In the past few years, a throng of governments and charitable organizations have initiated efforts to address existing social problems such as lack of education, diseases, and poverty. Today, governments around the world are making a supreme effort to fund their commitments to these interrelated problems. By all means, these institutions are left with limited ways of dealing with such problems.
Today, social entrepreneurs are humiliated by the traditional way of amassing funds. Moreover, donations and grants don’t really enable them to innovate or grow for that matter. Social entrepreneurs are left with zero access to capital markets and very little freedom to experiment at various stages of growth. One of the biggest obstacles faced in the social sector is the lack of effective funding models.
The problem here is not just funding. If you look at the figures from the social sector in the U.S, you’d find that there are $700 billion of foundation assets existing, with 10 million people working for non-profit bodies. Such massive figures, coupled with colossal inadequacies in capital allocation. Generally, these organizations and social entrepreneurs are left with very limited funding from donors, making it nearly impossible to survive for that matter. Most of these social sector organizations are too small and perpetually underfunded, with very little working capital to survive.
Now, let’s compare this to the world of venture capital. When an entrepreneur comes to us with a brilliant plan for a booming new business, what we generally do is step right in and fund the business. Then, why should it be any different for a social entrepreneur?
Things are about to change. We are on the verge of a major change in the venture capital industry.
Did you know that in the mid-1960s and early 1970s, a new type of investment channel was created, known as the ‘professionally managed venture capital partnership’? This innovation attracted investment capital from pension funds and donations. It changes the face of venture capital, which became a core part of many economies. It paved the way for a new approach and mindset towards funding innovation in the private sector.
This time, it is going to usher the much needed change to the social sector.
New investment models are created that help stream income from innovative concepts, such as funding bone marrow research. The myriad of hybrid organizations like Acumen Fund and Root Capital that turn patient capital into high social return investments around the world. Organizations like Endeavor and Social Finance help social entrepreneurs benefit from global capital markets to boost growth and employment as well as social impact.
In the last few years, government agencies across the globe are exploring the prospects of social impact bonds. Financial bodies have come into being that pay an investor if the cost or incidence is reduced, yielding better or comparable results than a government program.
These bodies address a myriad of issues, ranging from drug discovery, poverty, and food deprivation to sleeping sickness. Things might change rapidly in the coming decade. If investors are brave enough to take the same risks are early institutional backers of the venture capital industry, we might soon see a pool of social entrepreneurs developing large, efficient organizations that work on social issues and are also able to yield better financial returns.
We need more and more example, setting organizations to build that confidence and unlock the latent potential. Investors are most likely to put money into something when they acceptable returns. If something as novel as social impact bonds can yield financial returns as high as about 7 percent, with limited risks, there’s a high possibility that the two – investors and social entrepreneurs would join hands to improve the very pillar of our society.