Social Impact, Meet Venture Capital

Ask any entrepreneur: starting a new organization is difficult. Add to this, focusing on a customer who has little means to pay in a place with significant gaps in infrastructure with a solution requiring a fully integrated value chain. Starting a new organization with social impact goals is almost impossible.

Social entrepreneurs struggle to overcome these scenarios in order to improve the lives of people around the world. While their intentions may be good and they often strive to offer support for the social goals of an operation, the financial community has made a challenging situation even more difficult.

Who is the financial community? It’s not investment bankers and venture capitalists alone. This community includes grant makers, business plan competition judges, social fund managers, and the newly popular impact investors. Consultants to this community often suggest that each must “define a theory of change” and use this as the criteria by which to judge potential grant recipients or investments. This is difficult, especially for individuals with little to no experience or expertise in a certain issue (e.g. education, healthcare, agriculture) or geography. While not theoretically detrimental, due to the power dynamic between entrepreneurs and investors, can lead to inefficient, misdirected, and potentially damaging results.

There is no organized market for investment in social organizations, nothing like a stock exchange, and the output of these organizations is more complex than revenue measured in currency. Each transaction is unique, which requires that the social entrepreneurs and individual investor have to be involved in every transaction. Instead of equity, investors are buying a specific outcome (i.e. training 100 farmers, performing 1000 attended births, creating a new mobile clinic, etc.) and so they insist on playing an active role in defining the outcome and therefore the course that the entrepreneur must take to achieve it. The outcome they support may (or may not) be aligned with the longer-term, broader geographic, or most necessary goals of the organization. But, much like the governments in the developing nations where much of this work takes place, the entrepreneurs see any investment as good and necessary to keep their operation going. This process is time consuming and generally not well suited to the skills of the either the entrepreneur or the investor. It’s no surprise that the resulting agreements are often far from ideal.

So, what then?

I’d suggest that investors in social organizations take another page from the for-profit world and apply it directly to the way they plan their relationship with social entrepreneurs. Venture capitalists are fond of saying that they’d rather invest in a strong team with an average idea, than an average team with an amazing idea. And, while VCs offer advice and take seats on boards, they do not often exert control over the operations of the companies in which they invest. They don’t have time. This is not their role. They serve as a resource for the entrepreneurs when requested, during scheduled board meetings, and if things go terribly sideways. They are proud to have been a part of the successes of those in who they invest and they take responsibility for making bad decisions when there are failures. But neither the success, nor the failure is theirs.

Investors in the social space need to recognize the difference between themselves and the entrepreneurs they support with financing, and perhaps with advice and connections. They are not the entrepreneur. They do not know the market best. They are not taking the full-fledged risk. They should select entrepreneurs in whom they believe after reasonable due diligence, then give them the promised resources in a timely fashion. They should expect reports through board meetings and structured, general feedback common for all investors. They should let the entrepreneur know they are available, but not impose their views or physical presence on them. They should understand their role and stick to it.

In the social sector, organizations have long accepted, if begrudgingly, the need to appease those who make grants to their organizations. After all, it’s free money. But, as the money stops being offered for free and grants turn into PRIs, convertible notes, and straight-up equity, the recipients are paying enough and should not have to also be beholden to endless reports, prepare for various field visits, and expect that their efforts and achievements will be commandeered by those who provide funding. If social investors want to be taken seriously, then they also need to act like serious investors.

Ask any social entrepreneur and they won’t say any of these things. Right now, they can’t afford to. But, I believe that the intentions of those who work in the social space are good. We all want to better the planet. So, maybe it’s time that well-intended social investors know that they are getting in the way.

Now, please excuse me, I have some social impact to make.

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