Scott Kupor has written a book about venture capital published in 2019 (“Secrets of Sand Hill Road – Venture Capital and How to Get It”). It’s really worth reading and he makes an observation which we can relate to. In his view, venture capital is a source of funding for companies that are not otherwise good candidates to get funding from other, more traditional financial institutions.
Social finance is a source of funding for social enterprises. Social enterprises have similar problems as we have outlined in a recent study:
Social enterprises display surprising features: banks often consider them too risky, while venture capital funds might consider their business models to be below preferred risk-return-profiles. The financing needs might be too large for microfinance, but too low for most other institutional investors. These features show the need for a dedicated social finance market.
We could take the definition for impact investing as a starting point. A commonly accepted definition by the Global Impact Investing Network states that “impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
This means that we would restrict our toolbox to commercial investments only. There are many family offices or foundations which follow the same strategic approaches as impact investors but use guarantees or grants. There is no reason to assume that they are fundamentally different. There are still selection processes, business models, impact models as well as cash flow models to be understood and agreements to be negotiated.
In our definition, social finance is an expanded toolbox and includes those instruments we see in the wider philanthropic space. Why should you restrict your toolbox to solve a certain social problem? However, it is also obvious that nearly all growth in this area is happening in the commercial part of it.
Social finance intermediaries use equity, debt, grants and combinations thereof. We have also seen revenue share agreements, recoverable grants or convertible notes. These instruments are provided by social venture capital or venture philanthropy funds, banks, crowdfunding platforms, or business angels. Check out our publications if you are interested in more details.