In a recent piece written for Social Edge, the online community for social entrepreneurs, I wrote about our destructive obsession with new and cool social enterprises.
To prefer these to more established, but perhaps less exciting, existing businesses makes no sense. New ideas are like new love - marvellous as a fantasy, but requiring the test of time to demonstrate durability. Yet the social investment sector has a bias towards the new and cool, which we have encountered regularly.
Perhaps an even greater threat to the eventual success of the sector is a hesitancy to back social enterprises that have achieved scale and profitability. In a recent case, ClearlySo was asked to raise capital for a successful social enterprise - let's call it XYZ.
XYZ is a sector leader and has the capacity to access conventional finance. Its commitment to growing the sector has led it to prefer to raise funding in the social investment space. Yet it seems some investors, especially foundations, are reluctant to invest in XYZ because they would rather conserve their capital for those that do not have this conventional market access.
Flow to new firms
On the surface, this seems reasonable. By concentrating social investment on those firms that cannot access conventional markets, foundations ensure a flow to new firms that are not conventionally backable. Their scarce capital available for social investment is thus allocated to those firms that have no other choice.
But the implication of this is that foundations will, by definition, back less successful ventures and, as a result, will most likely suffer worse investment performance. It might also deter them from committing greater resources to social investment, because their trustees will have relatively depressing track records to assess when considering whether or not to enlarge their commitments. It is no wonder, therefore, that - with the notable exception of Panahpur - there is no UK foundation wholly committed to social investment.
The social investment that does take place by UK foundations is done mostly by dedicated smaller pools away from their main funds: Esmee Fairbairn and Lankelly Chase have been leaders in this. But the mainstream endowment funds of foundations still invest almost exclusively in conventional financial instruments - hence, they are unlikely to invest in XYZ because it is a new type of company, even though it might offer the same returns as conventional financial assets and helps fulfil the charitable objects of the foundation.
Where should successful social enterprises like XYZ go for funding? There is interest from conventional investors, but what are the long-term consequences of forcing successful social enterprises out of the social investment market? There is a risk, as they are excluded, that their objectives will migrate in a non-social direction.
Would it not be better to keep them in the sector and use them to attract larger pools of conventional capital? We could bring more money into the social investment sector, which puts a priority on social impact - surely this is preferable to casting out those we wish to establish as benchmarks?
Rodney Schwartz, is chief executive of ClearlySo, which helps social entrepreneurs raise capital