Alison Bukhari

Re-envisioning capitalism is a constant theme at the moment. As the global economy continues to reel from a financial crisis that seems to have no end in sight, people are starting to question what ‘traditional capitalism’ can deliver. If this isn’t a mere recession (or ‘double dip’), but a more fundamental restructuring of the global economy, then the spotlight is going to fall increasingly upon social enterprise. This has to be a great thing.

The last two months have seen Dasra’s executive education program graduate 42 social entrepreneurs. We have also seen over 700 individuals gather in Mumbai for Sankalp, a conference that is gaining a global reputation as the stage for dialogue around Indian social enterprise. Never before has the sector in India received such attention.

There is no doubt that momentum is building and it is refreshing to see the sector finally admit failures and fully articulate the myriad challenges it is facing. Now that social enterprise has been around for a few years, we are in a position to not just trumpet hopes and potentials, but analyze what is required for the sector to flourish.

For a few years the microfinance industry was hailed as the only example needed to support the argument that poverty can be addressed through market-based solutions. Although recent scandals have knocked the industry’s reputation, the basic premise – that microfinance can alleviate poverty while delivering returns to investors – is undeniable. However, this was not always the case.

Microfinance was successful because of years of philanthropic funding. It did not get there through upfront commercial investing. Grameen Bank took 17 years to get to an operating break-even. 22 years later, SKS broke even after six years of operations, but the success of younger MFIs is built on validation that took $20 billion of grants, soft loans and guarantees to reach maturity. This reliance upon ‘blended capital’ is something that a number of investors are not always willing to admit.

The investor community continues to talk of a lack of ‘pipeline’ and ‘investable’ business plans, but the social enterprise community is no longer talking about a lack of capital. Rather they talk of a lack of access to that capital, knowing full well that there are close to 200 impact investing funds globally looking to supply funding. Sadly the two communities are not yet on a trajectory that meets, because of expectation issues.

Perhaps some of the expectation issues revolve around definition. A social entrepreneur is basically an individual with an innovative solution to society’s most pressing social problems. He or she is persistent, tackling major social issues and offering new ideas for wide-scale change. A social entrepreneur could work in government, non-profit or business. The term ‘social enterprise’ is not as clearly defined. It should mean an organization that is solving a social problem using an enterprise approach. But the level of return that many investors expect leads one to believe that a lot of impact investors are expecting to invest in a relatively mainstream business that can demonstrate some level of social impact, rather than a business that is genuinely seeking to solve a social problem.

Perhaps we have to differentiate between social enterprise and BOP consumer-facing business? On the one hand there is a call to government to create a new legal entity that regulates reporting on social impact – a true social ‘company’. On the other hand, many are calling for the term ‘social enterprise’ to be dropped entirely. Let business be business!

Perhaps social problem-solving should be allowed to thrive without the commercial pressures that are currently stagnating the market place, and we should bring the social back into social enterprise and make a concerted effort to promote the blended capital approach. This way forward will demand that philanthropists play a critical role. They will have to provide at least some of the $20 billion funding that went into creating the microfinance industry through grants, patient debt and guarantees. This will require a problem-solving approach and an appetite for risk – in fact it will necessitate that the investor adopts the character of a social entrepreneur!

Monitor Group, in their excellent report Blueprint to Scale, call this important development ‘enterprise philanthropy’. The sector perhaps needs less jargon rather than more, but it is quite a succinct description of the kind of risk capital that will be critical to social enterprise realising its true potential. In India we face a difficult situation – there are millions of potential impact investing dollars from international players waiting to come in, and yet it is proving very difficult to value companies and structure the kind of equity deals that satisfy the investor and nurture the social business. Equity capital is of course welcomed and will eventually be a tremendous force for good. However, at this stage of the learning curve, when hundreds of entrepreneurs are still experimenting in order to work out the exact model that is going to balance social impact and return, subsidy is needed to accelerate the development process.

Despite India opening up to foreign direct investment in the commercial sector, investment in the social sector is highly restricted and the international repatriation of debt funding is not permitted. Local investors and philanthropists have to be persuaded that a great use for their philanthropic dollars would be an Indian debt fund, structured to catalyse the very social businesses that could take on return-seeking capital, but not just yet. Debt capital is required to fund a critical need for working capital, human resources, training, technology, market research and market creation through behaviour change programs. Dasra’s recent report for the Action for India Forum, Growing Social Innovation, leveraging technology and government, identifies some of the key areas where philanthropists could provide the carefully targeted subsidy necessary to kick start successful social businesses. Above all, these organizations need blended capital and mentoring support, improved data collection to make better business decisions, skilled human resources, and help with the high upfront costs of behaviour change.

The potential for impact investing in India has to be celebrated and as the sector matures, it is exciting to see a focus on the kinds of reports and analyses that will help us to invest in support infrastructure rather than just the enterprises. If Dasra can encourage a debt fund in India and more funders can be persuaded to become enterprise philanthropists, then the future for market-based poverty solutions is rosy indeed!

Alison Bukhari is director of investor relations at Dasra