The shift from hunter-gatherer cultures to cultivation and farming was one of the most significant steps in human civilization – some say the most significant of all. It enabled populations to rise, settlements to turn into cities, surpluses to be stored for the hard times, art and culture to develop.
So what has this got to do with social investment?
Currently, with a few honourable exceptions, the social investment industry is firmly in hunter-gatherer mode. Social investors roam the land to find the ripe, low-hanging fruit of investment-ready ventures. The common complaint of social investors is that there just isn’t enough ripe, low-hanging fruit. As social investment funds multiply, this is becoming the limiting factor for the whole sector. Some have started to act, tending the trees so they produce more investment-ready fruit.
But have any woken up to the need – and the amazing opportunities – of cultivating new seedlings to grow into more trees that will produce more ripe fruit?
Major population level studies like the Global Entrepreneurship Monitor show how in almost every country and almost every sector, the number of enterprises at each size follows a predictable ratio, around 10:1 at each stage. In the UK, we have 5.2 million enterprises, of which 3.3 million are sole or joint traders, and just 6,000 employ more than 250 people. You need a lot of start-ups to get any realistic chance of an enterprise that will be ready for venture capital level funding. You need to cultivate many seedlings to get a tree that bears fruit.
Most start-ups don’t scale up. But even beyond this, most that do scale up do not take investment by way of risk capital. They use other mechanisms, like reinvesting profits, growing their customer base, borrowing against assets. So we need even more start-ups for one investment-ready ripe fruit.
In the West at least, most social investors operate on a venture capital model: sizeable investments, made with thorough due diligence and significant transaction costs. Many see their speciality as ‘social’. By contrast, the first external investment (beyond the bank of Mum and Dad) taken by most early-stage ventures is from angel investors. They operate with small investments, person-to-person decision making and low transaction costs, and they are highly specialized by market sector. They take a number of seedlings and expect to get just a few saplings to sell on to the VC world. The high transaction costs of extensive due diligence would kill their margins, and they need to move with a speed and agility that demands deep familiarity with specific markets. One good example of angels in social investment is Clearly Social Angels.
Social start-ups are disproportionately led by people from less advantaged backgrounds: they are more likely to have experienced the sort of adversity that creates the passion and drive to solve social problems. So they are less likely to have the funds, confidence, skills and connections to thrive. They need more intensive cultivation support. Agencies like UnLtd and the 36 others in the Global Social Entrepreneurship Network can provide this early-stage support.
But much more help for the seedlings is needed if we are to get the volume needed for a successful social economy. And the angel stage is still a major gap.
In the UK, nearly 250,000 people started something social last year. Much of that activity was purely voluntary, but the figures suggest as many as 100,000 became recognized entities. The UK has the most comprehensive early-stage support for social entrepreneurs in the world, yet the sum total of that specialist support helps around 3,000 social entrepreneurs per year. Even here, we are orders of magnitude off the mark.
Many of these start-ups hide their social character, eschewing the regulated social forms such as charities and Community Interest Companies, and using the support available for commercial start-ups. At UnLtdwe see an increasing proportion of high-growth social entrepreneurs using profit-distributing models and locking their social mission in through other means. Echoing Green have recently reported on similar trends in the USA. This movement is seen in the B Corps initiative and is being picked up by the Mission Alignment Group of the Social Impact Investment Taskforce set up by the G8 last year. There are concerns about mission drift, but my hunch is these ‘profit-with-purpose’ businesses will create substantially more social impact over time.
All this, of course, is just part of the story. Where social ventures are creating new markets, the work by Monitor Inclusive Markets on moving from Blueprint to Scale and going Beyond the Pioneershows how we also need to build the wider ecosystem. We need the supplies, the tools, the logistics and the markets, for the seedlings to grow, the trees to fruit, and the fruit to reach the market.
Social investment is looking to become a major industry, building a better social economy, and becoming a key part of our global civilization. We have work initiated by the G8, the UN, OECD, multinational companies and major foundations, all hunting for the solution. Social investment simply cannot achieve its goals on a hunter-gatherer mentality. It’s time to shift to cultivation.
Cliff Prior is CEO of UnLtd UK.