Attention social entrepreneurs: What is the ideal engine for a social vehicle? And what fuel does it need to run efficiently?
Part 2 of the guest article by Christina Moehrle, originally published on Siemens Foundation Empowering People Network. Missed part 1? Read the first part of the guest article focusing on financing and business models here.
“The South”: The development stage
After roaming the wilderness for a while, social entrepreneurs often realize that neither their legal form nor their business model are set in stone. They can—and sometimes must—change over time. For example, some organizations start as a nonprofit and finance themselves through donations, grants, or unsecured loans. Later, they scale up and need different funding sources and legal structures.
Impact Investment
This is where impact investing often comes into play. But which is the right instrument? Equity is usually a good fit for early-stage social enterprises that have a high risk-return profile. Loans, on the other hand, are typically suitable for more mature companies with stable, predictable profits and the ability to reliably make interest and principal payments.
Mezzanine, on the other hand, can be a perfect fit for a social enterprise, which promises a somewhat slower growth path and less potential for high profits. In this respect, the direction your personal compass needle points also depends on the stage of your company's development. So, it's better to first determine whether your engine might run better with hybrid fuel before filling the tank with equity or debt..
„The East”: The social impact
The fate of pioneers can be tough. Innovative projects with high social impact potential aren't necessarily the darling of all investors. The more disruptive the business model, the riskier the future earnings and thus the returns for investors.
Not many social enterprises can offer both high social and high financial outcomes—at least not in their early stages of development. As a result, social entrepreneurs find it very difficult to access certain types of investors. Currently, the vast majority of them prefer a market-level financial return. This means they are essentially comparing the risk-return profile of a social enterprise with that of a traditional company.
Pay for Results
The good news, however, is that there are other investors as well: They prefer high social impact to high financial returns. Some of them therefore incorporate special incentive mechanisms into their models. For example, a social enterprise receives a financial benefit once it reaches predefined social impact milestones.
These so-calledannounced "Impact incentives or pay-for-results mechanismsanisms are additional hybrid variants that enrich the universe of social financing. And they make life easier, especially for social enterprises whose business models promise exceptionally high social impact.
Find your personal compass
After such an exploratory excursion into the forest of social financing forms, one may feel somewhat enthusiastic or even exhausted. It is best to focus on the four cardinal points – legal form, business model, stage of development and social impact.
Your own compass needle will then point you to the ideal route through the funding jungle. It's certainly not easy to see the forest for the trees. But social entrepreneurs with a sharp mind can receive a lot of support to fill their social impact engine with the right fuel for their grand mission.
Missed part 1? Read the first part of the guest article focusing on financing and business models here.
About the author
Christina Moehrle has been working as a freelance author and specialist journalist since 2012 with the mission of supporting social entrepreneurs and impact investors and bringing both sides together through increased knowledge of social finance. Since 2014, she has also been responsible for communications at FASE, the financing agency for social entrepreneurship.
