The Gap between Social Enterprise and Venture Capital
The Social Enterprise Model
Social enterprises solve social issues created by underserved markets or outright market failures with entrepreneurial solutions. These issues are often too large for nonprofits to effectively shoulder or not broad enough for government entities to embrace. Social enterprises fill a much needed gap, straddling the line between nonprofits and traditional businesses, whether as coffee shops, promoting sustainable coffee supply chains or as venture funds financing the future of energy and mobility. In the long run, the positive impacts of the social enterprise outweighs initial investments, and allow communities and individuals to be lifted up, rather than rely on handouts.
Social ventures are typically funded via donations, covering startup costs (licenses, employee salaries) and initial investments (materials or factories). As more sustainable income is generated, donations become less necessary and the social enterprise continues to scale appropriately, reinvesting profits. This model allows entrepreneurs to start companies that correct the flaws in the wider social or market system. Similar to non-profits, the social enterprise begins with social needs but ends up with clear business model, creating sustainable income for founders and outside stakeholders which the enterprise sets out to help.
How does venture capital play a role — or not — in this cycle?
Unfortunately, social enterprise is largely disconnected from the world of venture capital. This is due largely to a bias toward opportunities with perceived future “unicorn” valuations. This creates a double jeopardy where social entrepreneurs not only miss out on venture funding but also on venture guidance. The capital-driven aggressive growth necessary for positive long-term business outcomes and guidance that allows for achieving measured scale is basically unavailable. Generally, early stage funding leads to late stage social impact. For most social enterprises, this is unattainable.
Venture capital’s unwillingness to fund social enterprise models creates a nonsensical consensus that social ventures cannot yield the same returns as traditional businesses. However, this is untrue. The proof lies in environmental, social and governance (ESG) funds. Morgan Stanley’s 2019 Sustainable Reality report which analyzed more than ten thousand exchange-traded and open-ended mutual funds, found no financial tradeoff between ESG and traditional funds. The report also noted ESG funds were 20% less volatile than traditional funds. If ETFs and mutual funds are gaining returns on social enterprise, it means that the business in those funds are overall winners, in other words — profitable. In a sense, why would it be financially inefficient to invest in social ventures if the majority of social enterprises are profitable? The basket of social enterprise companies entertain the same returns and lower risks relative traditional businesses — meaning the investment strategy is sound.
Y-Labs: Promoting Social Entrepreneurship
Y-Labs promotes social entrepreneurship through education and direct ecosystem engagement and innovation. Through our pioneering four-week program, selected talented teenagers learn to develop disruptive solutions to social issues. With the support of Coaches who are accomplished professionals, students learn to create social business models that directly impact their communities.
Our virtual-first program allows teens with exceptional talent in the STEAMS (Science, Technology, Engineering, Art, Math, and Sports) to learn in a supportive and flexible environment designed for students adapted to the digital age.
We leverage our network of industry experts to mentor, guide and inspire students during each phase of their social enterprise project. In addition, our cohorts are encouraged to network and create professional relationships with one another.
Through our Idea Hub incubator, we curate ideas from students, non-profits, cities and the general community which are modeled into student projects and allow for the creation of social enterprises and real-life positive impact at an unmatched progressive scale.
After the program, students (refereed to as Fellows) have lifetime access to our online platform and continue to expand their knowledge through our e-learning content, network with future cohorts, and access mentorship and grant funding opportunities to pursue their ideas further.
Creating sustainable businesses that uplift society while meeting the needs of the market will take time, effort, and collaboration. Leveraging the best minds, the latest technology, and rich networks of experts and innovators, Y-Labs is providing contemporary solutions to age-old societal issues.
