What role can philanthropy play in social investment?
Why are there too few scaled and investment ready social businesses? What is the role of philanthropy in overcoming this issue? From Blue Print to Scale, a report produced by Monitor Group in collaboration with Acumen Fund, argues that philanthropy is an essential, albeit often overlooked catalyst that is needed to truly realise the potential impact of the social investment market. I agree with this position and feel that philanthropic investment and grants have a critical role to play in building the type of pipeline of social businesses needed for investors looking to take less risk, yet seek larger returns.
The Monitor Group report usefully identifies four stages of a business’ journey (see Table 1 image below). The report highlights how disproportionate financial support is needed in stages 1.Blueprint; 2. Validate; and 3. Prepare before a social business can reach the 4th stage of Scale.
In today’s market too few social investors are willing to invest in businesses that are in the initial stages of their journey due to the high risks and uncertainties associated with such investments. This creates what Monitor refers to as the ‘Pioneer Gap’ — a key factor constraining the availability of investment ready businesses attractive to social investors.
[caption id=”” align=”aligncenter” width=”600" caption=”Husk Power Systems, which pioneered the gasification of rice husk as a means of providing elctricity to rural India, is one of the businesses featured in the Blueprint to Scale that benefited from philanthropy”]
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In conventional business, it is understandable for investors to prefer to invest in the later stage of a firm’s journey, after commercial viability has been established and market conditions have been prepared. But this approach presents a critical challenge in the social impact space, particularly where traditional markets and/or public services have clearly failed, as preparing inclusive businesses to scale involves overcoming significant early stage challenges which can demand heavy up-front expenditure. Philanthropic capital can potentially have an important role in overcoming this challenge by providing financial resources to promising social businesses in their early stages, thus building a pipeline of businesses ready for Scale.
Realising the true impact of social investing may ultimately require more, not less philanthropy. And until this happens, we risk a continued imbalance of interested social investors met by an under supply of investment-ready social business opportunities.
