Who pays for innovation? Emerging social entrepreneurs running businesses with a deep commitment to a social mission often lack the draw of robust financial returns for investors, making them a difficult sell for angel networks, venture capitalists, and other traditional sources of early investment. For these entrepreneurs, the financial runway for their seedstage companies can be short–too short. But it’s risk-tolerant seed funding that enables–and accelerates–innovation.
More Enterprises, but Persistent Hurdles to Funding Solutions
At Echoing Green, we have a long history of selecting, seeding, and supporting social entrepreneurs through our fellowship programs. We’ve seen rapid growth in the volume of for-profit and hybrid businesses over the past decade. In 2006, only 15 percent of our Fellowship applications had elements of forprofit business models; in 2015, they had increased to 50 percent.
Despite compelling research on the “pioneer gap” and frequent acknowledgement of the lack of seedstage financing for social enterprise, the most promising early stage ventures still face crippling hurdles in accessing capital. The entrepreneurs we support say that in addition to individual fundraising challenges, their lack of access to aligned earlystage impact capital is a result of systemic, structural market problems. Absent additional sources of institutional seed funding, groundbreaking social entrepreneurs lacking access to networks of finance may not succeed. Now that they've launched their enterprises, they feel isolated from, and, far too often, adversarial with the impact investors with whom they'd hoped to partner.
And the road goes two ways: in these relationships, impact investors are also having difficulty reaching the goals and milestones that they've entered the market to achieve. As a result of this funding impasse, our collective learning of how to make positive social change through business is stalled–as is the change itself.
In response, we’re using our window into the trends provided by our Fellowship applicant pool and feedback from Fellows to innovate solutions that meet funder and entrepreneur needs.
We’re taking a number of approaches to address this:
1. Working with other funders and experts to pilot innovative investment readiness and followon investment approaches with our Fellows, using philanthropy, investment, and support, to identify what works and what could work in a broader context
2. Convening global social entrepreneurs, grant makers, and investors to have frank discussions of the issues they face to cocreate solutions.
3. Providing data and research on seed funding and support.
How Can We CoCreate Solutions?
We recently released a white paper in partnership with USAID, Deviation from the Standard. This report looks at data reported by 2015 Fellowship semifinalist applicants proposing forprofit and hybrid business models to share key learnings about the types of investmentreadiness support and financing that emerging social entrepreneurs need in developed and emerging markets. We identified three key themes:
1. Grants and similar types of flexible, risktolerant financing are critical at the seed stage for social enterprises operating in both developed and emerging markets. Diverse funding sources signal that there is a lack of large institutional seed funders of global for-profit social entrepreneurs. Instead, access to networks and personal wealth are key to early social enterprise funding success – excluding many innovative entrepreneurs.
2. Though most emerging social entrepreneurs have tried or are trying to get impact investment, only 7 percent of entrepreneurs focusing on developing countries reported having received impact investment, whereas 12 percent focusing on developed countries and 17 percent focusing on both developed and developing countries received it.
3. Founders of forprofits and hybrids indicate needing different types of support to become impact investment ready. However, all need basic education on the broad spectrum of impact investing and identifying what it specifically means for their organization.
What our findings in Deviation from the Standard show is that for this market to grow, approaches to seed funding and support must meet the needs of both sides of the table – funder and entrepreneur–given the needs and constraints of each are diverse.
It’s clear that new approaches to finance and support that cultivate innovative social entrepreneurs must emerge. By elevating the entrepreneurial perspective on startup impact investment, sharing trends we see among our forprofit applicants, and showcasing innovative models of early funding, we hope to inform and increase the flow of earlystage impact capital and investment readiness support.
We must spend more time talking to each other to find out what these social entrepreneurs really need to become deal ready–and then cocreate solutions.