Social entrepreneurs are stepping up to solve some of the grand challenges that we face as humanity. The SDGs provide a very ambitious framework to tackle these challenges and at the same time present a huge business opportunity, specifically US$12 Trillion (Business & Sustainable Development Commission, 2017).
To ensure the success of the SDGs, new instruments to finance social innovation are needed. In this article, we will explore 8 mechanisms impact innovators can use to get the financing they need, in order to maximize their probabilities of success and achieve their impact mission.
Philanthropic grants and prizes
Let’s start with a classic way to finance social initiatives in the nonprofit sector: capital from philanthropic foundations. Philanthropic funds are available to finance different causes and are usually made through grants. For example, the Bill & Melinda Gates Foundation awards grants to NGOs that work towards global health, poverty & development and education & learning.
Philanthropic prizes are another tool to finance social innovation and they can generate even stronger incentives to generate disruptive solutions to social challenges. For example, XPRIZE creates competitions to ‘entice the crowd to take action’, awarding winners up to 20M$ if they provide solutions to some of the world’s most pressing social/environmental challenges.
Responsible and Impact Investing
While philanthropists look to maximize their social return, on the other side of the spectrum we find private investors, who seek to maximize their financial returns. These private investors, though, are becoming more socially conscious and are increasingly shifting to a more responsible/ethical way of investing using ESG (Environmental, Social and Governance) criteria as part of their investment analysis (Eccles and Klimenko, 2019). With this new approach, they aim to reduce the negative impact of their investment operations.
Among private investors, some are going a step further, realizing that financial returns are not necessarily unlinked from social returns. Impact investing, thus, is a type of investment that proactively seeks to ‘generate positive, measurable social and environmental impact alongside a financial return’ (GIIN – Global Impact Investing Network). Impact investors finance social innovation by providing private capital for impact enterprises that have the potential of being highly profitable and scalable. Impact investments can be made by different types of investors depending on the company’s maturity stage (business angels, VCs, private equity funds, banks, etc.), and always combine social returns with financial returns. Examples of impact investing funds include Bridges Ventures in the UK and Oltre Venture in Italy.
One of the main challenges of impact investing is the pioneer gap, that is the misalignment between the financial returns demanded by capital investors and the higher risk of companies that aim to have an impact on vulnerable groups (Dichter et al., 2013).
In a middle ground between philanthropy and impact investing lies Venture Philanthropy (also called patient capital or catalytic capital). In the last few years, some philanthropic/social investors are adopting the Venture Philanthropy approach whereby they try to maximize the impact of a social innovation by being ‘highly-engaged and committed in the long term’ (EVPA).
To achieve that, Venture Philanthropy investors usually provide providing extensive non-financial support and tailored financing (which can include different financial instruments like grants, loans, equity, and hybrid formulas, depending on the needs of the social entrepreneur) to ensure its long-term success. They also emphasize the need to measure and manage impact KPIs to evaluate the performance of investees and establish the most suitable strategy to maximize their intended impact.
Venture Philanthropy in a way is complementary to impact investing and it has an important role to finance social innovation and close the pioneer gap, because it can assume some of the risks that capital investors are not willing to take in order to maximize the long-term impact of the social organization.
Outcomes funds are new vehicles to finance social innovation in which an impact fund hires a social organization to provide a product or service, and payments are based on performance (when previously agreed impact outcomes are achieved).
For example, social impact bonds are a triangular outcomes-based contract between an outcome funder (usually the public administration or a philanthropic investor, who identifies a needed social intervention), a social innovator (a nonprofit or a social entrepreneur that provides a service to solve the challenge) and an impact investor (who provides the funds needed to finance the intervention). This kind of outcomes contract allows the public administration (or a philanthropic outcome funder) to ‘reward investors for successfully delivering impact’ (Wellenstein & Afanasieva, 2019). In other words, investors provide funds to finance a social intervention, and earn a return if the social organization achieves the established impact goal.
Blending consists in combining different types of investors with different levels of return, risk and impact expectations. In blended finance, grants are used to finance non-financial support to ensure social organizations can effectively reach their mission. In addition, blending investors provide first-loss capital, in which they absorb potential first losses. They then get a return when the other private investors have obtained their returns. Other blended formulas include loan guarantees, quasi-equity debt and pooled vehicles. (Ship2B, 2017).
Public administrations are an important source of funds to finance social innovation. Both local and regional funds are available in the form of development aid, public grants to solve key challenges, or contracts issued by public institutions to buy products or services, among others. Furthermore, there are some administrations that are offering other tools as public impact funds. This is the case of the Social Innovation Fund in Portugal or Seed Capital in Biscay, Spain. Furthermore, public administrations are a key agent to promote outcome funds in general and social impact bonds specifically.
Another way to finance social innovation is to get funding from corporates. Companies are now more pressed than ever to be agents of change in their communities, taking all their stakeholders into account. CSR (Corporate Social Responsibility) policies are well extended and provide a way for social innovations to get funded through sponsorship or donations from corporates willing to use some of their budget for social or charitable causes. However, CSR policies can fall into the trap of ‘impact washing’ if their main agenda is to improve the public image of the company. That is why an evolved approach to CSR, CSV (Creating Shared Value) (Porter & Kramer, 2015), can be a more coherent approach to social impact.
Corporate Impact Venturing is an example of the CSV approach and it is an effective way of social innovators to collaborate with corporates. It consists in an open innovation strategy by which a corporate organization partners with an impact startup to develop a collaboration project that is core to the organization’s business. This kind of collaborations are usually tech-based and aligned with the corporate’s innovation strategy, with the objective of integrating impact innovations into their value chain and improve competitiveness in the market. Corporate Impact Venturing can take the form of commercial alliances (the corporate becoming a key supplier or customer of the social entrepreneur), or corporate investments (the corporate investing capital in the startup or even acquiring it). Through Corporate Impact Venturing, startups can also get access to non-monetary resources, like testing facilities, human resources or pro-bono services from corporates.
Finally, crowdfunding is a mechanism to canalize funds from individual citizens, who are increasingly becoming more conscious about social causes and therefore taking a more active role to support and finance social innovation. It uses the internet and other technologies (like blockchain) to connect individuals to projects with financing needs.
There are several crowdfunding models that social innovators can use (Acconcia, 2017), including donation-based crowdfunding (GoFundMe), reward-based crowdfunding (Goteo) microdonations at the end of the purchase (Worldcoo’s social rounding), crowdlending platforms (Kiva, EthicHub) and crowdequity platforms (like Fundeen, which allows individuals to invest from 500€ in renewable energy).
In conclusion, there are many ways to finance social innovation, and each entrepreneur must find the formula that best fits its needs and impact goals. Increasingly complex challenges will require complex solutions and innovative mechanisms to finance them, so we can expect to see more hybrid financing models as social entrepreneurs thrive and the impact financing market evolves. Impact measuring will definitely be key to evaluate the success of these financing schemes and to ensure all stakeholders are aligned to achieve the unprecedently ambitious 2030 agenda.
Finally, I would like to thank Cristina San Salvador for her support and for her valuable contributions to this article.
Andrea Esteve Pedró is a Venture Philanthropy Officer at Ship2B, where she supports social entrepreneurs through acceleration programs and access to investment. Since 2017, she has designed and implemented training programs to support 100+ impact entrepreneurs and now she is taking a new angle on impact investment to finance social innovation through the Venture Philanthropy approach. Before that, she worked as social innovation consultant and she participated in several volunteering projects with social organizations at international level.
Individual social media handles: LinkedIn
Organization website: www.ship2b.org
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The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.
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