Social Ventures: Funding

Impact investing is the process of making money by driving social change and positive environmental
impact. Financing is a main challenge of impact investing. When it comes to the fact that return is
uncertain, impact investing shows almost companies a dilemma; and, should the companies pour the
money into investment or not? The research needs a detailed financial investment that some non-
profitable can’t afford. In many situations, companies have to borrow money, which means more
pressure for them to demonstrate. The financial challenge sometimes pushes the sponsors to withdraw;
in peak, it can bring chaos to the organization.

In addition, another challenge caused by impact investing is hitting the balance between companies’
activities and their business. As it includes financial investment, there is always a confusion if the profits
are worth to invest or not. It causes more difficult to project when the returns also depend on other
market motivations, which organizations can’t control. Furthermore, choosing the correct activities to
invest is an ordeal. The efficacy and possibility of the investment are calculated by how precisely the
company determine, prepare, and proceed the program. Any lost at this step brings the end to the
entire process.

Navigating the Challenges of Capital Raising:

 Obtaining funding to move beyond the start-up phase for both nonprofits and for-
profits is often difficult.

 Funding collaborative activities is difficult because the societal benefits or cost

reductions are not readily captured in the public budgeting process.

 Funders of existing programs lack the risk appetite to support new projects in lieu of
existing programs.

 The time horizon needed to address social and environmental issues is not aligned with
the time frames of the potential funders.

 Early-stage investors expect to receive a risk-adjusted return on their investments.

 Hybrid structures raise issues of subsidies among the public, philanthropic and private
sector players.

 There are no market signals and pricing to indicate to investors how successful an
enterprise has been in achieving its mission-related impact.

Risk, Return, and Impact:

Impact investing still remains an effective method to create society and environment besides financial
benefits because of its properness is confirmed by its long-term and short-term impacts with its
achievements. Firstly, opportunities for investing with impact are vast, as such an investment strategy
can be applied across industries. Impact investing enables investor the opportunity to obtain both
returns and double their investment. Secondly, it enables to build a good affinity with communities and
also the business gets the chance of market expansion.
Thirdly, impact investing when planned and applied properly it also generate the guaranteed returns on
the investment. It also put creates the competitive environment for their peers to perform better for the
society. For this, the companies have to perform even much harder to meet the investors and
communities needs and expectations.

• Traditionally risk is inversely related to return

• Adding social impact complicates things

• Social entrepreneurs must find alignment with their investors’ social or environmental impact
goals as well

Values and Mission Alignment with Investors:

• Motivation:

 Understanding investor intent is key to raising capital.

• Issues:

 Investors typically establish clear program and sector guidelines to prioritize investment
opportunities.

• Evaluation:

 Investors establish benchmarks to compare their investment and assess performance.

• Approaches:

 Is the social enterprise’s strategy to create impact (its theory of change) in alignment
with the investors?

Impact Investors:

The impact investors tend focus on market-rate returns while yielding some social or environmental
good. These investors may be driven by fiduciary requirements, as in the case of pension plans.
Investors may compare the impact returns with a financial return. For example, blending development
banks with private investors and philanthropists Negatives can be slow deal closings and increased costs
whereas Positives can be risk-sharing and increased access to capital.

Building Partnerships to Create Impact:

Both entrepreneurs and investors can benefit from successful impact investing by:

 Optimizing for environmental and social impact and applying the rigor of investment
management tools.

 Expanding the scope and scale of philanthropic capital and maintaining adherence to
fiduciary responsibilities.
Challenges to Growth:

• Inertia-based resistance: the staff and board of the social venture do not see the urgency for
growth.

• Threat-based resistance: internal culture feels growth would detract from its mission.

• Venture’s board of directors does not support entrepreneur’s vision for growth.

• The stakeholder community does not support the entrepreneur’s impetus for change.

• The venture cannot demonstrate measurable success in achieving its mission.

• The venture lacks the necessary human resources and skill sets to support growth.

Capacities Required for Growth Strategies:

• Having a clear mission

• Creating an appropriate structure

• Modeling what works

• Developing a unified and supportive culture

• Good and germane data

• Having the necessary physical resources and human assets

• Having effective leadership capability and a functional governance apparatus

Strategies for Growth:

• Dissemination

 Involves making a social venture’s services and intellectual property widely available to
people and organizations who want to use them.

 Has the advantages of cost, speed of adoption, maximizing mission accomplishment,

and/or fostering relationships with social sector players.

 Has disadvantages in the lack of control over the quality of the product or service, and
the loss of possession of intellectual property (IP).

• Branching

 Achieves growth by creating multiple offices in locations other than the headquarters.

 Is attractive to some social entrepreneurs because it maximizes control.

  Not an efficient approach to growth in that it requires buying or leasing additional
facilities and office equipment, hiring and training additional staff, and managing from a
distance.

• Affiliation

 Achieves growth by creating a relaxed connection with outlying locally-managed offices.

 Is less expensive to implement because the self-sufficiency of local affiliates.

Building Effective Social Entrepreneurship Networks:

 Share similar missions that makes it easier for social ventures to work together
effectively.

 Have partners with shared values, vision, and negotiated common goals.

 Have members whose roles are clearly defined such that each member understands his
role relative to other member’s roles.

 Have the leadership necessary to move forward.

 Are in place when required during a particular stage in the venture’s life cycle.

Marketing:

A market analysis should identify who the customers of the venture are—their demographics, behavior
patterns, and lifestyle characteristics. A competitive analysis identifies the social ventures’ competition
and how it is unique relative to competitors. This distinguishing feature of the product or service of the
venture is the social value proposition. (SVP). A marketing strategy uses information from the market
and competitive analyses to lay out a plan for featuring the SVP and for the appropriate pricing,
promotion, and distribution of the product or service. Social ventures need to see their market
ecosystems as being “in play” and ripe for making friendships that increase the number of customers
they reach, expand the resources available, lower the costs of inputs, and turn competitors into
collaborators.

Citation: https://thegiin.org/