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Social Entrepreneurship

Premature Incorporation

Don’t let it happen to you.

I’m spending an inordinate amount of time these days talking social entrepreneurs out of launching for-profits. Many drank deeply of the impact-investing Kool-Aid, and came away believing that going for-profit is the only way to drive financial and operational discipline, that it will give them immediate access to much more capital, and that they will find the holy grail of sustainability while the deluded do-gooders who went nonprofit are still grubbing around in the bushes for donations.

It’s mostly bullshit.

Instead, a typical scenario goes like this: Social entrepreneur has cool idea. Social entrepreneur launches for-profit venture with own/friends’/family’s dough, maybe even gets a chunk or two of seed funding. Hard work ensues. Money runs out. Venture is nowhere near ready for real investment. Venture goes off a cliff.

Sure, there are exceptions. Sometimes those revenue projections turn out to be accurate. Sometimes the entrepreneur is ridiculously good at raising money. Sometimes they just get lucky. Mostly, though, it follows the script, and here’s why: Social entrepreneurship is largely about overcoming market failure. That is a lengthy and expensive undertaking, and even if you manage to pull it off, the result is rarely lucrative—and the more profound the social impact, the more expensive and less lucrative it’s likely to be.

It’s expensive because there is usually a ton of R&D to do before you emerge with a viable business model. It’s one thing if you’re just tweaking a proven microfinance model or adding a mobile platform—wow!—to something that already works. It’s another thing entirely if you’re tackling a big problem in a new way, in a place where markets don’t work very well. You’re going to need a lot of runway to go through all the iterative cycles it will take to end up with something that makes sense to people who expect to get their money back.

You need—and ought to get—free money to do it. Philanthropy, done well, is about making good things happen that wouldn’t have happened otherwise. When you come up with a high-impact solution that can spark a new industry, that’s a public good. I used to think that spending philanthropic money on something that someone else will someday make money from was somehow unethical. I was wrong. When you can make the case that it generates big social impact that wouldn’t have happened otherwise, it’s a home run for philanthropy and something that we ought to be searching for.

But if you launch right away as a for-profit, you’ll likely end up an orphan: Philanthropists won’t know what to do with you, and investors will rightly view your firm as a lousy place to put their money. You’ve made it hard for philanthropists to give you grants, and you offer investors an unlovely combination of high risk and low returns. In short, you’re screwed.

Some point to hybrids as an answer. I don’t like them. Trying to remember their convoluted structures is like waking from a dream—after a few moments of clarity, the whole thing slips away. Worse, they too often succumb to the temptation to dump all the questionable parts of the business model into the nonprofit side. Aside from the inherent lameness of that, the result can be a sort of stealth-subsidized business model that will never scale. The other big problem with hybrids is that if one side of the arrangement bombs, it pulls down the other—and in any case, the two sides rarely grow at the same pace. I’ve seen a few hybrids that work well—typically with the nonprofit side focused on R&D to drive new impact—but by and large, I think they’re messy one-offs.

I’d like to see a sequential approach become the norm: If you have a potentially high-impact new idea, you start out as a subsidized nonprofit that is focused on developing a scalable business model worthy of real capital. If you manage to get there, the organization flips into a for-profit and raises money from investors. The emerging business must be structured to ensure that it stays on mission, but that can be managed. We haven’t worked out all the kinks yet, but it’s cleaner than the alternative and more likely to produce a business that really can scale via the market. All we need to make it work are philanthropists and investors who know their jobs and are willing to try something (kind of) new.

And if your impact is profound but your breakeven point stays over the horizon, you can simply remain a nonprofit. You can’t sell equity, but you can get grants and cheap loans. Grants are free money, and zero-interest loans to nonprofits are not unheard of. Better a struggling nonprofit than a dead for-profit, and given the overall performance of social enterprise equity investments so far, would-be impact investors might want to save themselves a headache and just give you the money instead. They probably weren’t going to see it again anyway.

As weird as it sounds, for your lovely idea to survive and get to scale, you may need to dodge the world of impact investing for a while. Remember all that patient capital that was supposed to show up for all you and your fellow social entrepreneurs? Most of it was so lacking in urgency that it never left home. It probably never will show up: It doesn’t make philanthropists feel good, and it doesn’t make investors feel smart. Given that, you might want to stay in a cozy nonprofit burrow until your business is strong enough to survive above ground. When—and if—you do poke your head out, keep in mind that the right financial structure is the one that provides the best path to the maximum social impact. Nothing else really matters.

Read more stories by Kevin Starr.

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COMMENTS

  • BY Michael L Wyland

    ON December 11, 2012 04:27 PM

    I find myself offended and somewhat agog at the know-nothingness of this column!  Grants are “free money”?!?  If we finance an idea with other people’s money and it’s a money-maker, ditch the nonprofit and cash in?!?  And what, exactly, is a “subsidized” nonprofit?

    BTW, nonprofits are corporations, too.  They have governing boards, legal obligations to federal, state, and local governments, not to mention the need to be sustainable (meaning that revenue and expense need to be in balance).

    Wow!

  • BY Garland Doyle

    ON December 11, 2012 06:00 PM

    I agree with Michael.  I am offended too.  After reading your post, I get the impression that social entrpreneurship is a way to get the public and philanthropy to support your business concept before it viable for the free market.  This is deception.  It makes me leery of the whole social entrepreneur concept.

  • Joshua P.'s avatar

    BY Joshua P.

    ON December 11, 2012 10:23 PM

    Dear Michael and Garland,
    I think you may have missed Kevin’s point and underlying assumptions. We are not talking about your run of the mill NGO. These are generally highly driven young people who passed by promising careers working for some big financial consulting firm or other six figure job; so great was their desire to create positive social impact through business structures.

    This is the underlying assumption here, and the discussion is about the best way to achieve that impact at some real scale, not one grant at a time. Giving money to smart young folks trying to figure out ways to solve the many real issues in the developing world is not deception, its just another way to put philanthropic money to use. You can pay to drill 3 wells, or pay to work on a solution that might drill 1000 wells.

    Also, if you are actually able to build an idea to the point of potential profitability (i.e. sustainable), it’s not cashing in to turn it in to a viable business. I’ve worked for non profits that should have been businesses, but didn’t have the balls to enter the free market.

    On the other hand, I hope Kevin is wrong since I started my social venture as a for-profit rather than taking his advice smile

  • BY Gayle L. Gifford

    ON December 12, 2012 09:52 AM

    I’m with MIchael and Garland on this.

    Joshua, it is that attitude that you’ve expressed here, that most nonprofits are “run of the mill’ run by run of the mill people, instead of those “generally highly driven people who passed by promising careers…” that has put a truly bad taste in my mouth for many who have deemed themselves “social entrepreneurs”.

    I work with extraordinarily talented, extraordinarily driven, nonprofit leaders every day of the year. People who have made incredibly innovative strides in mitigating many of the failures of government and lack of political will that will actually solve many of the world’s problems instead of searching for some product solution. Or create something of beauty. Or care for people who need caring for. Some of those are locally based and their brilliance is their ability to adapt to the local needs and situation and to know that their solution won’t work elsewhere. Others do and can work at a larger scale.

    If you want to be in business for yourself and realize the wealth of your enterprise, then be a for-profit business, even if your goal is something of social value. Be a socially responsible business. I am terribly afraid that if we develop a whole industry of people ripping off philanthropy for private gain,  there will be no philanthropy left. And there is too much at stake both here in the US and worldwide for us to lose philanthropy.

    Not to mention guys, that developing revenues for a charitable organization is just as hard work, takes just as much talent and maybe even more so, than a for profit enterprise. At its core, you have got to convince people to invest in your organization without expectation of personal gain. Grants are not “free money” waiting for someone to snatch it up. I’m actually surprised to hear a so-called social entrepreneur promote philanthropy as most of the time I’ve heard social entrepreneurs disdainfully call philanthropy “begging.” Which I also find terribly offensive.

  • So help me understand the comments above… if a highly motivated talented person raises a grant for the non-profit she works for to pay her salary, she is saving the world, but if the same highly motivated talented person raises a grant to subsidize a commercial venture with enormous potential social impact but equally enormous early stage risk, she is ripping off philanthropy for private gain? I thought she was also privately gaining when she was taking her salary from the non-profit. This way of looking at the world just doesn’t add up to me. Most entrepreneurs will be paid far more in salary than they will ever cash out in equity, which makes them a lot more like non-profit employees in a funny way.

    An effective philanthropist is an investor in impact first and foremost. If they are an open minded investor, they will look at for profit, non-profit, market catalyzing, collaboration, and any other way they can get the highest leverage for their dollars. Many people in the philanthropic space have never been in early stage commercial startups, and they don’t realize just how much risk exists and how unlikely a big return actually is. Multiply that by 10x if you are selling to poor people in a country halfway around the world. Surely if the idea is good, supporting the entrepreneur through early stages presents a huge potential social ROI.

    I do, however, think that smart philanthropy should seek counsel from people who understand commercial investing. Follow on in an investment round rather than leading it. I can see the place for grants in early stage commercial ventures, but those should be rather narrow, and limited to things like R&D. If you’re going to provide a grant, I would suggest at least requiring matching equity/debt to be raised. Or even better, become an equity or debt investor as a PRI. Then funds get recycled if the venture is successful - nobody is being taken advantage of. I personally love the fact that foundations are equity investors in my current venture - if we succeed personally, we will also be automatic philanthropists through money raised for our foundation investors.

    The social entrepreneurs I’ve seen who have actually started an economically attractive for-profit in the developing world have usually started a successful for profit company before, usually in their home country. It is f—-ing hard to make a profit anywhere in the world, even if you don’t care at all about social impact. The best, like Jay from Bridge Academies, cut their teeth for a decade in business before trying something in the developing world.

    From what I’ve seen lately, social entrepreneurs like Jay are the vast minority. Lots more are what I call FPINO’s - For Profits in Name Only. They will never make their investors any money. I feel that way about a lot of tech startups too, so it is not exclusive to social entrepreneurs. But thinking a 25 year old with a degree from a good school but no prior entrepreneurial experience (maybe they have a degree in anthropology?) can show up in Kenya and actually make money selling to poor people - that is an impact investor fantasy. It will take them 5 years just to learn how business actually works. Business is difficult. I have been an entrepreneur for 20 years and I’m still learning every day.

    The guys who did it the right way on the non-profit side are people like Andrew Youn from One Acre Fund - he’s a very business minded guy and his organization has an earned income model that will eventually be self-sustaining. But if he had started as a for-profit, he would have had a tremendously tough time raising early funding and proving his model, because what he does is difficult and expensive, but tremendously innovative and valuable for his beneficiaries. The commercial risk/return profile would just not have been there. He also may have had to push his prices outside of the range his customers could afford, dramatically reducing his impact. Instead, he started as a non profit and has scaled extremely fast. His work may eventually inspire the for-profit sector to replicate his model. The result would be millions of poor rural farmers dramatically increasing their yields. Surely this is a home run return on social investment.

  • Kevin Starr's avatar

    BY Kevin Starr

    ON December 12, 2012 05:25 PM

    Michael, Garland, and Gayle - thanks for your comments.  Your points are important ones, and the juxtaposition of “agog” and “know-nothingness” is fun.

    A couple of clarifications.

    This piece is about that subset of organizations trying to take a high-social-impact product or service to scale via the market – something that is a big part of the overall SSIR conversation.  I’m talking about a specific funding problem that Sasha Dichter et al articulated and discussed beautifully and at length in a recent post: http://www.ssireview.org/articles/entry/closing_the_pioneer_gap.

    You may not have noticed the frequent use of phrases like “high-impact,” “profound impact,” “on-mission,” and “maximum social impact-nothing else really matters.”  These qualifiers are critical: We’re only interested in profit as a route to impact.  As it happens, in my own focus area – extreme poverty – most of the highest-impact solutions are non-profit, but we can’t afford to ignore the huge potential of the market for impact at scale.

    As to anyone getting rich:  If only.  How cool would it be if the guys at Komaza got rich while helping some of the world’s poorest people make money from micro-forestry, or those at Off-Grid Electric scored big for lighting up the homes of rural Tanzanians?  Sadly, there isn’t a lot of money to be made – yet – solving the big problems of the world’s poorest people.  I’ll say it again, though:  as long as the process is transparent, I’d be delighted if we subsidized the development of something that had a profound impact on poverty and someone made a ton of money taking it to scale.

  • Google Ventures’ analysts found that first-time entrepreneurs with VC backing have a 15% chance of creating a successful company, while second-timers who had an auspicious debut see a 29% chance of repeating their achievement.  Why should the initial odds for high-growth social entrepreneurs be any better, especially in places where markets don’t work well?

    All good entrepreneurs, socially minded or not, benefit from experience.  If young, idealistic SV entrepreneurs with limited experience were offered the chance to have training wheel financing for their companies where they could receive with a grant or inexpensive debt to be able to nail the business model which they could then use as a platform to raise VC capital, would they be more likely to succeed?  According to the statistics above, probably.  Of course geography and market play a large role in that as well, but to me that comes down to experience.  If you have tons of experience in growing a business, you will likely be able to apply many of those lessons to a new market or culture.  If you have tons of experience in working in a specific market or geography, you will likely be able to apply much of that experience to growing a business.  Without experience in either category, you will make more mistakes and will be more likely to fail no matter how good your idea is.  The logic seems pretty straight forward. 

    What I haven’t seen happen often is an A+ non-profit manager/director turn into an A+ high growth entrepreneur overnight.  Raising grant money is not really the same skill set as raising venture money (although of course some of the salesmanship overlaps).  For this reason, Kevin you might find yourself with successful non-profits, structured as non-profits, trying to raise venture money.  I think there is an argument here, as Xavier suggested, to give grants or PRIs to companies to focus on pilot or R&D phases with the aim of incubating companies to be investment ready.  As a co-founder of a social enterprise in Tanzania positioned for growth, I have seen funders starting to be more open to this.

    At the end of the day, venture and successful impact investors are going to invest in the team for the most part.  A good team requires experience.  If growth is the one of the key measurements of success for impact investors as Kevin suggests and as I believe, the day will come when passionate, mission-minded entrepreneurs are replaced as CEOs by their impact investors for not managing growth well and the business and its impact will continue to grow. Founders of non-profits don’t often find themselves getting the boot to get out of the way of their idea’s ability to impact poverty or climate change. 

  • BY Michael "Luni" Libes

    ON December 13, 2012 03:58 PM

    If there is a plan for a self-sustaining company, then taking the side trip down the non-profit path seems a risk and loss of focus.  It seems far better, safer, and easier to start the startup as a Benefit or Social Purpose Corporation (or Certified B Corporation), aim for investors and profits, and wig any potential grants at available, either take them directly or partner with an existing non-profit.

    Focus is a key to success.  Ideas that can generate a return should focus on investors.  It’s then far easier to explain to any investors why you took a small grant or donation as “non dilutive” capital, vs. trying to explain a flip from non-profit to for-profit status.

  • BY Jason Aramburu

    ON December 13, 2012 04:08 PM

    Thanks for the article Kevin. Increasingly many philanthropies are making grants/investments to early-stage for-profits with a clear social mission.

    I’d counter from my own experience that it’s sometimes easier to convince top tier engineers or biz dev professionals to join your super early stage social enterprise if you can give them equity. This becomes more complicated when you’re incorporated as a non-profit with vague plans to go for-profit.

  • Is it necessary or helpful for us to remain imbedded in our view of the world as having distinct sectors (e.g. private vs. not-for-profit)?  The lines separating them are no longer clear.  Organizations with a wide variety of legal forms have to be mindful of their mission and their marging.  By mission, I mean a mission that is not purely self-interested but socially or collectively valuable, and by margin, I mean the financial well-being that influences survival, adaptability and growth. 

    Instead of thinking of mission and margin as opposites, let’s think of them as two dials.  The founders and key people in organizations determine how much to turn up each dial.  Some not-for-profits turn the mission dial way up and turn the margin dial way down.  They may struggle to get by but do a lot of good within their niche.  Some not-for-profits turn the mission and margin dials up high and invest as much time, energy and money into fundraising as they do into their mission.  It’s important to know here that the average not-for-profit does NOT subsist on grants and donations, but has some 40% of its resources coming from earned revenues.  Some for-profit businesses turn both dials up high (this is a key characteristic of B Corps), and some for-profit businesses turn the mission dial down and focus on the margin.  These latter organizations might do a lot of philanthropy, but this is separate from their mission, which defines the reason the organization exists. 

    Some of this conversation seems to be about who has the right to access which sources of capital, but the world is changing.  Throw away your assumptions about how organizations of all kinds “should” be funded.  Before we had highly organized capital and philanthropic markets, social missions still got accomplished.  Our question as a society should be how best to make sure financial resources flow to the organizations that are providing value that we collectively need or care about. 

  • steve carlson's avatar

    BY steve carlson

    ON December 13, 2012 08:20 PM

    Kevin hit a home run with this article.  Sometimes you just have to talk straight.  There are a lot of failures in this space, including a many highly publicized ventures that are run by cool, skilled, motivated people who are just under resourced, don’t grasp the extent of market failure, or can never find risk capital to get out of the blocks with.  For some of them, the route Kevin suggests would have make all the difference.

    Kevin and many others are also pushing some very significant buttons with these kinds of articles.  They are challenging our philanthropies to step it up and look for ventures to support with grant monies that might later scale through the market.  If we can wake that sleeping giant, it could both dwarf the current Impact flow and fill a pipeline for later stage Impact deals that actually work.  That is a system that can scale. 

    Great case studies here:  http://www.mim.monitor.com/blueprinttoscale.html

    Listen to your elders and keep up the great work.

  • BY Gayle Gifford

    ON December 14, 2012 02:45 PM

    Scaling or not, high impact or not, under resourced or not, for me this article still flips on the ownership question. In the 501(c)3 there is No Private Inurement. Yes, people can get paid well for services performed. But the investment by other philanthropy in those organizations is part of a social contract that says that society itself will own the assets of that investment, and hold those assets for the continued benefit of the public good. And the governance model, as imperfect as it is, is designed to represent the interests of society above all else, above all personal gain.

    This is just not the same for the for-profit enterprise. I for one, am very very timid about blurring the lines between private ownership and public benefit. I don’t see the for-profit sector with a history of responsible action over the long haul. I don’t think we’ve even seen enough long-term commitment to socially responsible business practices, never mind the boundary blurring. We wouldn’t be worrying about searching for some innovation to solve societal problems like poverty or climate change if the business world had commitments to the viability of their communities above profit, to paying a living wage to their employees above profit, to not externalizing the costs of their pollution and waste in the name of profit, to not ditching their pension funds in the name of profit, to not opposing the taxes that support investment for the public good,  etc etc.

    Yes, yes, socially responsible business is what B Corps are supposed to be, but I am still unclear on what happens when the owners decide to go public, or sell their corp?

    Experimentation is great, but why does that have to be done with philanthropic dollars (that “free grant money” Kevin discussed). Ironically, there are hundreds (probably thousands) of nonprofits out there that could use scaling themselves, having already created proven innovations. And imagine the power of advocacy organizations in creating desired social change if they actually had the cash at significant scale to have the impact on the political process that most only dream of.

    My guess is that there are significantly more resources available in the for profit sector for investment in start-ups or scaling than there ever will be in the nonprofit sector. So why not let nonprofits keep on keeping on with the philanthropy they work so hard to build and protect, and let the social entreprenuers who can’t let go of private inurement as an essential motivation for doing good by society to stay for-profits and find their money in the for-profit sector. Which is supposed to love this for-profit social enterprise model right? So why is the challenge to find investors in these businesses so hard that they have to turn to philanthropy for support?

  • Todd Broadie's avatar

    BY Todd Broadie

    ON December 15, 2012 12:11 PM

    As a person that is currently starting a new project that truly fits neither for nor non profit structures (and has been involved in successful startups in both forms) this is fascinating.

    I’m researching both Benefit Corps and L3C’s, but this is the first model that truly might make sense for what I’m trying to do.

    Tell me more!

  • BY Daniela Papi

    ON December 21, 2012 09:19 AM

    Let’s hope the Off.Grid:Electric team does prove you wrong, Kevin. They’ll not only make a lot of money themselves, but in order to have done that, they would have to light Tanzania and beyond.  They just might do that actually…. and if they do get there, they’ll know they made the right choice overall to be for profit, as they wouldn’t have been able to gain the type of investments they are going to need otherwise.

    Should they have started as an NGO, as you are suggesting? Though I do agree with your point that many of the highest need problems have are addressing the largest market failures, hence the biggest need for subsidies, I also agree with Xaviers point that, in businesses like theirs, donated funding feels most ethical to me on the R&D side. With businesses that need a longer incubation/R&D/trial period, further NGO funding might make more sense.

    It’ll be interesting to see where all of these social investments end up. With so many social impact funds opening, and many struggling to deploy their capital for lack of viable businesses which check all their impact, scale, and returns boxes, over the next ten years we’ll likely end up with a lot of “patient capital” that hadn’t intended on being so patient and “social” investments with limited impact. Let’s hope more than a few Off.Grid-esque companies do break through, lighting Africa, growing a billion dollar business, and perhaps making many of the other failure investments and these debates worthwhile.

    Jill - sing it sister. As Kevin pointed out, we should be focusing on impact and “nothing else really matters.” Each impact start-up should be choosing the legal structure that will give them the highest likelihood of impact success. When an organization I was with was trying to decide if we should be for-profit, non-profit, or hybrid, as wise serial entrepreneur said “Why are you spending so much energy on this? Worry about achieving the goals you have set out. Let the lawyers advise you on what the best structure is.” He pointed out that some of the businesses he had founded has many layers of legal structures, but that was all secondary to the fact that they had to run a solid organization that was filling clients needs. Yes, people will take advantage of their supposed “impact” to get free or discounted funding for their businesses, but we’re not debating the best path for greedy unethical people to take. I assure I have come across many more people getting rich of lying about their NGO work than in running corrupt social businesses, as it’s a lot easier to trick donors into supporting you fake NGO than getting ongoing investments in a failing business.

    Gayle, I am not going to run out and hug an oil company, but where you say “I don’t see the for-profit sector with a history of responsible action” I’d in turn argue “I don’t see the non-profit sector with a history of large scale impact” as they have been “fighting” many of these issues for decades, and some of the problems have only gotten worse. I’d bet my money on a for-profit solar-as-service company any day over an NGO donating panels, that is if I wanted those panels to be working a few years after someone took the donor hand-off picture.

  • BY Daniela Papi

    ON December 21, 2012 09:25 AM

    (Ahh…. this is what life was like without auto-correct! Next time I’ll try to re-read my post before clicking submit. It can be a holiday party game: drink a gulp of eggnog for every mistake in my comment above!)

  • I’m not going to argue for or against the underlying ideologies of the commenters above—it’s too bloody tiresome, boring, off-topic.  More importantly, everyone’s entitled to have their own beliefs and religion.

    The singular point made by Kevin is very clearly articulated in his article’s title: “premature incorporation”.  It is a problem.  It deserves being noted.  You can make more or less of it, but it’s an accurate and valuable admonition for eager young folks to heed.  Social entrepreneurs of any age and those who would feign support their valuable outcomes should take this advice IF they are interested in achieving actual results in society. 

    Others that weigh in and argue rhetorically offer less useful insight to the social entrepreneur who mostly seeks operational value—what do I do now?

    I would go further to say cautions against “premature incorporation” should also be heeded by all social entrepreneurs invested in starting any social impact producing organization—whether charitable, blended or for-profit.  Delay, delay, delay incorporation (and all other fixed costs and headaches) until everyone is begging ready, willing and able to make the enterprise work with other people’s money—whether from funders, customers or both. 

    Charitable, blended and for-profit enterprises are ONLY ever sustainable with OTHER PEOPLE’s money (even the wealthy philanthropist can never be entirely self-funded—those charitable dollars are granted by the greater public through tax free concessions). 

    So the admonition to entrepreneurs everywhere to avoid premature incorporation is valid and valuable—loose the ego in starting something and getting a formal title and instead keep the cash until others actual place value on what you started…that’s the social impact ever company needs to achieve.

  • BY Gaston Bilder

    ON January 9, 2013 03:19 PM

    Rob,

    You seem to imply that you should avoid at all costs “premature incorporation”. I have a contrarian view. If only sustainable projects/entities where launched, then the pace of innovation would be much slower (or eventually disappear).  Whatever seems to be sustainable (profitable, self financing, etc.) one day may cease so to be tomorrow.

    The fact that somebody else is willing to risk money in you, means that as an entrepreneur you are diversifying your risk, i.e. even if the project that you have been financing so far out of your own pocket goes sour, you may keep some cash to enable you to start anew tomorrow.

    @gastonbilder

  • BY Robert Pekin

    ON January 30, 2013 01:08 PM

    Loved this article, thanks for sharing your no bullshit thoughts Kevin

    I am a serial Social Entrepreneur with over 15 years experience and it’s only in the last seven years that I have started to really see the rubber hit the road. I also mentor quite a few new SE’s in my spare time.

    I’m going to have one leg on each side of the barbed wire fence on this one as whilst I found myself nodding enthusiastically to a lot of what was expressed I also cringed a little about some of the generalisations. However the point was clearly made, keep an eye on the numbers and be cautious of big loans, grants and venture capital until you have a good handle on your innovation and see a clear strategy to fulfil on your impacts over time. Dont try to realise your ideals straight away

    The only thing I would add and it’s an important add in this context is; Work on yourself!!!! No structure is ever going to keep you disciplined except the structure you have around yourself. At the end of the day it is how you hold yourself accountable to your own conscience and how you communicate that to your whole team (external as well) will be the only thing that counts.

    That being said we do need (at least here in Australia) better legal structures and tax incentives so that less time is consumed in trying to choose the right structure.

    This sector is in it’s very early days and needs a deeper approach to mature those institutions around around us in order for social enterprises to flourish. That will only come from deep robust conversations with all those that wish to support you.

  • BY Anais Tuepker

    ON March 7, 2013 09:44 AM

    Great insights, Kevin - your observations on the impact investment sector rang true to my experience trying to launch a social venture, and I’m so glad to know someone with longer experience and a broader perspective sees those ecosystemic flaws in the funding opportunities truly available. Many thanks and keep it up, please.

  • Kevin W. Crean's avatar

    BY Kevin W. Crean

    ON March 7, 2013 03:15 PM

    Like Anais I found Kevin’s observations to be spot on—unfortunately so, since the organization I co-founded, OneRoof, may have been in mind as an example of a premature attempt to scale based wholly on private capital.  (In the interests of full disclosure, I was a Rainer Arnhold Fellow 2005—07 and the for=profit I was involved with, despite more than $7 million in private capital, mostly went down to ruin after a few short years.) 

    What I learned through my OneRoof experience can largely be summed up by what Steve Blank and others are now teaching for-profit entrepreneurs:  you aren’t presenting a business model to investors.  You’re searching for one.  There are so many hypotheses in a business model that it can hardly be otherwise, no matter how smart you are.  Your job as an entrepreneur, then—at least in the early stages—is to methodically verify the bases for your guesses and to “pivot” when you realize that you just didn’t know what you were talking about with respect to (fill in the blank:  distribution, segmentation, time to commercialization, etc.). 

    The really bad news?  The early stage lasts several years.  (And if you don’t believe me, go ask Paul Polak how long it took him to put together a simple treadle pump that could be profitably sold into the South Asian market (by the way, initial designs for such a pump had already been invented).  Dr. Polak thought nine months.  Tops.  The reality was something closer to nine years. So there’s an ethical issue as well as a legal one if you go to the capital markets too soon or with too fuzzy an idea as to where you are in terms of maturity, i.e. product market fit with respect to each “cell” on Steve Blank’s “business model canvas.” 

    Oddly, for the most sophisticated philanthropists, the financial loss occasioned by a poorly performing for-profit might not be terribly out of line with the tax write off investors get from a donation to a 501(c)(3), so the measure of failure may not primarily be financial.  On the other hand, when the doors to private capital shut, they tend to close rather firmly.  So it’s as much about protecting your credibility for further funding down the road as it is about protecting investor capital.  In terms of building a viable social enterprise field, it’s also about retaining credibility with funders, whether they be investors or philanthropists, because many wear both hats.  While both an investor and an entrepreneur can be deluded about an investment, one mostly remembers the projections not being met.  It’s called attribution bias.  It’s not fair, but it is very real.

    As academics like Andrew Hargadon at U.C. Davis have shown, real innovation is decidedly non-linear and sometimes comes right out of left field.  As often as not, it’s more or less cobbled together by entrepreneurs who not only ride off the failures of those who went before, but who—with real creativity—deploy that prior “failure” in a new and different context.  I mention this because the implicit promise of “impact investing” is that the investor is presented with an opportunity to invest in a year nine enterprise, so to speak.  Yet how often does a business model offer both a stunningly new twist and the kind of empirical evidence that would justify the investment?  I think that by definition this happens not very often. It seems to me that Kevin’s rightly worried about what happens when a number of those “impact investments” go bad.  Expectations for impact investing have been driven up for any number of reasons, not least because we all would like to see some breakthrough in the field of social enterprise that’s faster and easier than what we’re currently doing.  I agree with Kevin’s perspective in part because these sorts of expectations are perfect not for the building of a field, but for the creation of a bubble.  And bubbles tend to burst.

    If there’s a center of gravity to Kevin’s observations, I think it might be this:  this sort of work is extremely difficult.  No sense sugar coating it.  Impact investing may be a worthy effort; however, if investor expectations are not handled correctly and honestly, “impact investing” may be viewed soon as nothing more than a nostrum.  And that would be a shame for those who need impact.

  • Sarah Alexander's avatar

    BY Sarah Alexander

    ON June 11, 2013 11:55 PM

    My immediate impressions are why are we deliberating how entrepreneurs need to shape up so that they can attract investors or philanthropists. Why is the focus on how these investors need to feel “smart” and “good” be the reason why entrepreneurs turn topsy turvy navigating the right structure to start with. I think there needs to be a fundamental shift in the conversation to what investors need to change about their expectations on market failures, high risk and low returns. In its true form that is impact investing. Currently we are dealing with investors who masquerade as impact investors but really are nothing more than a notch below commercial investors.

    A for profit structure brings certain advantages which is why increasingly more entrepreneurs are leaning towards this model. However the challenge is the lack of appropriate financial instruments tailored to the needs of these guys. This needs to change. Practitioners need to speak up about what works for them and the impact investors circles need to think about how their monies can be combined to provide value. Of course we need to develop conditions where the entrepreneur is no racking up high overheads because of low cost funds.

    For too long financing has been looked at from the perspective of investors and I think that discussion needs to change course and impact investors also to be scrutinized and think about appropriate financial instruments that truly benefit the entrepreneurs.

  • BY Vijay Swaraj

    ON July 12, 2013 09:54 PM

    GLOBE is Registered Under Indian Trust Act 1882.F.C.R.Act.2010 & Income Tax Act 1961 section 80g & 12aa. GLOBE work for all round Interigrated development in Bihar(INDIA) Request to you kindly permission for our Trust GLOBE.

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