Tough Love for Impact Investors – the Europe Session at SOCAP
Social investors are on the hunt for “investable” social enterprises to fill their “deal pipeline.” But do all these enterprises want (and need) investment? In the SOCAP/Europe session on “How to Fill the Deal Pipeline in Europe: Changing our Models to Fit the Continent,” staff from Ashoka and the Schwab Foundation searched for answers together with social entrepreneurs and investors.
Tough Love: What’s the Role for Impact Investors?
Felix Oldenburg, Ashoka’s Europe and Germany director, promised some “tough love” for investors to strengthen the perspective of social entrepreneurs in the impact investing scene.
The session started from a key concern from investors during the conference – how to find investable companies? Oldenburg said the difficulty is not “because social entrepreneurs are financially illiterate, but it’s because they don’t find impact investment money interesting.” Ashoka is more interested in scaling “ideas” rather than the “organizations” – while investors normally have a focus on investing in and growing organizations as such.
Such concerns were echoed by other panelists and audience members. One member of the audience reasoned that half of social entrepreneurs he worked with (all Ashoka fellows) do not have a fit with impact investing because they don’t have a revenue model in the traditional sense. And Jürgen Griesbeck from social enterprise Streetfootballworld stressed that violence prevention through sports programmes, for instance, is something difficult to monetize and invest in.
Getting the impact investing process right
Still, even for those that can “absorb” and pay back impact investment money, the process is not right yet.
Mirjam Schöning, from the Schwab Foundation, raised concerns about the investment size (most entrepreneurs need smaller funds, relatively unattractive to investors), process duration (too long, with sometimes rather “plain” outcomes), and attention to social impact (may be high on paper, but a secondary concern to investors in reality).
Faisel Rahman’s experience with funding Fair Finance, UK, illustrates Schöning’s point – it took him four to five years to prove that he his “here to stay,” and then another 1.5 years to negotiate debt funding for his organization, backed up by a 180-page legal document, and supported by consultants and experts around him.
How to fix impact investing?
Despite all those notes of caution (or warning) – impact investing is here to stay, and social entrepreneurs in all colors and shades need funding.
Fixing the deal-pipeline would probably start at an earlier stage. Indeed, some investors might move “up,” supporting social enterprises before they’re ready for formal investments. Often, entrepreneurs rely on grants and or subsidies to move through the “valley of death” between private resources used for start-up, and larger sums in form of formal (debt or equity) funding later on.
There also might be surprising opportunities in other sectors. Jürgen Griesbeck reported on how his organization mobilized millions during the soccer world cup in South Africa, and later “directed” millions of public grant money in Latin America to “sports for development” and violence prevention activities (instead of governments spending them on “police and prisons”). While sourcing such amounts from impact investors would be extremely difficult, they are available in the public sphere.
To help social entrepreneurs – particularly those on the social/non-profit end of the continuum – find the right partner and source of funding Schwab Foundation released a Social Invesmtent Manual. It serves as a first point of reference for those looking for funding and provides an overview of the social investment landscape, instruments and processes.
Turning things on their head?
Oldenburg, who hasn’t shied away from challenging convential wisdom recently closed the session with some notes on the power differential between entrepreneurs and investors. At the moment – and at SOCAP/Europe – discussions are often initiated and dominated by investors. Felix hopes “that this session has balanced this, starting from ultimate impact and not so much from financial mechanisms.”