Yearning for earnings: what´s behind the hunger for social businesses?

 

Kristin Majeska

In the hip barn of the twenty something owners of a horse-powered winegrowers on the coast of Maine, the rafters echoed with the buzz of wealthy young people who got together because they were excited about the idea of creating and investing in ventures that give back to society. Across the sea in Madrid, suits and ties representing consulting firms, large multinationals and private investors spent an afternoon cheering on – and later committing investment capital to – several of the nine social enterprises nurtured by UEIA Social, the first European accelerator of technology-based social enterprise, from an initial field of 120 business proposals. In San Francisco, home to internet fortunes and deep-pocketed philanthropists, a well-established social entrepreneur in the impact investing space finds it easy to raise high-risk unsecured investment financing for a venture housed in a non-profit, but has a tough time raising the traditional grant funding his board would like to see.

Everyone knows most for-profit start-ups fail. So what’s the appeal?

Energy
In the US, Next Gens who’ve grown up volunteering and seeing their parents head out to endless long board meetings are often jaded by traditional fundraising and conservative board governance models. They love the idea of doing good, but hate the idea of ‘begging’ for money. Sure, businesses are risky, but right now they’re kind of sexy too. There’s a perception (mostly true) that when you use a business to accomplish your social vision, you’re able to respond and adapt quickly, you can take chances, invest, and make decisions without dealing with a cumbersome board structure. Naturally, if you grow and take on outside capital, that decision-making control can change dramatically, but the start-up story tends to feature nimble and passionate innovators. And when we’re talking about start-ups with a social purpose, it’s clear that the earnings are a means, not an end, another value the Next Gens we work with hold dear. To borrow a phrase from James Gutierrez, the young founder of Progreso Financiero, social entrepreneurs want to be surrounded by ‘missionaries, not mercenaries’.

Impact
For young people who have wealth or access to wealth through trusts or family foundations, it tends to make intuitive sense to use the full range of their assets to create a world that better aligns with their values. They’ve seen how innovations that use capital markets to go to scale can change the way the world operates – think Google or Twitter. And on a smaller scale they’ve seen what happens when there’s not investment in sustainable local companies: small businesses and producers disappear, Walmart becomes the only option and the fabric of the community frays. For many, donations to non-profits continue to be important but are not enough, given the chances they want to see in the world.

Pragmatism
The social entrepreneurs and impact investors we work with hold strong ideals, but they’re also incredibly pragmatic. When I recently waxed eloquent about all the reasons donors were becoming intrigued by impact investing, one social investor pulled me back down to earth with a very matter-of-fact observation. ‘And people need to get their money back and make a little. They can’t just give it all away!’ We’re seeing increasing requests for help with due diligence and making sure that the impact investors are comfortable with the level and type of risk in their portfolio.

Does it feel ethical to charge for walking children to and from school, something parents and siblings have done for decades? It does if you’re looking at it like CienPies (Centipede) a Spanish social enterprise from the UEIA Accelerator which considers their service a healthy, educational and environmentally friendly alternative to other forms of paid transportation or childcare. They believe a self-sustaining business is the most viable way to get kids walking again. Telefónica’s Director of Reputation and Corporate Social Responsibility and UEIA backer Alberto Andreu explains the investor perspective: ‘We are looking for businesses … that offer a sufficient combination of financial and social returns.’ It’s got to be both.

Relationships
Back at the barn in Maine, one experienced investor and philanthropist confessed to that group that as much as the financial rewards, she values the relationships she has developed with the social entrepreneurs she has financed. In her words, ‘we’re business partners, we’re in this together’. She’s a strong believer in philanthropy and makes many strategic donations, but it’s a different power dynamic when she puts money into a social enterprise. Another philanthropist and impact investor, an early player in Slow Money, underlined the importance of reciprocity in investor/social enterprise relationships – because capital flows in both directions. He values the human dimension of the angel investor role in mission-driven businesses. Many times, he explained, the entrepreneurs he funds turn into friends.
Beyond income statements, balance sheets, even impact metrics, social businesses are attracting bright young entrepreneurs and committed investors and philanthropists because, well, they’re social!

Kristin Majeska is a partner at Philanthropic Intelligence

Tagged in: Social entrepreneurship Social investment


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