The balance of power in social investment

Do the people with the money that always dictate the terms? Not so, says Dominic Llewellyn of Numbers for Good. Social ventures just need to be clear what they want from their social investor.

When UK Prime Minister David Cameron identified social investment as “a great force for social change” in a speech in 2013, it was just that, one force amongst many in the social economy. Why has so much attention and energy been lavished on social investors, leaving social entrepreneurs out in the cold? Why do so many social entrepreneurs feel let down by social investment? What’s gone wrong and how can we redress the balance of power?

The perceived glamour of social investment has no doubt been driven by some early achievements by founders of social investment; convincing the British government to use unclaimed money in dormant bank accounts to found the world’s first social investment bank Big Society Capital, launching the world’s first social impact bond. This early success, combined with post financial crisis disillusionment in traditional markets, captured the attention of finance professionals seeking more meaning in their careers, creating an influx of would-be social investors. And lo, a powerful army of social investors was formed and set forth to conquer…sorry, I mean capture returns from, the social economy. Unsurprisingly, in the social economy, social enterprises in particular, are suspicious of these investors and in many cases this suspicion has not been without merit.

The truth is that most social investors are as disinterested in corporate greed as people in the social sector are. That’s why they left the City. They do what they do because they are inspired by social enterprises and want to help, not harm; making money is mainly a secondary objective. And although investors are not primarily motivated by profit, neither are they the impact measurement obsessives they’re perceived as. If anything they’re slack when it comes to levels of proof of impact required for a deal, as the Investing for Good report on social investor’s impact measurement ‘Oranges and Lemons’ indicated. This leads to the slightly paradoxical position that social investors are happy with both reduced returns (compared to those available in the commercial sector) and lower levels of impact measurement.

When it comes to who holds the power in a particular deal, this ebbs and flows between parties as they negotiate an investment proposition. There is an assumption that investors hold all the cards (and certainly the purse strings), but it is not in their interests to bully a social enterprise out of a deal. While the push to invest isn’t as strong as the pull to receive it, investors need to do deals too.

Ultimately, social investors want to invest in excellent social enterprises and the more prepared the social enterprise is in entering negotiations, the more even the power balance will be. For social ventures seeking investment this means being able to clearly articulate their social impact and demonstrate a successful track record. It means having ambitious but realistic growth plans and a robust financial model. A strong team is critical, both at a management and project level.

However, just as investors look to social enterprises to demonstrate their capabilities, social enterprises must also actively assess the qualities of their potential investor. Numbers for Good advise clients to choose investors based on chemistry and competence, as well as cost. For social enterprise leaders it’s also crucial to understand what, aside from financing, you are looking for from social investment. Perhaps you want a hands-on investor who will get actively involved in advising on strategy; perhaps you can’t imagine anything worse. Understanding what you want from the investment process up front allows you to set a clear tone in your interactions with social investors, inform where you are happy to make trade-offs (there will undoubtedly be some), and where you are absolutely uncompromising in your demands.

It isn’t easy, but the real power is with those social sector organisations who can deliver all this. Our role at Numbers for Good is to help as many organisations reach this position as possible and to turn the tide of social investment.

 

 This article was originally published in Pioneers Post Quarterly, the printed edition of Pioneers Post. To find out more about PPQ, including how to subscribe, click here. Read the original online version here.

Photo credit: Gabriel Saldana.

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