Disequilibrium: the disconnect between impact investors and social entrepreneurs

Social enterprises are on the rise.

B Corp: Fresh City Bag

Fresh City Farms (B Corp): Toronto-based urban farm and farming network

In Canada alone, there are now over 100 certified B Corps actively using the power of business to tackle social and environmental issues. Each and every day, talented young entrepreneurs are improving their communities on a local and global scale. Just like traditional businesses, social enterprises need capital to expand their operations and achieve their organizational goals.

Similarly, impact investing is growing too.

The number of progressive investors interested in having their capital generate social returns, in addition to financial gain, is growing not only in Canada, but around the world. Now, more than ever, investors want their money to impact the world as well as their bank accounts.

Social entrepreneurs and impact investors must have an ideal relationship then, right? Well, sometimes.

If there are an increasing number of social entrepreneurs seeking money and a growing population of impact investors looking to invest, shouldn’t the supply and demand of impact transactions satisfy the marketplace?

Unfortunately, we are not in utopic equilibrium. Yet.

There is a disconnect between the capital needs of enterprises and investors. The disconnect has to do with risk. Turns out, investors don’t like it. While impact investing is indeed a budding asset class, most impact capital is allocated to mature social enterprises and investment vehicles. This is because these opportunities marry a high probability of earning steady returns with a low risk of failing. Unsurprisingly, safe investments with healthy income are attractive to investors.

The consequence of risk-aversion is that most impact investments are made in social enterprises or financial vehicles that have already been vetted and de-risked. This trend has significant effects on both individual social enterprises and the impact investing sector as a whole. While there might be a considerable sum of impact capital invested in the marketplace, a limited amount is allocated to early stage ventures: this is when entrepreneurs need capital the most to innovate, build their businesses, and accomplish their organizational goals. If too many early stage enterprises lack growth capital, a pipeline of de-risked investment opportunities will never fully develop. A consistent flow of early ventures must graduate to mature enterprises to satisfy the demand of more traditional impact investors.

Twenty One Toys: re-imagining toys as tools for social change

Twenty One Toys: re-imagining toys as tools for social change

The solution is simple and clear: invest in early stage ventures! Invest with intention and longterm time horizons by targeting early stage social enterprises with the goal of maturing a strong pool of de-risked ventures.

If the trend is towards risk-aversion and the solution is to invest in higher risk early stage ventures, how do we move forward? Understanding that there is a problem doesn’t catalyze capital.  

Simply put: some must lead the way. There are pioneering investors that deem the investment rewards to be worth the financial risk. Impact investors looking for both higher financial and social returns will see the value in early stage impact investing. Leading investors are also focused on intentionally supporting innovation by closing the pioneer gap – the gap between capital access and the capital needs of new social entrepreneurs. As the goals,  strategies, and potential rewards align for these investors, their investments enable new waves of social entrepreneurs to make an impact.

One investor already leading the way is Youth Social Innovation Capital Fund (YSI for short). YSI (disclaimer: I lead it) does what others don’t do. We provide capital and support to entrepreneurs when they need it most: in the early stages of building their ventures. Our goal is to graduate YSI-supported social enterprises from very early ventures to ones ready to take on more growth capital.

There needs to be more investors like YSI (or more investment flowing through YSI) in order to satisfy the capital needs of social enterprises at every stage of growth at all times – not just sometimes.

* Editor’s Note: While the author writes of social enterprise as a collective term to describe all businesses with a social purpose, due to regulatory and incorporation differences, SiG differentiates between non-profit social enterprises and for-profit social purpose businesses. See our Knowledge Hub for more information.