Social investment can offer social entrepreneurs the chance to scale up their impact tremendously, fulfilling the promise and potential of their organizations. It can also lead to unintended consequences when there is a mismatch between the investor and the entrepreneur, or between the financing terms and the dynamic aspects of the social enterprise.

We at the Schwab Foundation for Social Entrepreneurship collected data and narratives from several dozen social entrepreneurs around the world about their experiences with social investment. Social investment is a means to provide capital, in a business practical approach, to organizations that bring social change. While the general consensus is that social investment is an overwhelmingly positive force, a handful of social entrepreneurs have reported less glowing experiences.

I offer here two examples, not to point fingers or question intentions, but rather in the spirit of collaborative and continual improvement. With this discussion, we give voice to the dissenting, often unheard but equally valid perspective. My hope is that we can use our collective power to address the barriers that now may be small cracks in the wall but in the future could cause a backlash against what otherwise has vast potential to make a positive difference in the world.

One social entrepreneur described a year-long “dance” with social investors. Given the rigor of the due diligence process and the already stretched bandwidth of her staff, she had to put internal projects on hold in order to meet the demands of the investors. At the same time, since the conversations with the social investors seemed to indicate the investment was almost certain, she did not focus on courting other prospective investors or writing grant proposals. At the eleventh hour, the deal fell apart. The investors told the social entrepreneur: “Sometimes these things happen.” She was left not only without the anticipated capital infusion, but also scrambling to make up for lost time on other projects and fundraising.

Another social entrepreneur told us about social investors who chose to work with her because of her organization’s theory of change, strategy for reaching the target audience, and measurable social impact. Yet over the years of the investment, the investor demanded that her organization pay for supplement costs, such as in-kind services and regular travel expenses, and used their decision-making rights to steer the enterprise away from the core values guiding its community engagement and mission. Her organization was left in the red and forced to downsize. This affected her team’s morale and the community’s esteem for her social enterprise.

During the Summer Davos meeting of the World Economic Forum in September 2010, forty social entrepreneurs met to share their experiences with social investing. From this, social entrepreneur Andreas Heinecke launched a taskforce to create useful insight for social entrepreneurs considering social investment, beginning with collecting a baseline of quantitative and qualitative data from the social entrepreneurs in the Schwab Foundation community.

Much has been written in recent years about the potential impact of the estimated 1 trillion USD impact investing—or social investment—sector. Yet little has been written for social entrepreneurs about the process of forming productive relationships with social investors, and whether receiving an investment is the right growth approach for each social enterprise.

Over the past year, with the support of the Center for Entrepreneurial Finance at the Technical University of Munich, the Schwab Foundation for Social Entrepreneurship created a free guidebook for social entrepreneurs on social investment.

It was not until we posted this document and received more than 1,000 downloads in the first 48 hours that we understood the pent-up global demand for this knowledge. The guide provides a launching point for social entrepreneurs to begin conversations—both with prospective investors and among themselves—around the challenges and opportunities represented by the social investment space. 

Here are two tools from the guidebook for social entrepreneurs to explore which financing instrument and which investors best suit the needs of their organization. These tools can help the social entrepreneur begin discussions internally and then inform their work with prospective investors.

Diagram based on Achleitner, Spiess-Knafl & Volk (2011) (See full document for detailed descriptions of terms.)

Source: Spiess-Knafl (See full document for more information on the criteria and investor landscape.)

Are you a social entrepreneur or social investor who has had experiences with social investment?  If so, we want to hear from you about what needs to be done to make the process work better. What knowledge, processes, or platforms do we need to ensure the social investment sector can achieve its potential for positive impact?