Impact investment isn’t a movement any more, but a real and fast growing asset class.
When historian Thomas Kuhn published his book The Structure of Scientific Revolutions in 1962, not only did he introduce the term ‘paradigm shift’ to the world, but the theories he presented also caused a sort of paradigm shift in themselves as to how we understand the evolution of science. Rather than progressing in a linear and continuous way, science sometimes finds unexpected new answers that turn old assumptions on their head.
At a point in history when old assumptions on how to manage our resources are no longer valid, many of us put our hope to a new breed of entrepreneurs who are looking to fix our social and environmental problems by using business as a tool for change. So it’s no surprise that conferences, grants and accelerator programs, all devoted to nurture these social entrepreneurs, are popping up all over the world.
From Toronto to Tokyo and Tottenham, government officials and philanthropists are betting on these handful of entrepreneurs to conceive the paradigm shifts Kuhn referred to that we need to get our society and planet on the right track.
In the social entrepreneur world, however, visiting the annual SoCap (Social Capital Markets) conference in San Francisco once in a lifetime is the equivalent to the obligatory Hajj to Mecca for Muslims. Conceived by long time entrepreneur and impact investor Kevin Jones, SoCap is the place for social entrepreneurs and investors interested in venture philanthropy and impact investment to pitch their ideas and compete for funding.
Jones' second European conference to date, this time in the city of Malmö, Sweden, - Copenhagen's hip little sister on the other side of the Öresund sound – felt like the attendees were not just discussing the future but almost redesigning it right there at the event.
Defining a Bubble
I entered the opening night party with expectations as sparkling as the bubbles in the organic wine that I was greeted with at the door.
After a few minutes of networking, I recognized a social entrepreneur who is now a year into realizing his dream of providing a crowdsourcing solution to fund projects to create better neighborhoods. It quickly becomes obvious through our conversation that the journey hasn’t been as easy as he expected. In fact, this fall he plans to enter the speaker circuit to supplement his salary.
The irony isn’t lost on him – he expects to make more money talking on his idea than he should be making by actually working on it. “But as soon as times get better, I’ll be back full time on my project!” he quickly added, clearly in response to my shocked expression.
As I moved on to the next conversation, I quickly checked my phone. Luckily, it was still my iPhone 4S and not a Nokia 8110. Assured that I hadn’t slipped into a time warp and been transported to the year 1999, I asked Siri to define a bubble. Within seconds, she displayed a set of definitions on the screen, including: ‘a speculative scheme that depends on unstable factors.’
That's it, I thought. When you’re able to make more money talking about what you are about to do, rather than doing it, that’s unsustainable. Of course, I know all about it, having experienced the dotcom boom firsthand only a few years ago.
I was one of the many entrepreneurs who created laborious powerpoints for ideas and later received funding only on the value proposition of ‘create leading edge differentiating [insert whatever service here] set of tools with a potential to create a paradigm shift in the industry.’
Investing in Social Entrepreneurship: A $1 Trillion Market
But I digress. On the second day of the SoCap conference, Tone Rosingholm of JPMorgan emphasized that the investment opportunity in the social entrepreneurship economy in the US is between $400 billion and $1 trillion.
According to Rosingholm, that’s 10 times more than what is donated in any typical year in the U.S. She wrapped up her presentation by alluding to a clear shift with more people wanting to invest in business, rather than donating to causes, in order to change the world.
This went along with what Kevin Jones had mentioned to me a few weeks earlier after he keynoted the Swedish Venture Capitalist Association annual meeting: "Impact investment isn’t a movement any more, but that it’s a real and fast growing asset class."
Now, as I chatted with some investors at the SoCap conference, his statement was validated again and again. Yet it became evident that investing in social entrepreneurs is no easier than investing in ‘regular’ entrepreneurs. Even though we must all applaud their willingness to start businesses that serve social problems, and even though it seems that there’s lot of money being directed to generate more of that, we might not want to invest in all of them.
Let me explain.
Screening Potential Entrepreneurs: 'Forced' vs. 'Opportunistic'
Having worked in India, China and Indonesia, Beau Seil, now managing director of Unitus Impact has seen social entrepreneurs of all sorts. Distinguishing between forced entrepreneurs and opportunity entrepreneurs, Seil said, "Some just want to create a livelihood for themselves, others start [businesses] to solve problems in the neighborhood."
The first step in screening potential entrepreneurs? Answering whether they are really hoping to solve a problem or merely address the symptoms of that problem.
Even those in the first category will sometimes realize that the problem isn't as pressing as they did when they came up with idea and then shift into reverse to create a livelihood by talking on their idea instead, a lot like the crowdfunding entrepreneur I had met on day one.
The second step: Understand how the entrepreneur is going to cope with the challenges that scaling a business will bring. "Is their business model focused enough or are they trying to achieve a number of things at once?’" offered Seil. Without clear scope and having defined what you’re not doing, it’s impossible to scale.
When Oxfam recently created a fund in order to offer their donors the opportunity to invest in, not just donate to entrepreneurs wanting to change the world, they turned to a Swiss fund management company. Fabio Sofia, director at Symbotics Group, said their aim is to fund those in the middle: the social entrepreneurs with proven business models that now need funds to build capacity. They are too small to attract ‘regular’ venture capital while the majority of available seed capital is tied to incubators for entrepreneurs with no track record.
Believing in the Power of Disruptive Change
Even though early investing carries the most risk, it also brings with it fun and a ton of passion, clear to anyone who has seen the energy these social entrepreneurs bring to idea pitches and similar conferences.
Hoping to find entrepreneurs with a real potential to solve certain issues, a family foundation manager told me they’ve actually stopped accepting applications for grants, deciding to spend their resources instead on separating the social from the entrepreneurs.
Suddenly, it dawns on me that the difference between social and ‘regular’ entrepreneurs is a lot blurrier than I had expected. And just as scope is important for entrepreneurs wanting to change the world, so is the scope of the investors who are buying into their passion and ideas, whether you are a patron or a pension fund.
Later, I bumped into Per Olsson, researcher at the Stockholm Resilience Center, who’s been studying the factors needed to bring about change. He told me that even though paradigm shifting ideas come about every now and then, sometimes they are just too radical to be embraced and are then soon forgotten.
But he’s also found that disruptive changes have a higher likelihood of succeeding in tough times as the ones facing us today, when people are more open to finding new and unexpected solutions. I look around the room, filled with people bubbling on about how their innovations will change the world and forward-thinking investors with a desire to fund the next big idea.
I look at my glass of wine and decide it is not half empty, but half full after all.