Much has been written about the growing size and influence of impact investing
for social enterprises. I don’t disagree with the data or the pundits but is there too much marketing hype? Will the good news ultimately blind the social finance movement to the fact that many important and demonstrably impactful social enterprises will not generate market returns?
Will the result be to limit access to capital that these social enterprises need? Are we creating a chimera that will come back to bite us? Will government and foundations feel that they can back away from grant-funding since the data “proves” that we can have our cake and eat it too since we’re generating returns and creating impact?
The reason for lower social enterprise returns is not so much a failure of the traditional business model. Rather, they have a unique social enterprise business model that is a hybrid combining both mission and business objectives; the outputs and outcomes are going to be different and often cannot be judged in the same way as traditional business models. Also, generating impact can have added cost compared to competitors. This goes straight to the bottom line for the social enterprises, providing such ventures with greater challenges for competitiveness.
Consider employment-focused social enterprises. They may be a bakery, a courier service or a call-centre. The cost of recruiting, training and managing those with chronic barriers to employment are higher than the traditional businesses against which they’re competing. The customer is not going to pay more for the service so these social enterprises have competitive disadvantages coming out of the gate.
As much as social enterprises have hybrid business models, they also have hybrid financial models. Funders, especially government, need to recognize this reality in their funding strategies. Use grant-funding or provide catalytic first-loss capital (link to GIIN Issue Brief) to offset the risk and increase the returns for private capital.
For example, the cost of providing grant-funding to an employment-focused social enterprise to help to defray the costs of training and support for employees would be much less than providing life-time supports to these same client groups. The social enterprise’s business model as a bakery or courier service still needs to be robust but they can now compete on a level playing-field with their competitors.