NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

After more than a decade working in social impact as an entrepreneur and implementer, in March, 2019 I transitioned out of my role as CEO of Resonate, which unlocks the leadership potential of women and girls in East Africa. I am now a pursuing a masters degree at Stanford Graduate School of Business to position myself to direct more funding to local social entrepreneurs in emerging markets.

I had become increasingly aware that I had a lopsided view of the complex web of people, organizations and processes that go into funding social impact. While I know what it is like to be an entrepreneur seeking funding, I hadn’t had the opportunity to see this process through the eyes of an investor. In fact, most of us who work in social impact tend to sit on one side of the table or the other, which can lead to blind spots and inefficiencies on both sides.

Prior to starting at Stanford, I began looking into some of the barriers to funding I had experienced myself as an entrepreneur. Through a research project funded by Miller Center for Social Entrepreneurship at Santa Clara University, I interviewed 42 individuals who represented investors, entrepreneurs, mentors and intermediary organizations’ staff to identify best practices and uncover areas of misalignment between entrepreneurs and investors. We are sharing the key insights gathered from this process in the hope that it will help bridge the information gap for all the different stakeholders involved in social impact work, and catalyze more effective investment facilitation.

Social Enterprise Trends – and Challenges

It is an exciting time for social enterprise. Consumers are becoming more interested in conscious consumption, and our increasingly connected world allows for a more global approach toward markets, investment and impact. Though still somewhat nascent, the current global impact investing market has grown to an estimated $502 billion. Impact investing is no longer only the purview of specialized investors looking to fund a cause – even large conventional players such as Bain Capital have created funds with an impact focus.

But despite this increase in resources and recognition, social enterprise and impact investing are still relatively new fields. There is ample room for innovation, but that comes with a lack of clarity and formality in the sector: One of the key takeaways of the 2018 GIIN Annual Impact Investor Survey is the diversity of the impact investment market. This rapidly growing market can also create obstacles for some deserving social enterprises to secure funding. And at the same time there is a heightened risk of impact washing, as more conventional companies and investors try to get a piece of the growing impact investment pie. What’s more, startup social enterprises can find themselves in the “missing middle,” in which they are too big for a microloan, and yet appear too small or too risky for traditional bank lending.

The impact investing market can and should be able to fill that gap. There are many different types of investment vehicles for social impact, and yet there aren’t always appropriate structures for investment across the risk/return spectrum. Early-stage impact ventures can be vastly different in terms of the type and structure of capital they need, which makes raising funding particularly challenging for new entrepreneurs with innovative products, company structures or investment strategies. And although there are some attempts to standardize and segment the sector, there are no widely agreed-upon operational definitions or terms, creating ambiguity and risk for both investors and those seeking capital.

These barriers are particularly high for businesses started by women or non-Western founders. A survey conducted on women entrepreneurs by the Graça Machel Trust indicates that 71% of female entrepreneurs in East Africa self-fund their businesses, in large part because they don’t have access to other forms of capital. Among all East African entrepreneurs, 90% of those that receive funding have at least one European or North American founder. Despite the increasing capital available for impact investment, Echoing Green found that the top 10% of organizations raise the majority of funding, while 51% of organizations raised none at all.

So for those ventures that do get funded, what are they doing right? And what gaps can we address to make funding available for the enterprises that are currently being left behind?

What’s Working

Throughout our interviews with different stakeholders, the following themes emerged consistently, across stakeholder groups, as successful approaches to facilitating investment.

It’s all about relationships.

Securing investment is highly dependent on the investor-entrepreneur relationship. Ultimately, introductions, matchmaking or referrals can be a helpful “foot in the door,” but they cannot serve as a proxy for trust built directly between the entrepreneur and the investor. While a mentor, investor or champion for the company can lay the groundwork for a warm introduction, entrepreneurs need to drive outreach and expand their networks. This includes connecting with investors who may not be a good fit for the company, but who can create connections to other “pockets” of investors.

 “Finding a way to get noticed is part of the test for entrepreneurs.” – Investor

Specialization is key.

It is increasingly difficult to serve the entire social enterprise market. Because relationships are so critical, networks can be more effectively built by attending events that are specialized by geography or industry. There is a huge value for entrepreneurs in connecting with similar companies, because increasingly investors turn to their portfolio companies for new pipeline.

“Our best referrals usually come from organizations in our portfolio.” –Investor

Outreach should be personal and targeted.

Communication between investors and intermediaries is most effective when it is occasional and targeted. Even if there is a great-fit introduction, an investor might not be looking for pipeline at any given moment, so accelerators and mentors should guard against outreach fatigue by making information delivery occasional and on an opt-in basis. Ad-hoc connections should be specific and personalized. More and more, investors are seeking connections to locally-led ventures, so these introductions are particularly valuable.

“If I get any local entrepreneur-led organization referred to me I will have a call.” – Investor

What’s Not Working

Although the challenges faced by each stakeholder group are different, recurrent themes are represented below.

Communication barriers mean missed opportunities.

One of the biggest gulfs between investors and entrepreneurs is communication. This disconnect can lead to missed opportunity or failed deals. All stakeholders noted that nuanced financial terms represent an area rife with miscommunication and misunderstandings. Although entrepreneurs can often speak eloquently about their missions on a high-level, they sometimes lack the depth of financial understanding and specificity that investors want. Furthermore, specific nomenclature differs across industries and sectors, meaning that entrepreneurs need to be well-versed in a wide range of language and terminology, depending on the investors to whom they wish to connect.

These barriers are exaggerated for female founders, and entrepreneurs from emerging markets. For non-Western entrepreneurs, not having command of specific terminology can be misinterpreted as not having a good business or a polished plan, while female entrepreneurs have to find a way to show confidence in growth without being perceived as “too aggressive.”

“No one here would say ‘40x’ but if you’re in a Starbucks in Silicon Valley, everyone understands what you’re talking about.” – Entrepreneur

“As a woman, if I’m in a confrontation, if I show assertiveness, that is seen differently.” – Entrepreneur

Not all social enterprises should be raising funds.

One of the biggest challenges brought up by investors, mentors and intermediaries is that not all ventures coming out of an accelerator are actually ready to raise capital. Yet if a capital raise is set as the end goal of an accelerator program, there will be pressure from multiple stakeholders for the company to raise funds, even if the timing is inopportune.

Because there is no clear definition of what “investment ready” means, it is more difficult to determine and communicate who meets that standard. Even if a venture is ready to raise, capital amounts and types vary widely, and there is often disagreement about a company’s specific capital needs. Figuring out the right capital structure is imperative, because raising an early round with the wrong type of capital could hurt ventures in future rounds.

The final – and perhaps most difficult – reality is that not all social enterprises should succeed.  Yet the network of accelerators and mentorship programs that rally behind an entrepreneur all have a stake in seeing that company succeed, so there is an increased reluctance to fail fast (or at all).

“Not all ventures are meant to receive investment – some are meant to die.” – Intermediary

Not all advice is good advice.

The rising profile of the social business space has attracted all sorts of players who want to be involved in supporting the growth of social enterprises. Whether as mentors, investors or other actors, these folks can play a very productive role in supporting entrepreneurs. However, advisors can sometimes provide misinformation or misguided suggestions that can be harmful, if not evaluated critically. For some companies, being advised to apply conventional business strategies to more impact-focused businesses can lead to miscalculations. For others, being advised to think within the confines of traditional nonprofit or impact frameworks constrains innovation and growth. Further complicating things, entrepreneurs often receive different and conflicting advice from different advisors.

This is exacerbated by the fact that people without relevant experience can end up in positions of power over social enterprises, and entrepreneurs can feel beholden to take their advice, even if it isn’t in their best interest. Entrepreneurs need to think very carefully about who they take on as mentors and advisors, and they should feel comfortable turning down advice if it won’t serve their business in the long run.

“The advice that people get can actually be pretty dicey if people don’t actually have sector experience.” – Investor

Understanding Different Viewpoints

The social enterprise landscape will no doubt continue to evolve and change at a rapid pace. As it does, taking the time to understand the viewpoints of other types of stakeholders is a critical part of aligning expectations, incentives and ultimately capital to fund social impact.

We hope that these insights can play a role in accelerating this process. If you’d like to learn more about how to improve communication between impact investors and social entrepreneurs, reach out to me or stop by Miller Center’s booth at SOCAP 2019 to continue exploring these topics. Together we hope to create usable insights and best practices that we can incorporate into our next funding conversation – no matter which side of the table you’re on.

Ayla Schlosser is former CEO and Co-Founder of Resonate. She is currently a graduate student at Stanford Graduate School of Business. 

Photo courtesy of Nastuh Abootalebi.