Fighting For the Middle Ground

Investing responsibly can help promote the growth of socially responsible businesses and your money can go to work for you, for a good cause.  Your money will help provide the financing for social entrepreneurs to grow and expand their missions.  While there are tons of people out there who take environmental, social, educational, and civil rights factors into consideration when investing their money, for the vast majority of investors these ideas would never cross their minds.  So, until the New York Stock Exchange (NYSE) and NASDAQ are replaced by social stock exchanges (SSE) like the one in Sao Paolo (not likely anytime soon), when it comes to financing, social entrepreneurs are stuck fighting for the middle ground.  They are too business-oriented for charitable donations, and too charitable for normal investors.

            And this is the subject of today’s post.  Because of the awkward limbo social entrepreneurs often reside in, they have to piece together a mixture of financing that can be confusing, stressful, and time consuming.  Since social businesses fall in the middle ground, their sources of financing don’t fall into neat categories like “philanthropic donations,” or “government funding,” or “private investors,”  but rather, a hodgepodge of all of these.  This raises many difficulties as often times the CEO of a social business is forever chasing the next source of financing, which distracts from the mission.  Instead of managing the day to day duties, he or she is on the phone with philanthropic organizations, organizing fundraisers, or lobbying Congress for this years tax incentive – which may decide whether or not they can continue operating.  Nevertheless, this is the reality of businesses with social missions.  Unless they are selling products or providing paid services that finance their social causes, social entrepreneurs will have to deal with these hurdles.

            I will focus on the various different sources of financing, one by one, in future posts.  But here is a quick run down of the patchwork of financing options for social businesses. 

• Personal Funding – since social entrepreneurs believe in their mission, many invest their own savings in starting up.
• Government Grants – because of the social benefits of ceretain social businesses, government grants are potential sources of financing.
• Angel Investors – often times a very wealthy individual believes in a certain cause, and donates large amounts of money.
• Philanthropic Organizations – they may be reluctant to donate to for-profits, but a big source of financing for non-profits and some semi-profits.
• Venture Capitalists – they probably won’t invest in either non-profits or semi-profits, but venture capitalists are a huge source of financing for for-profits.  The most obvious example is the abundance of venture capital money in the renewable energy sector.
• Going Public – Once a social business gets big enough, it can list on a stock exchange and rapidly raise capital from individual investors.  But, this also brings risks, such as losing sight of the mission.

Since their is often a gray area of where a social business operates, many social businesses tap into two, or three, or many of these sources.  Having multiple sources of financing may allow for flexibility, but it also brings difficulty and uncertainty. 

Social Stock Exchange

In previous posts, I discussed the virtues of conducting your business in a socially responsible way, and examples of people all over the world doing so.  So, naturally, with all the financial upsides of doing good, it must be easy to reorganize and/or start your own business for social benefit, right?  No, of course it’s not.  In fact, even though there are tons of people out there trying to contribute to the world, it’s extremely difficult to start a sustainable business that also has a social mission.  Why?  It’s not because of a lack of ideas or motivation.  No, the single biggest obstacle preventing social businesses from getting off the ground is financing. 

Social entrepreneurs may have great ideas and great missions, but they often lack the capital to start their business, or to expand their business on a grand scale.  A big reason for this is the gray area in which social entrepreneurs operate.  All too often these businesses are seen as too business-oriented for donations from large philanthropic organizations, but too charitable for the average investor looking for a 9% return on his or her investment.  So, the result is that many of these social business ideas struggle, fail, or never even get off the ground. 

Raising capital for a business with a social mission can be incredibly hard.  Historically, their has been no shortage of venture capitalists that a startup can tap for easy liquidity.  But, if your main focus is not financial, it may be difficult convincing investors why it’s a good idea to invest in your cause.  Non-profits and semi-profits have historically had great difficulty rasing money for their objectives.  Not only are the fund raising processes very limited in the amount of money they can raise, but they are also incredibly inefficient.  How much time and resources are lost when day-in and day-out the head of a non-profit has to criss-cross all over the country seeking donations?  Or when a CEO of a for-profit social business has to reassure investors that their money is going to a good cause? Or a new startup needs financing?

Well, at the risk of sounding like an ardent capitalist, there is no place that is more efficient at raising large sums of money than private capital markets.  When a company goes public, on a listed stock exchange, they can rapidly raise very large amounts of capital, allowing them to grow and expand. 

One really intriguing development in the world of social entrepreneurship is the idea of a social stock exchange.  As Sarah discussed in her blog, the first social stock exchange was launched in 2003 in Sao Paulo, Brazil.  The ideas, according to its creator, Celso Grecco, is to make a “social profit”.  Any business that wants to be included in the social stock exchange submits their ideas to a board of experts, and if approved, it gets included into a portfolio of other like-minded initiatives, and sold to investors.  This allows investors to put their money in a stock exchange that supports good causes and also allows these investors to turn a profit.  It also provides the much-needed financial capital for social entrepreneurs to launch their businesses.   As Sarah noted, more than $5.5 million have been contributed to more than 71 philanthropic enterprises. 

Grecco’s idea is spreading.  South Africa opened a social stock exchange in 2006.  England and Germany are planning to open their versions this year, and more are in the works in India, New Zealand, Portugal, and Thailand. 

Connecting social entrepreneurs to  investors will be a major step forward in fostering the growth of socially responsible business ventures. 

*photo and article from Newsweek.  It can be found here.