I am getting ready to learn as much as possible from this web conference. My question on this topic is the following: What is the role of government to promote social investment, especially as it relates to developing countries? Can social investment ventures work efficiently in countries where instability is the norm?

I’m looking forward to read your replies.

Thanks,
Ilio Durandis
Founder
Haiti 2015
www.haiti2015.com

Hi Ilio:

Thanks for your comment. At this point the social investment field is too immature to provide a comprehensive overview to “government efforts in developing countries.” As far as I know most government/policy work related to social investment is happening in developed countries in Europe and places like Korea, with the UK far ahead of the rest. In the US we are hoping a more enabling environment will emerge in the US as a result of the Obama Administration’s Office of Social Innovation.

That said, there are many, many examples of social investments in developing countries, spanning the spectrum from recoverable grants to equity investment. Most of this investment money is coming from private foundations and individuals and not governments per se.

Perhaps at this juncture of the conversation it would be useful to turn our attention to the spectrum to better understand the types of funds available, for what and by whom before getting into details public policy. Expert guests may also have points to ad here.

Thanks, Kim, for those points, and for the re-direct onto what types of capital fall within what we're calling the spectrum of social investing. It's an important topic because so many types of investment vehicles and levels of financial return can be called "social investment".

In general, social investors are using a type of thinking learned from the commercial investing world. They tend to focus on building capacity, rather than specific programs. Goals can be more long-term, and might include goals for the investee to become financially sustainable.

Social investments can be broadly divided into capital that requires no financial returns (grants), and capital that does require some level of financial returns. The factors that unite these under the "social investment" umbrella are the approach, mindset, and expected outcomes of the social investors, as well as the activities and impacts of the investee.

So let's first consider grants that might fall under the category of social investing. How do these differ from the grants that are well-known to most NGOs and charities?

While a grant of this type would still be “non-returnable,” the social investor might consider the grant an equity investment, meaning the investor takes a highly engaged, long-term stake in the success of the organization, investing in the organization’s capacity and growth, rather than a specific program. Many social investors termed “venture philanthropists” take this approach with grants.

I'm interested to hear whether anyone following this discussion has experience with "venture philanthropy"-style grants, and can talk a bit about the differences in how the investor makes decisions, what the investor expects the capital to be used for, and the pros and cons of these differences for the social enterprise organization.

Or maybe your organization is more traditionally funded, and you're curious as to how this type of grant really differs from traditional grants. Feel free to share your questions!

It seems that often the social investment field will claim to target “social and environmental outcomes” but there is little emphasis placed on the latter. For example, projections of environmental benefits are rarely included in SROI calculations even when some of these are more easily quantified and projected than more mainstream social indicators.

It appears that environmental indicators are viewed as falling within a larger umbrella of social outcomes, however this is not always the case. Can social investors adequately build environmental indicators into their underwriting process? Why have they been so slow to do so? Does it make more sense for a parallel field of environmental investing to emerge separate from social investing? Why or why not?

Many thanks for your thoughts,
David Sturza

The “spectrum” is useful orientation to social investment that depicts the range of investments types beginning with charitable/social instruments such as grants on the far left, and moving to “soft” investments, e.g. interest free or below market rate loans and equity-like investments left of center, to bonds and market rate loans, right of center and finally commercial instruments such as venture capital and private equity at the extreme right. To the extent the text box will allow is a crude overview of the progression of social investment instruments from left (social) to right (commercial):

Grants-engaged philanthropy-recoverable grants-program related investments-equity-like investments-soft loans-patient capital-subordinated loans-commercial rate loans and private equity. (** Please note – there is a glossary in the social finance paper that accompanies this conference.)

Types of social investment are correlated with type of return on investment: 100% social returns (extreme left of spectrum), 100% financial (extreme right of spectrum), or some variation of “blended (social and financial) returns. All social enterprises produce blended value, however the degree of social value and financial value ranges depending on the mission and financial/business model and market.

Below is a generalized view of the range of organizations, value they generate and suitable social investments along the spectrum (left to right)

1) Not-for-profit/charity that generates exclusively social returns and earns no income – social investment: grants
2) Social enterprise that generates mostly social returns; recovers some of its cost through revenue, yet runs a deficit – social investment: grants for capacity building, bridge funds; PRIs, soft loans)
3) Social enterprise/business that generated both social and financial value (breakeven to profit-making) and has a clear social/environmental purpose – social investment: PRIs, soft loans; market rate loans or equity, “quasi-equity”
4) Commercial opportunities for business in deprived areas which produce a financial return and defacto social return – social investment: market rate or below market rate loans or equity coupled with tax reduction and/or government incentives
5) ‘Social firms’ or BoP businesses that employ disenfranchised members of the community and generate both social and financial returns – sub-market and market rate loans and equity.

Finally, the attached picture file illustrates the spectrum as it related to “supply of investment available” to “investment demanded.” Not surprisingly, gaps exist between sources of funds available to social enterprises or “blended value businesses” and need. We can save this comment for further discussion.

Thanks, David. It’s a good point. When we say “social”, the environmental can get pushed to the background. I think that’s changing. There are some social investment funds out there who are focusing specifically on environmental impacts, and others who are interested in blending the ideas of “social” and “environmental”

E+Co is a good example of an “environmental” social investor – they recently took an equity investment in SELCO, an Indian social enterprise working in rural solar electrification. (http://www.eandco.net/module-TAG-display-iid-28-theme-EAndCo_Portfolio.h…). They’re expecting a full market return on that investment.

There is an important pair of points here for any social enterprise curious about seeking social investment. Understanding each individual investor’s criteria and goals – for social/environmental impact, and for financial return – is an essential part of the research process.

If your social enterprise can make a great case for environmental impact, you will be well served to seek out those social investors who specify an environmental “return” on their capital. And some investors will be happy with many types of impact – be they classified “social” or “environmental”.

You’ll then want to ask yourself whether the level of financial return the investor requires fits with your business model. If you can offer only a very modest financial return (for example, you think your projected cash flow can support a loan at 2% with a long pay-back period), you will have to rule out someone like E+Co, who take a very commercial approach to their social investing.

One mistake that many social investors talk about is social enterprises that try to convince investors to change their criteria. Social entrepreneurs are great at being passionate about their ideas, and great salespeople of what they’re trying to accomplish. But you can waste a lot of time trying to convince a social investor to change his/her mind about what kind of social impact should be expected, or what level of financial return s/he will accept.

While some investors might be a bit flexible on the impact side, many have already decided which categories and metrics they will use to determine social impact. And investors are VERY unlikely to be flexible about financial returns. Remember that they have investors and stakeholders, too, and they’ve promised them a certain level of return. Usually, for a very commercially-minded social investor, no level of social/environmental impact will convince them to take a risk on a social enterprise that is likely to give them below-market returns.

Good evening everyone!
My name is Oliver Karius and I am writing to you from LGT Venture Philanthropy (LGT VP), based in Zurich, Switzerland.

Before I respond to what both Jessica and Kim have so elegantly introduced us to, i.e. the differences in capital, I wanted to briefly introduce LGT VP. The LGT Venture Philanthropy Foundation was founded in 2007 by initiative and funds of the Princely Family of Liechtenstein. Its mission is to raise the sustainable quality of life for the less advantaged people especially in the developing world. Applying a venture philanthropy approach, we seek to support both non-profit and for-profit organizations active in the areas of alleviating human suffering, education, and sustainable livelihoods by providing capital, as well as knowledge, strategic support and access to relevant contacts and networks. The aim is to create long-lasting sustainable impact while building the structures to enhance long-term development and self-empowerment. LGT Venture Philanthropy makes use of grants, loans and equity investments. Any generated profit is channeled back into the fund and will be used for additional investments.

As you can see we provide three “types of capital” – grants, loans and/or equity. I am writing as a “patient” investor, i.e. we seek to use the right “kind” of capital so that the entrepreneur can achieve the desired impact. As an investor, we would also like to see a return, albeit a “social return”. In that we are not different to a normal investor. We seek to allocate capital efficiently, i.e. to get the highest outcome/impact per dollar invested. In today’s world, capital is scarce and it is crucial that each dollar is spent wisely and preferably on setting up structures that are sustainable. Just handing out cash is not the solution.

As a patient investor we want to see that social entrepreneurs have a clear plan WHAT they want to use the capital for. They should have a clear – and realistic – vision of where they want to be in 3-5 years (just like a normal entrepreneur) and practical and realistic plan of how to get there.

We also look at the underlying “business model” to decide what type of capital is most effective. Some organizations can generate revenue (which is a good thing, b/c it allows it to have capital at its own disposal and does not have to request capital from donor/investor). If this is the case, and the organization is not too far from being cash flow break-even (i.e. total revenue received equals the total costs associated with the sale of the product) then we would always opt for a loan or equity invest (note: equity investing only works in for-profit companies b/c you as an investor can own a part of the company (a shareholder)). If the model will not be able to generate income, then a grant is totally permissible. However, we would always attach milestones against the grant and work very closely with the organization.

So, the discussion about grant, loans and equity is not that difficult. Understanding the underlying business model and then structuring the most appropriate type of support is the hard part. In most cases, we find that the most important part is to support senior management. And for that, we work very closely with the local CEO/founder. The responsibility always lies with the CEO/founder and not with us. A relationship based on trust is key.

Key take away: – Know what problem you want to solve – Know what business model you want to use – Know where you want to be in 3-5 years – Always consider the overall organization capabilities and not just programs – Articulate your impact – Find the right kind of investor that fits with where you want to be going – Grants, loan and equity type financing are the means to an end

It is already 19:30 and I will have to log-off shortly. I’ll be back tomorrow. Have a good discussion.

As a featured social investment panelist, I’d like to add a few thoughts on what some people have already said today. I work at Blatter+Frick in Zurich, Switzerland, a boutique philanthropic advisory firm serving social investors in Europe, North America and the Middle East – you can read about our services on my profile, I believe, so I won’t get into it here.

There are always multiple ways to go about creating an impact –we tend to use a portfolio approach with our clients which certainly takes this into account. Portfolios differ from client to client and may include one or several geographical and thematic focuses, as well as the varying “risk” profiles and terms to maturity of their investments (corresponding to the specific personal strategy of the client). The reason I mention this here is because it is important for a social enterprise to realize that a social investor is comparing the impact – the depth and breadth – of that social enterprise to the impact that could be achieved by investing in another organization halfway around the world.

If, then, you’re competing against a pool of hundreds or more of social enterprises from around the world, where is your unique selling point? (I’m assuming that most social enterprises taking part in this forum are here because they want to know how to get more social investments heading their way). The social impact that the social enterprise generates is obviously a key criteria, but all other things equal (as they usually are since almost all social enterprises claim to be successfully solving a market failure) a social investor is going to look for organizations in which she or he can make truly unique impacts on the social enterprise and thus on the mission of the organization.

Think about it: who wants to be just one more investor in an already overfunded success story? That is the role of traditional NGOs, which are inherently risk averse and bet on sure things (thus, success begets success). The goal has been to improve access to a service in the short term, and no organization is willing to risk its money on initiatives which do not guarantee the provision of that service at the end of the project cycle – this would look bad in the eyes of donors and governments, not to mention in the eyes of the project managers‘ superiors. Social investors, on the other hand, have a very high tolerance for failure and are less sensitive when only 3 out of 10 investments succeed – but when those three succeed, they can be blockbusters. So, beyond the social impact of the social enterprise, I would say that the most compelling investments have offered various roles which our clients have been able to engage through.

At the most basic, you have the role of investor: you add value by investing money in initiatives where funding is needed to propel key objectives. Investments may be short or long term, and may be made as a grant, loan or combination thereof. Another possible role is that of a Connector, where the investor adds value by providing a given initiative access to her or his network in an effort to help the initiative overcome strategic bottlenecks. This may manifest by facilitating access to services, resources, power, technology or people to propel goals and contribution towards the emerging paradigm. As a facilitator or convener, the investor helps the initiative by bringing together relevant stakeholders and facilitate them through a collaborative process. This is especially relevant as the investor might be seen as the only neutral convener that has no agenda. As an aggregator, you add value by connecting complementary initiatives to obtain optimized outcomes.

Eventually, it is in the social enterprise’s best interest to open up and say “this is where I am deficient” so that a social investor can identify areas of support beyond simply investing or granting funds. Whereas a traditional foundation grant might focus on “training the trainers” to enable more water wells to be dug, a social investor would act as the glue to bring a number of pieces together to try something innovative, albeit riskier, which may end up questioning the underlying assumptions of what the individual social enterprise is doing (which no one, save for the social investor, really likes to do!).

Sometimes these roles may tend to fall outside that of the traditional grantor or that of the emerging social investor, but I still believe that they fall along the spectrum that Kim talks – perhaps just flying at another altitude along the spectrum.

tks david, tks Oliver, thank everyone for sharing opinions. My name is Xian, come from China. From my personal experience, having an social enterprise idea is easy, making a concrete business plan is difficult, and the most difficult process is making the social enterprise survive and making profit to sustain – and achieve the SROI goal of investor. Thus, is it possible that franchising mature business model in different countries, and the franchisor become investor as well (instead of collecting charter fee)?
Another question is, as an investor of SE, how to evaluate social return of SE, which is invisible and not so easy to calculate in short term, especially under the context of developing countries which the investors are not familiar with?

Thanks Xian.

My name is Jason Goldberg. Our company, Edge, helps socially beneficial enterprises in South Africa to expand impact by becoming more competitive and growing. more on our website www.edgegrowth.com.

You asked about how one would evaluate social returns? We have developed a model, together with Mecene Investment, based on the SEAF model. Its not perfect, since much social/environmental benefit (sometimes the most important social / environmental benefit) is not measurable. Nonetheless, it does the job and results in a conservative assessment. It is a Socio-economic IRR methodology (SEIRR) in that it determines the Socio-economic Internal Rate of Return of a financial investment (internal rate of return is a standard measure for investors).

Here’s how it works, in summary:
The approach relies on the ability to measure quantifiable benefits to specific stakeholders. Socio-economic returns are measured by monetizing measureable socio-economic benefits (including shareholder returns, wages,other employee benefits, taxes, customer benefits, benefits to local suppliers, etc), and adding these returns into a total Socio-economic value, per financial year. The SEIRR is then calculated by using a normal IRR formula on the total socio-economic value stream. The chart attached illustrates.

Of course, the devil is in the detail. “How does one assess customer value?” is usually the most complex item to address, and often the most important in social enterprises. It gets still more tricky with environmental benefit assessments. The bad news is this must be done on a case by case basis, using solid reason and whatever quantifiable metrics and measurable data are available. There is no single approach.

I hope that is useful.
Take care
Jason Goldberg
Edge – Enterprise Development
jgoldberg@edgegrowth.com

I have had a problem getting on board here, but have now succeeded in actually logging in. I will post a background note here, then read the proceedings to date and be back tomorrow in force. Realizing we run the risk of sounding petulant, let me say that we have finally secured initial project funding. Our story should prove instructive to some (including ourselves)

Microventure Support (MVS) was created to address the gap in the missing middle. We are experienced MFI folks, both as TA consultants and operations staff with significant credentials in finance and skills training. Our objective is community level economic development through investment and training for the SME, SGB.

In early 2008, after a long deliberative process that included professionally directed strategic planning, creation of a formal position paper,the development of a professional website, (www.microventuresupport.org) preparation of a comprehensive business plan with detailed appendices and full financials along with assumptions etc., and finally, a fully narrated ppt slide presentation of our plan and objectives. We were as well prepared as any business I have ever consulted to move into the funding experience.

We self-funded our developmental steps, we conducted two separate "in-country feasibility studies. Our plan was widely acclaimed by all to whom we presented it. Our funding was committed by a new socially responsible investor being backed by a major financial house.

In March of 2008 we went to London to sign the agreement, only to find the investment firm had closed the unit and withdrawn from the SR sector literally overnight. Eventually, they went out of business.

I have attached our position paper http://public.mvs.fastmail.fm/MVS_PositionPaper_Final.pdf position paper as initial background for those who would read it. ... see you all tomorrow.

Jerry Peloquin

In truth, the core nature of
investment and return is not a
trade off between social and
financial interest but rather the
pursuit of an embedded value
proposition composed of both

Judy, Fit Resources Kenya

INTEGRATING SOCIAL AND FINANCIAL RETURNS by
Jed Emerson
In recent years, we have witnessed:
▪ the rise of anti-globalization and alternative globalization forces calling for
a “non-corporate” vision of our world’s future;
▪ a significant rise in the number of mainstream corporate CEOs discussing
the social and environmental performance of their firms not as a means
for advancing PR and marketing campaigns, but as a strategy for increasing the total value of their companies;
▪ the spread of social purpose enterprises, as nonprofit organizations launch market-based businesses pursuing social value; and
▪ the increase of discussions within various investor groups (both marketrate and philanthropic/social investors) about to how to track and assess the relative value of non-financial performance of capital investment
portfolios.

While it would be easy to view each of these developments as discrete
activities, in fact they are all part of the same process of exploring the true
nature of value. They are part of an emerging set of institutions, performance methodologies, and capital investment instruments capable of maximizing that value. They are all manifestations of the reality of the Blended Value Proposition. Exploring the Intersect between Financial Investing and Social Returns: What’s Wrong with This Picture?

Our world is currently defined in clear terms: Investors seek to either
do well or do good. We work for either a for-profit corporation or a nonprofit
CALIFORNIA MANAGEMENT REVIEW VOL. 45, NO. 4 SUMMER 2003 35
organization. Ultimately, it would appear we want to either make money or give it away. As we explore this world more closely, however, it is clear things are not nearly so cut and dry. In general, those in pursuit of capital may receive it in a variety of forms:
▪ A grant (which is a form of capital investment seeking to support the
creation of social value with no expectation of principal or interest
return).
▪ A recoverable grant (capital with no interest, but the expectation of principal
return).
▪ A Program-Related Investment (a loan, usually provided by a foundation,
which requires principal return, but carries a below market interest rate
of 1% to 3%).
▪ A loan or equity investment from a Community Development Finance
Institution (these are received by the borrower on market-rate terms, but
the lending capital comes to the CDFI from foundation or governmental
sources on below market-rate terms).
▪ A market-rate loan or equity investment from a mainstream capital market
player in pursuit of full financial returns.

This continuum of investment instruments runs along an investment
plane. At one end of the plane are those instruments (grants) that
seek full social value and returns, with no consideration of financial performance and return, while at the other end of the plane are those instruments (market rate loans and equity) that do not take social value into consideration and measure performance strictly on financial and economic terms.

These instruments are, in turn, put into use by an array of capital market players, ranging from mainstream capital asset managers to philanthropic institutions. This arrangement has served us well, creating both a thriving nonprofit sector and economically efficient for-profit economy. Our understanding of both investment and return is founded upon a traditional separation in the creation of social versus economic value. It is logical. It is the common understanding of the world. It is also inherently wrong.

The fundamental challenge to be addressed is that even a child knows
the value of a quarter is the same, yet different, from the value of a lollipop one has bought with that same quarter. The tension experienced by communities attempting to trade economic vitality for environmental health is the same as that balanced by the conscientious investor pursuing both financial rationality and social sense. Yet historic definitions of investment and return ask us to somehow choose between the two.
Judy, Fit Resources Kenya

By and large, even a genuine profit oriented enterprise achieves a social goal by creating jobs and paying a salary. In this understanding social enterprise does already exist. Having said that, in our opinion the problem is to know how much “social” is (could be) incorporated in an organisation and then how to organise business in order to achieve a maximum of a social mission and make it a sustainable enterprise.

We dealt with this issue in our contribution Social enterprise in microfinance industry: what does it mean? Microfinance Gateway, Sept, 2008 http://microfinance.developmentgateway.org/Highlights-content.9199.0.htm…

From the micro finance’s view point we concluded that any MFI while attending a social performance target has to strive to reconcile social goals and financial benchmark. In such equation social performance is function of a good management practice and not vice versa! This is a very crucial point. This means that there could be as many definitions of social performance as many MFI because, although social goals are a common denominator, the strategy to reach them is quite different.

Referring to the proposed spectrum approach it should be clear that although any organisation is social oriented the degree of achieving a social mission could be quite different whether the organisation is in the segment of enterprise development (accumulation) or income generating activities (increase family income) or food security (distribution of basic food to very poor people). In other words this segmentation could provide the developers-practitioners with a more defined boarder in the already mentioned spectrum approach.

By taking into consideration above market segmentation and underlying the dominant objective whether enterprises development or income generating activities or food security of a single MFI, it will be easier to evaluate the impact of the intervention in terms of social objectives.

Ascanio Graziosi
http://www.cambridgedata.com/GraziosiAscanio

Hello All:

Great healthy discussion and debate going on! At the same time there seems to be some confusion about what a social enterprise is…

Because social enterprise is a newly emerging field, this confusion is understandable. Currently, there are several definitions for social enterprise all with nuanced differences, however the fundamental underpinning is the ubiquitous in all definitions: social enterprise is a business whose primary purpose is social. Social enterprise are intentional responses to social problems, which execute their social mission via a business vehicle or trading organization. Social enterprise is NOT any business that pays taxes and creates jobs as one comment suggests.

One of the simplest definition of social enterprise – as business trading for a social purpose. (Social Enterprise Coalition). Another definition example is: A social enterprise is any business venture created for a social purpose—mitigating/reducing a social problem or a market failure—and to generate social value while operating with the financial discipline, innovation and determination of a private sector business. (Virtue Ventures)

The definition of social enterprise is important as it relates to social investing. Social investors, regardless of where they are on the spectrum—i.e. primarily philanthropic investors that seek mainly social returns or more commercially-oriented investors that seek market or near-market rates financial returns, or somewhere in between, they share a common characteristic: their investments are motivated by the desire to create social value/benefit/change. Their investment decisions reflect their philosophy and strategy with regards to how to best support the creation of social value. Investment decisions can relate to life cycle stage of enterprise, sector, geography, potential to scale, type of social impact, target beneficiary, social and financial return on investment metrics.

Before I go too far, we have found this series of exchanges productive and valued, so as far as MicroVenture Support is concerned this is exactly what we wanted to see and expected.

We have, it seems, a unique set of challenges and would engage this group, if possible in suggesting solution strategies. Also, I think it may help if a more concrete example of market driven social engagement can be addressed.

Here’s our situation. Perhaps our story will encourage others to step forward. As explained in our position paper, we seek to engage the most promising SME’s at the top of the MFI’s lending limits. We provide investment (between $5 & $30K USD) and active incubation. We provide management training and business development support along with investment capital. Our plan calls for rapid replication of individual businesses and incubator centers. We intend to do this through locally trained instructors and staff. In five years we will have 43 centers and over 200 successful small growing businesses (SGB’s).

So, we don’t make yogurt, or shoes, or build hospitals … we create socially responsible small and growing businesses that create jobs and anchor communities. We are the nursery of a merchant economy. Oh, and did I mention profitability. Even with quasi equity and informal relationships, when you start at the bottom there is significant room for growth.

We believe we know who should be our investors, but after two years we have found only one foundation willing to engage; We are not easily categorized; we are not a simple NGO; we are not an MFI; we are investors not lenders; we are trainers and mentors; we are not a common operating structure easily named so, we are not easily funded.

Ideas anyone?

Thanks for this specific example for us to chew over. Interestingly, you yourselves are investors, but I believe you’re asking us to look at you as a social enterprise, and consider how you might attract social investment capital into your work.

I would start by going back to the basic questions Oliver and Kipper have posted. What does your organization look like from the following perspectives:

1. Social impact

• What are the quantiative and qualitative social impacts you intend to measure, or are measuring?
• What “social impact” categories do they fall into? e.g. Poverty alleviation, environmental impacts, women’s empowerment, etc

2. Business case

• What is the opportunity, and why are you in a good place to seize it?
• What is your plan for the next 5 years, and how will you execute it?
• What are your management team skills to execute on the plan?
• What money do you need and how will you use it to reach these goals?
• Who are your competitors?

3. Financial returns

• What are the financial dynamics of your business?
• What will cash flows, P&L, and balance sheet look like for the next five years?
• What kind of returns can you offer investors? (debt or equity)
• How are you structured – can you give investors ownership in your business?
• What assumptions are your financial projections based upon? Are they realistic? If you change them for the worse, how does this change your financial picture, and your investors’ financial returns?

Asking these questions of yourselves will have two benefits:
1. You will be able to quickly filter the social investors you are researching, to decide who is a good fit, from your perspective and theirs

2. Doing this exercise will help you clarify the case you make to social investors.

Perhaps you’ve already done all of the above. If so, can you share with us the other challenges you’ve had? Is it getting the attention of those investors you think are a good fit? Is your level of risk perceived to be too high by the funders you’re targeting? What feedback have you had from investors who have said “no”?

Thanks for sharing.

Great discussion so far!

1) Thanks, Jerome, for bringing in a specific example of your experience. I want to point out several other examples of “out of the box” social enterprises that combine elements of value chain development, fair trade social enterprise who are also looking for investment: http://communities.seepnetwork.org/value-conference2009/node/2073 They were featured in our June discussion on sustainability ands cale-up. In value chain development, we believe we have a strong development case, but it can be hard to sell because we are not a simple business model of one institution looking to run an operation – we are developing markets.

2) The process of social investing involves getting a good match between social enterprise and investor – easier said then done. You can see from the chart the Kim presented that there is high demand for grant funding and not enough supply, and better supply of investment funding, but fewer social enterprise options. Although individual applicants probably do not have much opportunity to influence investors, perhaps collectively, we can dialogue and influence the market – both entrepreneurs and investors – for everyone’s benefit. Question to investors: how do you find entrepreneurs? how do you set your policies? Where do you gather as a group to learn from each other, spot industry trends? From the social entrepreneur perspective – we may know how to assess an investor once we find one, but investors can be hard to find.

3) A “chicken and egg” dilemma arises sometime in the matchmake process, too. The investor says: how much return can you offer? The social entrepreneur says: what are your selection criteria? What kind of return do you want? While sometimes both parties are fixed, other time one or the other is flexible in that the invesor may offer different products, and in that a social enterprise can present a more or less financially viable plan depending on the social outcomes. If a social enterprise incorporates literacy, health, and environmental awareness training into its microfranchise package, then it will have higher costs and lower return than if it just focuses on technology, finance and basic business training. A company selling solar energy will earn more selling larger units than smaller units, but will serve a highg incoem bracket of customer. Question: how can we make this matching process more efficient? Is there a role for on-line matching? for official trade shows, etc?

Thanks,

Mary McVay
Director, The Value Initiative
Facilitator, The Enterprise Development Exchange
The SEEP Network
mcvay@seepnetwork.org
708-660-8140 (Central time, USA)

interesting is jpeloquin’s example. Your enterprise looks similar with what I am going to do in China. or like Mary said a “matchmaker”. As far as I know, most small size Social enterprises have no idea, no energy, no time, no knowledge to deal with the question how to attract (various oriented) investors; at the same time, the investors have no patience to wait for complex explaination of how the local-based or community based SE works. Thus, an activity of matchmaking become primary for both sides. More importantly, the blur sustainability of SE and the vague reliability of certain ROI become a barrier to inspiring most investors become social investors. Although SE business models are various due to its nature, my point is the intermedia agency(the SE who support other SEs) could make the channel run smoothly: for examle, setting certain basic rules and management standards, cataloging certein types of SE, auditting the business operation as third party… Like ISO, enables a consensus to be reached on solutions that meet both the requirements of SE and the different needs of investors. The function of intermedia agency is quite important.
BTW, in terms of the definition of social enterprise presented by Kim, is there anything related to the profit distribution of SE? Only for reinvestment or to some extent the profit could be distributed to owners or shareholders?

Regarding Xian’s question about the profit distribution, I would like to offer some words based on my experiences. Some social enterprises have done well charging market value for superior services or products (maximization), while others have gone into the market providing necessary services at reduced rates while still recovering all of the associated costs (optimization).

In social enterprises that our clients have invested in, money has been used for three purposes: to support non-profit activities, to be used to expand the social enterprise, or to be held as retained earnings for future expansion of the social enterprise. In all three cases, all profits eventually go back to support non-profit activities unless the businesses make a loss or go out of business.

Of course, if a business is performing a social good by providing products or services, there is no explicit need to give the profits back to charity or society for that matter. I would actually like to see more BoP businesses developed – with the necessary social consciousness to use pro-poor pricing, of course – which would fill in the gaps of services that the government cannot support but the normal private sector is not willing to engage in due to the perceived low ROI (or other reasons). Why shouldn’t someone take a healthy salary – and the investors receive a return on their investments – if the social enterprise is providing a social benefit? Society is saluting non-profits for trying to become more financially sustainable but then cry foul when the investors or owners of a social enterprise earn “too much” profit. There is a contradiction there, which may inhibit profit-seeking entrepreneurs from entering fields which could, in the end, provide great social benefit to society.

Your point, Xian, is well taken that investors do not typically know the local lay of the land (we use networks of local contacts to provide that context for us so that our investors can make the best informed decisions with the information that is available, but it is still a very difficult proposition) and the social enterprises do not have the time to find the investors.

I would caution about setting standards and having one intermediary agency with oversight authority, however, since this raises questions of additional costs (even open source entails the input of people, and time costs money) as well as governance (with so many platforms emerging, which one should we choose and, once one is chosen, who regulates that body to ensure transparency and accountability?). It is necessary to somehow unify the myriad matchmaking movements emerging around the world to reduce redundancy and improve effectiveness, but I would posit that competition in this field is healthy and, indeed, improves the quality of data available for social investors to rely upon.

Dear all,
there have been a number of discussions about the types of capital available for organizations. The core questions we, at LGT VP, ask is: “What is the most appropriate type of financing for the specific organization to reach their intended impacts?”

Some organizations have the potential to generate revenue and others dont. I want to focus on those that can and ask the following question: “What is the equivalent of equity financing for non-profit, revenue-generating organizations that can become cash-flow positive? What type of financing would allow an investor to carry the financial downside risk and participate in the financial upside potential in the social investment space?”

In a for-profit setting you would finance the growth stage of an organization with equity (tied to rights/milestones/returns). This does not exist in the world of organizations with the legal “non-profit” status and forces you to either finance through grants or loans. Grants are not that attractive to the investor because this is in essence “free capital”. Loans are attractive to the investor but not necessarily to the organization b/c a loan needs to be booked as debt (even if this is a very soft loan and there being no/little collateral). The “equity” equivalent to finance non-profit, revenue-generating is lacking.

What are your ideas/suggestions?