Over 1,200 attendees from all sectors of social enterprise in the U.S. converged on the Social Enterprise Conference at Harvard University in early March. The conference focused at the nexus of social innovation and entrepreneurship. As Caleb Shreve, executive director of the Global Fairness Initiative, said, “Social mission brings heart; entrepreneurship brings growth and impact.”

Several insights from participants emerged at the conference:

Transformative Capital
Eleven grants were made in the first year of Obama’s Social Innovation Fund (SIF) to intermediary philanthropic investors like Venture Philanthropy Partners, who received $4 million for a two-year commitment to invest in the non-profit initiative, youthCONNECT. A total of $50 million a year is to be granted by SIF. Intermediaries and non-profit social enterprise recipients are each expected to match government funding dollar-for-dollar.   

It seems to me that impact investing in the U.S. remains so small in relation to the massive scale of American capital markets. Nonetheless, impact investing involves sums that are substantial enough that it can fuel experimentation and scaling. There are a number of organizations like Root Capital and IGNIA Fund that are investing nine-figure resources annually in debt and/or equity financing.  

Impact investors are challenged to find social enterprises with the ability to generate reliable revenues. In other words, some capital is being kept off the table because of the business risk associated with blended value organizations, especially in their early stages.

The lack of a large enough intermediary sector of players to undertake such tasks as deal-sourcing and capacity-building for social enterprises continues to be a serious impediment to growth. This keeps the cost of lending high and, one presumes, reduces the amount of lending that would otherwise occur. Legislative changes like the creation of L3C hybrids are not yet sufficient to stimulate a social capital market in the U.S.

To stimulate that growth, impact investors like Root Capital sees its role as one to catalyze a new financial market for social enterprises by enabling the creation of entire industries in developing countries that become large enough to attract regular capital, allowing Root Capital to exit the market.

Impact investors’ expectations for financial returns on their investments vary widely. On one hand, IGNIA only invests for returns of 25 to 30 per cent while Grassroots Business Fund expects single-digit returns.

The issue for impact investing is not only the amount of capital but being able to provide a variety of financial tools depending on the needs of the social enterprise. In the case of Snag Films, for example, The Knight Foundation provided a grant for the start-up, later a $500,000 investment to scale up, and finally partnered with a private venture capital firm for a final $10 million investment.

Scale
The challenge is to define scale. Some participants said, “work at scale, not to scale” by which they mean to scale your organization to the local market, to define it by the community, or to be as big as you need to be to affect the change you have targeted. There needs to be solid, strategic reasons to scale a social enterprise that enhance sustainability and effectiveness.

Good governance and appropriate leadership are critical for successful scaling. The board needs to have expertise and ask tough questions while being invested in the mission, not just in their relationship with the founder. And not everyone can lead at different stages of an organization’s growth.

Measuring Social Impact
Most practitioners measure impact but do so each in their own way and for differing objectives while supporting the efforts to agree on standards like GIIN. Challenges to measure impact include the questionable quality of data since no audit processes are available to confirm its veracity; no substantial impacts may be seen for some time, perhaps too slowly for investors; and attribution is problematic – how much change is due to the impact of the social enterprise.   

I believe that social impact measures by their very nature will always have a significant amount of subjectivity and bias; the results must be considered with care. That being said, impact measurement is important. If we are to welcome more private capital, it will be necessary to be accountable for outcomes; those who do it well will likely receive more investment. And the analytical process makes for better management with a more disciplined approach to achieving social objectives.

Professor Alnoor Ebrahim of Harvard Business School kept things in perspective: “There is a sense that if you build measures, investors will come. Research shows that those who invest in social enterprises do so because they believe in the issue.”

“Leadership in the Bush”
The nexus of entrepreneurship and social innovation is a powerful point where leadership and ideas can be freed to drive change. William Foote, the founder of Root Capital, talked about “leadership in the bush,” that the community and business leaders in the isolation of rural Peru or Kenya have the skills, drive and agility to match any corporate CEO. Impact investors like Root Capital see their role as one of enabling those leadership skills to go to work to improve communities and the lives of those in them.

Photo credit: http://www.socialenterpriseconference.org/

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