Social investment markets are growing around the globe and—as efforts like the G8 Social Impact Investment Taskforce indicate—they are increasingly receiving high-level support. Many believe that social enterprises—recipients of social investments—are important contributors in the fight against poverty, but unlike with NGOs and other types of organizations, evidence backing this assumption has been scarce and largely anecdotal.
We recently completed a large-scale study of investment in social enterprises, based on a survey of 36 social investors and 286 social enterprises from Colombia, Mexico, Kenya, and South Africa. Our findings generally support the idea that social enterprises can have a positive impact on poverty reduction. But they also reveal some caveats, which have led us to derive concrete recommendations for action.
As our report “Taking the Pulse” describes, social enterprises that have received social investments are dependent on bringing in a large portion of their income through the direct sale of products and services to end consumers. While funding for social enterprises is mainly in the hands of the private sector, support from the public sector, or third-sector organizations, is limited. More than half of the social enterprises we surveyed indicated that they received no support from public institutions. Several of them indicated that governmental entities were even hindering them in achieving their goals, for instance by imposing significant bureaucratic hurdles. As a result, social enterprises tend to operate in markets that offer easier circumstances and higher potential for profitability. However, this also means that they neglect other important markets, particularly those that relate to meeting basic needs such as water and sanitation.
At the same time, the role of the private sector in solving social problems in developing and emerging nations has shifted over the last decade. Stakeholders from the public, private, and civil-society sectors are increasingly providing funds to profitable companies rather than to public or nonprofit organizations. While the share of nonprofit organizations in the portfolios of social investors has sunk, funding in for-profit social enterprises, and organizations that combine nonprofit and for-profit legal structures (hybrid organizations) has increased greatly.
We also found that in the countries we examined, social entrepreneurs who received funding from social investors typically were part of the educational elite, with a higher educational degree. This can be traced back to the complex challenges of managing social enterprises that have innovative business models and high ambitions for social change. But it also means that many social enterprises are likely missing important opportunities to gain knowledge from low-income entrepreneurs who may have a more-limited educational background, but who could contribute to building endogenous solutions for their communities.
Based on these and other findings, we have compiled a number of recommendations for investors and social enterprises:
- Generate alternative sources of income, such as long-term supply contracts, to give social enterprises the opportunity to serve people living in the lowest-income tiers of the base of the pyramid. Financial innovations such as the micro-health-insurance program Changamka, which combines saving schemes for end-consumers with long-term subsidies from the public and third sectors, are promising solutions in this regard.
- Encourage cooperation between supporters of the public, private, and third sectors to optimally utilize the strengths of each sector and redefine outdated funding structures in development cooperation. Various umbrella organizations in the social enterprise field have recently put forth the concept of first-loss capital, where an investor agrees to bear first losses to catalyze the participation of co-investment partners that otherwise would not have entered the deal.
- Provide more innovative financing instruments that meet the financing needs of nonprofit social entrepreneurs. Many social problems do not initially lend themselves to a profitable solution or require several years of preparation to establish markets. As the microfinance industry—which started as a nonprofit playing field but now attracts large amounts of profit-seeking investment—illustrates, nonprofit social enterprises play an important role in building markets.
- Employ inclusive business models to involve low-income entrepreneurs. Social franchises, for example, can establish networks of entrepreneurs originating from low-income settings, thereby empowering people from the bottom up. Social investors should also rethink their selection criteria, and, together with umbrella organizations and policy makers, promote training and mentoring programs that prepare entrepreneurs from all educational backgrounds to access funding.
We firmly believe that social enterprises can be important players in the fight against global poverty. Building financially sustainable organizations that help solve social ills, and remain up and running without donations, is crucial in the long-term. Only with the appropriate support and patience from investors can we establish such organizations in all relevant areas of action.