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Brain circuits

3 steps to scale social entrepreneurship

Published 31 March 2022 in Brain circuits ā€¢ 2 min read

Social entrepreneurship is increasingly recognized as an innovative and sustainable approach to development, job creation and poverty alleviation. Philanthropic impact investors play a key role in building the social enterprise pipeline ā€“ from start-up to scale-up. Ā 

Philanthropic impact investment helps social enterprises transition into sustainable organizations that unlock social innovation. It diverges from charity since there is often some expectation of financial return and a focus on market solutions, which boosts the likelihood of long-term sustainability.

However, philanthropic impact investors take a ā€œpatient capitalā€ approach and do not systematically expect the financial returns associated with traditional venture capital.

Put yourself in the shoes of a philanthropic impact investor. What mechanisms would you leverage to help scale social enterprises?

Now compare your answers with these 3 key mechanisms used in the industry:

  1. Advising: Like venture capital, philanthropic impact investors provide important value-added services such as:

(a) contribution to strategy and governance (e.g. board seat)Ā 

(b) leadership mentoring and development

(c) helping social enterprises professionalize (e.g. human resources, accounting, marketing and communications).

  1. Funds with additionality: The additionality principle encourages investors with scarce capital to concentrate their investments where they can make a difference. Brest and Born (2013) argue that impact investing must improve a social or environmental outcome more than what would have otherwise occurred.
  1. Ecosystem building: Fulfilling a networking and support role to facilitate connections between investees (and other potential investors). Creating a community of social entrepreneurs not only helps to navigate the common challenges of scaling a business but also provides a sounding board and learning opportunities to identify strategies for crosspollination. Ā 

Finally, here is a poll question, to get you thinking about the most important aspect of philanthropic impact investment, as you see it. Choose one:

  1. Enterprise buildingĀ by playing an active role in the governance of social enterprises
  2. Bridging theĀ gap between traditional philanthropy and commercial capitalĀ 
  3. ProvingĀ patient capital to social enterprisesĀ with a longer time-horizon
  4. All of the above areĀ equally importantĀ 
  5. Other: (please specify)

Feel free to post your answer in the Comments section below.

Further reading:

Read more about how inclusive capitalism can address absolute poverty and further keys to success for philanthropic impact investing.Ā Ā 

Authors

Vanina Farber - IMD Professor

Vanina Farber

elea Professor of Social Innovation, IMD

Vanina Farber is an economist and political scientist specializing in social innovation, sustainability, impact investment and sustainable financeĀ with also almost 20 years of teaching, researching and consultancy experience, working with academic institutions, multinational corporations, and international organizations.Ā SheĀ is the holder of theĀ elea Chair for Social Innovation and the Program Director of IMD’s Executive MBA program and IMD’s Driving Innovative Finance for Impact program.

Patrick Reichert

Research Fellow at the elea Chair for Social Innovation

Patrick conducts research at the intersection of entrepreneurship, finance, and social impact, with a particular focus on the mechanisms and logics that investors use to seed investment in social organizations. He is a research fellow at the elea Chair for Social Innovation.

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