Guest Articles

Thursday
January 16
2020

Carola Schwank

Filling the Funding Gap: Two Innovative Ways to Improve Financing Opportunities for Social Impact Entrepreneurs

Around the world, social entrepreneurs are finding ways to elevate and impact marginalized communities in remote geographic regions. But these ambitious individuals often struggle to scale their enterprises because of difficulties accessing tailor-made capital. It’s common knowledge that social entrepreneurs avoid depending on grants or donations while they develop and expand their businesses in a stable way. It’s also well-known that they often run into difficulties finding the “right” investors that will cater to their specific needs. To put it simply, there is a clear mismatch when it comes to pairing up social entrepreneurs and funders for impact investment purposes.

With that in mind, we at Siemens Stiftung, along with one of our non-profit partners, enpact e.V., decided to initiate and host an international expert round table on this crucial challenge. At the round table sessions, we were thrilled to have social entrepreneurs from around the globe, and leading experts from the fields of social finance, development politics, philanthropy and technologies for development. A robust variety of promising approaches and ideas emerged from these discussions, and there were two recurrent themes that showed the most potential to fill the funding gap and impact social entrepreneurs:

  • The need to collect relevant data for financing processes by using data generation systems, and
  • The need to improve tailored matchmaking between entrepreneurs and investors by pooling different sources and types of capital.

We believe that these key insights hold the potential to change how social entrepreneurs scale their businesses, which will not only improve outcomes for them, but also for the communities in which they work. You can find discussion of these topics, along with a plentiful amount of topical insights and expert advice, in our “Innovative Financing for Social Entrepreneurs” report – a result of the collaborative round table and subsequent discussions.

 

Two ways to support social entrepreneurs with financing

Let’s explore these two themes in more detail, to see why they have the highest likelihood to improve and scale the currently-existing ecosystem for social entrepreneurs.

First, there is a substantial need for innovative technologies that truly support social entrepreneurs in finding the right funding partners. Data generation platforms may help simplify due diligence and matchmaking between social entrepreneurs and investors, and allow for urgently-needed smaller ticket sizes that fill the financial gap for early-stage entrepreneurs. With an expert team, we have discussed the idea of developing a free, easy-to-use online platform that would allow entrepreneurs to create a business profile (programmed with specific algorithms) that is based on both financial data and qualitative information, to shed light on their business potential and overall performance; using this tool, funders could filter and search for the investment opportunities best-suited to their own strategies/requirements. Entrepreneur profiles would be presented with the highest possible degree of transparency, so that both parties remain confident in the data and motivated throughout the transaction process. With its rich “data bank” and customizable analysis tools, this type of solution would not only support social entrepreneurs in finding the right funding partners and vice versa, it would also make the due diligence process for investors more transparent, time- and cost-efficient, and effective. In addition, this approach could provide entrepreneurs with increased visibility – which is especially important for small enterprises that are often overshadowed by a small pool of better-known organizations.

Second, whether it’s due to the newness of social capital markets, the increasing complexity of finance instruments, or an inherent characteristic of social innovation, we find that one-size-fits-all approaches often fail to address the needs of social entrepreneurs. That’s why financing vehicles that combine different sources of capital with different distribution methods are a promising solution in addressing the need for increased and individualized impact investment. If they involved a combination of different types of funding (repayable grants, loans or equity, for example) and individual repayment mechanisms, these financing vehicles could provide more flexible, tailored solutions for entrepreneurs. For instance, as part of this approach, foundations could also step in as direct funders or co-funders of social enterprise, alongside traditional investors.

At the same time, our expert team has identified another way to get individualized capital to the right entrepreneurs: pooling different sources and types of capital for enterprises working in specific industries and/or regions. Different industries and regions house a subset of entrepreneurs and distribution channels – often with similar needs, and catering to these needs could streamline processes and open up resources to the players who seek impact creation there. The replication of existing models that pool and distribute diversified capital based on the needs of these social enterprises in a cost-efficient way should be examined further, in collaboration with investors and entrepreneurs.

 

How the social enterprise industry and its players can move forward

Our team at Siemens Stiftung knows that such initiatives cannot be designed as stand-alone undertakings. Our objective is not only to share these insights with the social impact ecosystem, but to encourage and strengthen dialogue between all parties involved in social development. Along with our partners, we will continue to advocate for and facilitate work on innovative approaches to financing for social entrepreneurs. In fact, we recently brought together many of our expert round table participants for an online follow-up meeting, in which we discussed key findings, sought feedback and, most importantly, agreed to invest further resources into the two financing approaches mentioned above. We are also aiming to establish working committees with our expert partners to ensure continued efforts are made on both initiatives.

We invite all players in the social business sector to join forces to continue building better, more sustainable financing methods for social development projects. Day in and day out, we are impressed by the noticeable impact social entrepreneurs’ work has on improving living conditions, and creating new jobs and income opportunities for people around the world. But these entrepreneurs need the financial means to stabilize and grow their businesses, with accessible finance being one of the most important preconditions for their long-term success. We look forward to working with our partners as we build upon these innovative ideas – and explore others – in the near future. We invite you to explore the report on the round table and to share your impressions, thoughts and feedback with us.

 

Carola Schwank is Head of empowering people. Network (epN) / Development Cooperation at Siemens Stiftung.

 

Photo: International experts convening at Siemens Stiftung’s round table on innovative financing for social entrepreneurs in Cairo, Egypt.

 


 

 

Categories
Entrepreneurship, Investing
Tags
entrepreneurship, impact investing, impact investors, social capital, social enterprise, social entrepreneurship, social impact, social innovation