben: “Yes, I hope you set the example for other providers who also are in this business. Björn, I also have a question for you. Because we now heard about a great example of the career impact bond. Do you think such a such scheme also works for the Netherlands?”

Björn: “I think that’s a that’s a good question. I think, why not, I would say, right? I think there’s a lot in the model and a lot in the fund, that is certainly applicable here as well. Of course, I think the way that the system is designed and student loans and in the US is, is very different here. Of course we have we’ve many conversations in the Netherlands around student debt. But it’s not nowhere near the magnitude, I would say that’s in the US. But at same time, I think a couple of things that at least I hear in a story of Michael from a transition towards skills based, certification based programs that really leads to career pathways. The alignment of incentives, which I don’t think is here and in the current educational system, as much. As well as, as I said that there is still a big challenge and a big gap between what are the demands of the labour market and the people being trained. So I think all of those elements existed in the islands as well. So absolutely, I do think we could, we could apply and take lessons from the model in the US and bring it here.”

Michael: “I think it’s an interesting observation. I don’t know nearly enough about the Netherlands and your labour market to know if that’s true. I mean, my picture though, is that you have you know, much higher levels of education you have a much higher levels of an ongoing adult education. A much more developed vocational and education and training infrastructure. So probably a lot of data on which to base this kind of decision making. But do you, I mean, so I guess every market has different challenges, barriers to employment, you know. No need to identify. But are there groups in the Netherlands that are have been historically excluded from the labour market for which the training and skills development and then financing are the constraints?”

Björn: “Yeah, and Ruben chip in. I’m not sure whether financing is always the biggest challenge for those groups. But there is definitely in minority groups, people with disabilities, I mean, there are many groups that have much harder access to the labour markets. Or I think as well, what we see now and then you touched upon the green energy jobs, I think in this transition towards green energy, but also towards digital skills. I think many of the groups that are already disadvantaged, are actually in the jobs that are most likely to be replaced in the next decade or so. And that is probably the group that would need the most attention and could benefit from a scheme like this.”

Michael: “We have also found that we are working, so we have in the US most of the place based workforce development funds are done by states and local governments. And they are grant based. And we are working with those state and local governments to hopefully transform some of those grants into funds that are sustainable and can be used to finance future learners as well. And we find the place based model can be very strong, because it integrates the needs of local employers and local policymakers. And I mean, you have in Holland, a similar program in the region of Twente, right, where the Twente Fund for Craftsmanship is very similar in how it brings in some of the workforce training plus employer plus financing structures.”

Björn: “Interesting, you know more about the sector here than we do probably on this particular element. But it’s funny that..”

Michael: “It is always good to learn from others, right?”

Björn: “Absolutely.”

Ruben: “Absolutely. And that said at the last question, what is your biggest lessons learned? What did you your long career? What did you learn from setting up the fund?”

Michael: “So I think what we learned is that we have a lot to learn. And that financing is a tool, but it’s only part of the solution. And that not everything we look at is a nail. So you know, financing is not the solution to every problem. And that we learned that it’s really important to align all of the partners interests to the same outcome. And it sounds obvious when you say it out loud, but it is interesting, because our first career jackpot impact bonds that we first structured, weren’t always that way. Where investors might have turned out okay, but learners didn’t. Or training providers might have turned out okay, but learners and investors didn’t. So the reorientation of those systems so that everybody’s aligned, is to the outcome of increased incomes for learners is really the most important lesson I think we have learned. And I think Google is an extraordinary partner in this, because they also really see the importance of that alignment. And they say the long term strategic importance for that align.”

Ruben: “Thank you, Michael, we are reaching the end of this podcast episode and this season, we finish all episodes by asking a personal question. You have had a great career and we would like to hear about not a common thread, but the impact thread that runs through your career.”

Michael: “My very first job, not my very first job, my very first job was picking corn on a farm, but my very first job where I had to wear a tie was for a large Swiss pharmaceutical company. It doesn’t exist anymore succeeded. Now the company is called Novartis. But in back in those days, it was called Ciba Geigy. And in the 80s, there was a fixed exchange rates, right countries used to manage their exchange rates to a fixed number. And so Ciba Geigy, developed a structure where they were able to do an exchange rate deal with a government in the Caribbean in exchange for basically giving away drugs to charity. And to me, I learned right away my very first job, that business was really a powerful force for more than just profit, if it was oriented that way. And I have been on that path ever since. And it has been, like extraordinarily lucky that I got that role at 21 years old to observe that you can actually use profit making business to drive health care outcomes. And then you can, you know, the lesson that businesses is a force for positive social change. You know, I learned that then, and it stuck with me throughout my whole career.”

Ruben: “Thank you. That sounds like a good ending to the podcast. Björn, what is your takeaway of this podcast?”

Björn: “Well, first of all, if Michael’s first real job was a job where he had wear a tie for the first time, I feel like I’ve never had a real job. So I’m not sure a long time. But no, I think what’s interesting is also when I went to the university, they kept talking about things like the triple helix and the quadruple helix for people that have been in this space around you, collaboration between universities or academics, government, business people, and all of that never really took into account how you align incentives around finance and around long term careers? I think that’s, you know, this feels like a great step forward. That’s probably not part of that curriculum yet. But how can we really use those tools for good, and for longer term career success for people who need that, and I think that’s really exciting. And congratulations, Michael, on getting this fund together. And hopefully, it’s a starting point for much more.”

Michael: “Well, thank you guys for having me as it’s been. It’s been, as I said, a pleasure and an honour to be your first American guest. And I look forward to working together with Social Finance the Netherlands in the future.”

Ruben: “Thank you. We hope you can invite you sometimes here in the Netherlands, you could you can start share more about your story, and we will give you some tulip bulbs.”

Michael: “Thank you very much and you are welcome to come to Social Finance in the US anytime you’d like.”

Ruben: “Yes, we were there and we have really, really excited so we hope to be there soon again. Thank you, Michael, for your time and amazing insights. Also thanks to my co-host Björn Vennema and ABN AMRO and Oranje Fonds for helping to make this podcast possible. Production: Daniël van de Poppe. Editors: Daphne Sprecher and Nina Berculo. Don’t want to miss out on anything from this podcast series? Subscribe to the podcast via your favorite podcast channel. Also, don’t forget to leave a review in the iTunes podcast app. Or take a look at our website www.socfin.nl. Thank you for listening.”