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Four Starting Points for Social Business Founders

If your search landed you straight on this post, I’m guessing you’re a new social entrepreneur and trying to figure out your strategy for this whole “social venture thing.”

I can help you. I’ve started a social business, and lived to tell the tale. Here are some things you should be aware of early on in the process.

 

1 – On Incorporating a for-profit vs a non-profit 

Unless you have compelling reasons to establish a non-profit, establish a for-profit organisation instead. Establishing a non-profit comes with a boatload of bureaucracy and paperwork. Besides, while for-profit startups are generally seen as iterative business, this doesn’t apply to non-profits. Being a for-profit organization gives you, the founder, both the flexibility and credibility to build a viable business. It allows you to raise capital from private firms and investors. Having said that, if your intent is to heavily rely on grants and donations from individuals, foundations or corporations to fund your mission, then by all means, establish a non-profit.

 

2 – Who will you be able to raise capital from? 

Let’s assume you’ve established a for-profit. This means you’re not running a charity. You’re running a business. Unless you’re a bootstrapping miracle, you’re bound to need a cash infusion at some point during your starting-up-phase.

Are you targeting a larger market? Do you have proprietary technology? Unique assets that will make you a success? If the answer to any of these questions is YES, then don’t put yourself into a niche and just raise capital from mainstream investors – provided they will go along with your mission. Don’t put yourself into the tight niche of “social business” investment opportunities. Just build a scaleable organisation with a business offering that happens to have an insane positive environmental impact, but also appeals to a regular investor. Take Elon Musk as an inspiration. Few would describe Tesla or SolarCity as “social businesses” right off the bat – yet their core product has immense social value. He just didn’t put himself into a tiny niche, and went out to dominate entire markets instead.

If you’re targeting a niche market and are anticipating below-market returns, like we were with my former startup – a mobile application focused on the needs of immobilised people, then you need to figure out your fundraising strategy. Your case isn’t lost, but it’s going to be a little trickier. You have a bunch of options at hand: Impact investors, mission-driven angels and crowdfunding (including ICOs). Anticipating below-market returns isn’t all bad in itself, but you need to very clear about WHY you’re building this. The stronger your social mission, the easier it’ll be for you to crowd-fund your project on sites like Kickstarter, IndieGogo and others.

 

3 – Getting certified as a B-Corp

There are many reasons to become certified as a B-Corp, or “benefit corporation”. If you have a consumer-facing product and want to make “social” part of your company identity, this can make a huge difference for your business. Spend a few hours researching requirements for B-Corps early on in the process before things get too crazy. Then focus on getting your business off the ground and get yourself certified after the initial startup-phase – if at all. Why? Getting that B-Corp logo takes effort. Time that you could spend building your business instead.

 

4 – Checks and Balances – A great board of advisors is key

Put regular checks in place to make sure you are staying on course. Especially pivots in the early phases of building your business could affect your original mission and long term impact. Recruit a strong board of advisors early on in the process and enlist their help to stay on course. A great tool to get advisors involved and actively engaged in your business at an early stage is the FAST agreement by the Founder Institute. It’s used by tens of thousands of entrepreneurs every year, in order to establish strong working relationships for their startups.

 

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The Difference Between Social Impact Investing and Socially Responsible Investing

The single biggest problem in communication is the illusion that it has taken place.
George Bernard Shaw

Impact investing is a hot topic right now. A few years ago, while I was researching investor behaviour in impact investing at the Free University of Berlin, few people in the startup scene around me seemed to have a solid grasp of, or interest in, impact investments. These days everywhere I go – regardless of whether it’s Silicon Valley, Berlin, Nepal or beyond – people seem to be talking about it. A multitude of impact venture funds, social impact accelerators and certification programs like the B-Corp program have sprung up onto the stage of our global investment markets. Some VCs have started incorporating statements about adhering to dual- and triple-bottom line principles into their mission statements. In short, it’s looking good for impact investing. It seems to be rapidly gaining in popularity.

Unfortunately, when topics get hyped, that hype generally creates a bit of confusion, and that confusion can lead to ineffective communication around the topic. With this article, I aim to clear up some of the fuzziness I’ve been seeing in regards to how impact investing is defined, and clearly define what distinguishes it as a concept from socially responsible investments (SRIs).

Just in case you don’t know what sort of confusion I am speaking of, let’s take a quick look at market size estimates. According to an extensive investor survey by the GIIN, the Global Impact Investment Network, assets under management in impact investing have grown annually by 18% between 2011 and 2015. By GIIN metrics, the amount of assets currently allocated to impact investments is generally estimated to be in the billions with a market size floor of around 115 billion. This number accounts for a tiny fraction of the 156+ trillion global financial markets. However, other people actually estimate the market size for impact investments to be much higher, with estimates ranging into the range of several hundred billions, or even trillions! This current discrepancy between estimates makes zero sense and can only be explained by the fact that there appear to be different standards regarding what sorts of investments should be counted as impact investments. Devon Thorpe, author of the impact focused blog Your Mark on The World, clearly hit the nail on the head with his explanation of why the gap between market size estimates has widened to such an extent: “The market has grown, but not that much. What is happening is that more and more people are arguing that the investing they do should be counted as part of the impact investing pool.”
In this context, it clearly doesn’t help that even Forbes author Anne Field seems to think of impact investing and socially responsible investing as sort-of-the-same-thing, lumping both categories together in a recent article covering the growth of the impact investment market. She refers to the market size of SRI at 8.72 trillion, even though the headline of her article clearly refers to impact investing.

Let’s set this straight. Impact Investing is not the same as Socially Responsible Investing.

Here is a common definition of impact investing, by the GIIN network:

impact investments

Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”
(emphasis mine)

The history of “impact investing” is a pretty short one. The term itself, impact investing was coined only 10 years ago, at a 2007 meeting which took place at the Bellagio center in Italy and was organised by the Rockefeller Foundation. The purpose of this meeting was “to explore with leaders in finance, philanthropy and development the need for, and ways and means of, building a worldwide industry for investing for social and environmental impact.” As a concept, impact investing has also been closely tied to a focus on a “dual bottom line” or “triple bottom line” . There is a “duality of goals” for each investment made with an impact approach. Financial returns are only one side of the investment goals. If impact investment don’t meet their social impact goals, they are generally not deemed as successes. This distinguishes impact investing from “regular” or “mainstream” investing, where the main goal of the investment is to generate financial returns. Impact investment approaches are also not limited to one particular industry. It is generally understood as an investment approach across asset classes.

Let’s contrast this with a definition of Socially Responsible Investing, by netimpact.org:

“Socially Responsible investing (SRI), also known as values-based or ethical investing, refers to the practice of integrating social and environmental factors within investment analysis to avoid investing in companies that have negative impacts on the environment and/or society.”
(emphasis mine)
A main feature of socially responsible investing is screening against negative externalities. “Negative screening” has been around a lot longer than impact investing, starting with the Pioneer Mutual Fund in 1928. It is generally defined as “the conscious decision not to invest in companies that are inconsistent with the personal values of the investor.”  The roots of SRI can be traced back centuries, or even to ancient times. William Donovan’s “A Short History of Socially Responsible Investing” makes for a pretty interesting read.

Can you spot the difference between the two concepts? While SRI approaches are generally supposed to AVOID causing negative social impact, impact investments have the explicit goal to advance positive social impact. Impact investing distinguishes itself from other investment approaches through the intentionality of creating social change. What also sets impact investing apart from SRI is the introduction standards and methods for the assessment of impact goals. According to the 2015 GIIN investor survey, around 99% of impact investors actively measure the outcome of their investments.

SRI seems to often be used as an overarching term for all types of social investment approaches, but only a tiny fraction of SRI investments could actually be classified as impact investment.  Comparing SRI to impact investing is like comparing apples to oranges. Screening out bad stuff, doesn’t equal building good stuff!

In our conversation around impact investing, we should be mindful of the terminology we use. Language is the foundation of communication, which is the foundation of system-wide change.