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Social entrepreneurship and impact investing: creating sustainable passion with economic sustainability

By Bolun Li, Zhe Kong

 

Social entrepreneurs: passionate but not sustainable?

Social entrepreneurs are getting younger. Most new comers are from the millennial generation. Social entrepreneurship has become a business of juvenile and passion: young people are growing impatient with social problems and becoming passionate with creating social changes. However, most of their social adventures end at an early stage or fail to scale up later. Overtime, when initial passions burn out but expected social impact has not been realized, and change-makers are still struggling with financial difficulties, all things get stuck and initiatives become totally unsustainable. In fact, this reflects the challenges most social entrepreneurs face: how to sustain passion and turn it into sustainable social entrepreneurship.

Social entrepreneurs in the communities of Casiguran, Aurora, Philippines

 

Social entrepreneurship: from “0” to “1”

To fully understand the extent of difficulties faced by start-up social entrepreneurs, early this year, Diinsider conducted a survey in Madagascar. The top answer on the list was “how to start an organization with no money at all”. The answer is echoed by Diinsider’s co-founder Gladys Llanes, a documentary filmmaker from the Philippines: “I myself experience how hard it is to sustain your passion in terms of financial challenges”. Start-up grassroots social enterprises usually can only seek small grants from philanthropy foundations with budget less than 10,000 USD per year. Due to lack of financial resources, it is extremely challenging for them to survive, let alone scale up. Without scaling up, it is impossible to seek large scale financial support from venture capital or impact investment. It becomes a vicious circle and a graveyard for grassroots social enterprises.

 

So how to start a social enterprise with limited financial resources? You probably need to explore more non-financial resources. As Anh Thư Lê, founder of STEP Forward Exchange Vietnam told Diinsider during an interview: “We have to think about not only how much initial capital we should find, but also how to acquire appropriate knowledge, skills and network needed for ensuring the success our social initiatives. Perhaps, without these above considerations, the immediate excitement wouldn’t take us go any further.”

Anh Thư Lê with her team in a community event

 

Recently, Diinsider conducted another small scale survey and asked what social entrepreneurs need most in order to sustain their efforts, and our results show besides financial support, business plan development, partnership opportunities rank high. To summarize these needs, what a social entrepreneur needs most (apart from passion), as far as we believe, is the capability to secure all sorts of resources. It does not mean that you must have all of them resources at the beginning, but you have to find all of them as your social enterprise grows. If you would love to hear more, here are a few suggestions:

 

Business Model Development

Transforming your idea into a business model is the first step of starting a social enterprise. It involves many analysis, from defining a problem, knowing your customer, design your product/service to value proposition and revenue streams. Some analysis may seem deceptively simple, such as defining a problem. Social entrepreneurs usually assume that they know the problem in their communities, because they live there, they know all members of the community. However, what at first seems to be the problem is often merely a symptom of a deeper problem. For instance, deforestation could be a symptom of livelihood, so instead of planting more trees, you may want to offer alternative livelihood to the community.

 

Knowing your customer involves intensive resource mobilization, as you will need to your target customers to participate in co-designing so that the product/service can suit their tradition and lifestyle best. All these step and analysis require to use professional skills and tools, such as SWOT analysis, business model canvas, focus group study, etc.

A standard business model canvas

Partnership

Social problems are usually complicated and cannot be solved by a single social entrepreneur. Since start-up social enterprises only have limited resources, partnership with other organizations with similar mission is a good approach to maximize your impact. But building an effective partnership is challenging. First of all, you need to identify the right partner. Someone with a big name may not be the best match for you. Finding the right people means knowing your own strength and weakness. The partner can come from other sectors. For example, if you are a grassroots organization working to bring solar panel to your community, the strength is that you have access to the target market, while your weakness is that you do not have the technology. So your potential partner may be a solar energy firm. In any case, a successful partnership needs to be mutually beneficial to the partners involved.

Revenue Streams

The fundamental difference between a social enterprise and a non-profit organization is that the former needs to maintain financial sustainability. This means you cannot rely on donation or grant (except for at the beginning phase) and have to sell at some point. According to the social enterprise certification standard in Hong Kong, by the end of the 3rd year of establishment, if at least 50% of your budget come from revenues, and at the same time you are creating measurable and direct social impacts, then you are considered a qualified social enterprise. Similar to charity, social enterprise put “the bottom of the (wealth) pyramid (BOP)” in the center of their mission. So usually it is much harder to sell your products or services to this group, and most probably you have to “invent” a new revenue model. For example, instead of selling a product, you may want to rent it because the BOP population has limited cash flow; instead of transporting resources from the outside to target communities, you may want to discover available resources and skills within the communities. But remember that you have to “sell” eventually. This will not apply to all the social issues (like severe disease), but it would be helpful for most of them.

“Bottom of the (wealth) pyramid (BOP)” is the demographic group earning less than 2 USD a day.

Impact investing: from “1” to “100”

If you have passed the start-up phase mentioned above, now you have a promising social enterprise with revenues. So what is next? You may find out that compared to commercial activities, you are earning revenues a bit slower, and having difficulties to scale up. Small amount of grant or donation can no longer meet your needs. So how could you access more capital? How can you scale up? Here comes impact investing.

The term “impact investing” dates back to 2008. It is still a nascent industry, fast. The Global Impact Investing Network (GIIN) estimates that there will be 500-1000 billion USD impact investments by the year 2020. Impact investments, defined by GIIN, are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. It aims to address urgent challenges of poverty, inequality, health and climate change, that government and philanthropy alone cannot solve. Impact investing can be directed to both for-profit social enterprises and nonprofits with revenue streams, provided that they can return investments as simple loan repayments or as shares of revenues for equity investment.

Some impact investors may expect a lower than market return for the positive impact, but the actual performance of impact investment is comparable to market return. Based on a survey in 2015 by Cambridge Associates and GIIN, impact investment funds under $100 million returned a net IRR of 9.5% to investors, outperforming similar-sized conventional investment funds (4.5%). Impact investment funds over $100 million (6.2%) is lower than their counterparts (8.3%). Emerging markets impact investment funds have returned 9.1% to investors versus 4.8% for developed markets impact investment funds. Those focused on Africa have performed particularly well, returning 9.7%.

Impact investing helps you gain a significant amount of capital in your early project stage, to scale up quickly under the condition of good social impacts and revenue prediction.

Global Impact Investing Network

Just one example. Imagine that you are running a solar energy NGO for community people in rural areas with annual budget of 10,000 $. With your current budget you can serve 100 people for free. After a year of operation, people in the community find that the solar energy can create value. For example, children can help farming in the day time and study at night with solar light bulb, so they can keep up studying. Kerosene lamp was replaced so the fire safety is no longer an issue. Some community members now do not mind paying a small amount of money for your solar products. Then you carefully design market research and come up with a solid business plan to generate revenue to cover 10,000 people instead. At this moment you accomplish the 0 to 1 stage above-mentioned. With a solid business operation, an impact investor learn about your initiative and is optimistic about your economic sustainability and return. An large scale investment is made to acquire your equity, and the investor becomes your shareholder, can will involve in your future management by offering his expertise. With the investment and expertise, you can scale up and serve 1 million people across your country or even the global. This is just a simple case how impact investing can play a role and help scale up your solid initiative.

 

If you want to grow your initiatives (an unsolicited commercial)…

Your sustainable passion largely relies on how much you can grow your initiative in the early stage. Mentorship, business plan development, impact investment, publicity and communication are what you have to take care of seriously. And Diinsider will be ready to assist you in any of the related fields. Our mission is to assist grassroots social impact organizations figure out sustainable roadmap, and scale up solid initiatives from “1” to “100” and “100+”. So it is time to talk to us and let us know your struggles, and how we can be part of your solutions. Our highly dedicated team combines expertise in both public and private sector, and is passionate about creating sustainable passion!

Reference:

Sean Greene, A Short Guide to Impact Investing, 2015

Cambridge Associates and the Global Impact Investing Network, Introducing the Impact Investing Benchmark, 2015

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