“Enterprise Philanthropy” as a Solution
Luckily, Husk encountered Simon Desjardins, the program manager of the Shell Foundation’s Access to Energy program, in 2008. The foundation made a set of strategic grants to the early-stage business that helped the company become more attractive to investors.
Together, they determined what investors would need to fund the company: to build more plants, to lower the cost of each plant, and to build plants and sign up customers more quickly and efficiently. So Shell made grants to the organization against a series of milestones. The first one asked Husk to build three additional plants in six months, the second to lower the cost of each plant, develop a proprietary payment system, and so on. In total, $2.3 million in grants were given between 2008 and 2011 to hit the milestones. By hitting nearly all the milestones, Husk was finally able to attract impact investors.
This strategic grant giving known as “enterprise philanthropy” may prove to be an opportunity to bridge the “Pioneer Gap” – the problem when few impact investors are willing to invest in companies targeting the poor and at the early stages in the creation of these businesses.
Enterprise philanthropy is about providing both grants and ongoing, hands-on support to the early-stage business so that they can move through the stages to scale and attract investors. Enterprise philanthropy differs from traditional grant making in four ways, dubbed the four P’s of enterprise philanthropy: all stakeholders must have an aligned purpose, there must be a focus on profitable proposition so that grants do not undermine the long-term viability of the business, having milestones will help clarify progression, and because building a new business is difficult, let alone one with many more challenges, persistence is key.
Connecting the Remaining Half
As for the demand side, investors need to work on the willingness to make investments in early-stage enterprises. One solution is to lower financial return targets to a suggested 5 percent per year or lower. As a comparison, the Kauffman Foundation analyzed the investment returns of its $250 million invested in 100 venture capital funds, and found that “the average venture capital fund fails to return investor capital after fees”. Only one third of these funds surpassed the returns available in the public markets. Does this mean the risk of making an investment in Silicon Valley is comparable to an investment in early-stage social enterprises? At the very least it suggests we can tolerate and are tolerating risk better than we think.
Another proposal is to build more blended investment funds so that we’re not just looking at every investment decision through strictly a financial or impact lens. Although most investors are not experts at raising philanthropy, and many philanthropic funders may feel they are subsidizing investors’ returns, a successful combination of investor capital and philanthropic funding will give investors the liberty to extend targeted grant capital to investees.
A third solution is to create more funds that are backed by philanthropic capital, so that they are not tied down to expected returns for external investors. These types of funds would have more flexibility to take on early-stage risk and would complement the work of social enterprises.
Moving Beyond the Standstill
As Husk did in the past, a large number of social enterprises currently rely on prize money from competitions, incubator programs, or limited amounts of grant money as startup funding for their businesses. Some even take matters in their own hands by starting crowdfunding campaigns. But these only take them so far, while impact investors remain frustrated that there are not enough investment-ready companies.
The reason that social enterprises and impact investing exist is because of an evolving philosophy that the time has come to use business tools towards social good. It has only begun. But no matter how many banks set up impact investing programs, how many social enterprises are launched, or how big impact investing is predicted to be, a well-functioning marketplace, and by extension widespread social impact, will only happen when both demand and supply are aligned.
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