From Gordon Gekko to Grant Funding: leveraging the full spectrum of capital to solve social problems

This is the first in a series of Shift blogs looking at funding and investment for social entrepreneurship. We look forward to sharing more each month.

The Rise Fund, set-up and expounded by luminaries like Jeff Skoll and Bono, is one of a growing number of impact investment funds that targets “competitive financial returns” from investments in “meaningful and measurable” social impact.

This language and confidence can grate with some who work amongst complex and often grindingly awful social problems. Market rate returns for investors from solving social problems sounds like the ultimate defence of the doctrine of profit maximisation. Gordon Gekko would presumably be grinning from his fictional grave to hear that greed has gotten so very, very good.

But we should reserve that judgement. Gordon Gekko’s cash — uncaring, impact agnostic capital that is willing to make zero ROI compromises — sounds like an odd contribution to solving social problems. But, if the shoe fits, it doesn’t matter. There are clearly some forms of social problem and some types of business model where social impact and financial value align sufficiently neatly for standard commercial returns. And, when this alignment exists, there are two overriding reasons why we should access this capital:

  1. It represents a massive pool of additional capital that can be leveraged to add critical scale and sustainability to solutions
  2. It provides a strong impetus for efficiency and entrepreneurialism that should increase impact in businesses where financial and social value are perfectly aligned

But, where the Davos delegates get too carried away is when this kind of investment solution is presented as “best of class”. The pretence, implicit or explicit, that the coexistence of profit maximisation and impact represents the ultimate form of social entrepreneurship is misleading and unhelpful.

In reality, this approach is relevant for a very small number of problems, markets and business models and completely irrelevant to most others. It represents the extreme end of a spectrum of sources of capital and types of investment, which goes all the way through to capital that cares deeply and exclusively about impact and seeks no returns, such as the grants made every year by funders like the Big Lottery Fund in the UK.

From our experience of attracting investment right along this spectrum, we have 4 insights that may contribute to the debate:

  1. The question of what represents sufficient alignment between social value and financial value to enable “competitive financial returns” from investments in “meaningful and measurable” social impact requires more debate, greater clarity and higher standards. There some great examples of this alignment and there is plenty of pretend nonsense, all claiming to have found the same sweet spot, and this breadth isn’t doing anyone any favours.
  2. The highest standards of entrepreneurialism exist all over the place within impact focused organisations, not just those that have finance-first equity investment and these practices can and should be incentivised via every type funding and investment partnerships at every point in the spectrum.
  3. The task of a social entrepreneur to deliver profound, measurable impact and generate sustainable and scalable revenue is incredibly hard and, currently, most have to conjure this magic combination by themselves, from scratch. Work to investigate, evidence and codify different combinations of problem / market, business model and capital would represent a hugely valuable, evolving asset for social entrepreneurs and those that support them. We’re hugely supportive of work by Big Society Capital in the UK and others in this area.
  4. The greatest need amongst those seeking impact investment is not for finance-first capital, but for capital that a) strikes a pragmatic balance between financial and impact returns using the former to maximise the latter b) is patient c) comes in at the equivalent of seed funding stage with acceptance of the risks and uncertainty that brings d) makes up one link in a chain of interdependent grant funding, investment and commissioning. We’re also confident that there is plenty of capital that can be harnessed to play this role, in amongst the billions given away by Trusts and Foundations, high net worth individuals and the government. We’ll be talking more about this in future blogs.