Projects within reach of success still need our help

If a social enterprise fails near the finish line, it is tragic and undermines all the capital invested, says Rodney Schwartz, chief executive of ClearlySo, which helps social entrepreneurs raise capital

Rodney Schwartz
Rodney Schwartz

Conversations with investors, particularly those from a philanthropic background, are often focused on the desire to help social enterprises that require substantial assistance. The argument goes something like this: "We cannot use our resources to assist those already well on the way to success - better to focus on those who really need our help."

This argument has a certain logic to it, and investors with a strong social orientation - in particular those who represent charitable foundations - might feel legally or morally compelled to act in this way. A related argument frequently surfaces when foundation investors are asked to participate in structured financing and to take up the riskiest and least remunerative positions. On occasions they are asked to assume the "first loss" or take a "capped return", or sometimes a combination of the two. A sense of indignation emerges that their capital is being exploited so that those with a market return requirement can profit from social investment transactions they would otherwise not participate in.

I can see the point, but would suggest a different perspective - one that is based predominantly on the idea of social impact maximisation. There are times when large financial sums are required and these can be made available only through larger structured transactions. These necessitate access to mainstream players - banks, for example. By accepting greater risk or lower return, or both, foundation capital can bring in far larger sums than would otherwise be feasible, or are available in the social investment sector. Society's needs are so great that, even with more than £600m coming from Big Society Capital, far more is needed. As mainstream capital still seeks market returns, only social capital or government subsidy can make such deals happen.

An unwillingness to use social capital like this because mainstream investors get their return is akin to cutting off one's nose to spite one's face. These foundations would willingly offer grants in which 100 per cent loss of funding is assured. But by using their capital in structured transactions, far more social impact can sometimes be generated, and they might see some return. Not to do so just because other investors (with very different criteria, beneficiaries and rules) might do well seems odd and reduces the social impact generated.

Similarly, by shunning those social enterprises or projects that are close to viable in favour of the more hopeless, they are reducing both their return and their social impact.

Moreover, they are undermining the probability of success for those social enterprises that are just about sustainable in favour of those that still have a long road to travel.

And these "nearly there" social enterprises are, by definition, not yet there. If they fail just near the finish line, it is deeply tragic and wastes all the hard work and capital invested by foundations and others that got these social enterprises "nearly there" in the first place.

To get the most out of our money (a critical discipline in our capital-starved times) and generate the most social impact, we need to start with the least needy and work our way backwards. This might seem perverse, but for those who care about substance over form, and about making a substantial impact more than a huge gesture, it is essential.

Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital

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