Like any investment, there are certain risks to consider in social investing—including social impact, and the standard financial, and operational risks.
Investing for social good is an attractive prospect. One that appeals to both our sense of altruism and pragmatism. So it is no surprise that social investing has been making headlines and attracting record amounts of capital in recent years. So how can investors get involved?
Like any investment there are certain risks to consider and with social investing investors must be concerned with social impact as well as the standard financial, and operational risks. So, before you crack open that cheque book here are 10 questions you need to be asking:
Is there a defined social mission?
Clarification on the “what” and “how” of accomplishing the social mission will avoid future organizational breakdowns. For example, what is measured when a social enterprise says its goal is to improve livelihoods? What are the milestones to attain the stated goals?
Is the organization open to collaboration with other stakeholders?
Social issues are often complex problems that cannot be solved by one stakeholder. It is important that the social enterprise not only has a solid understanding of the landscape and the stakeholders, but also the drive to collaborate, learn, and influence others already working in the field.
How is the business model positioned to make the impact?
Social enterprises derive revenue from sales of goods or services, so it is important to understand the organization’s long-term vision for profitability and the extent to which profits are used to further the social mission.
Is there a market?
The fundamentals must be sound regardless of mission, so asking questions such as “Who is the target consumer?” and “What is the competitive landscape?” will help to assess the overall viability of the business. Ideas must be market tested and organizations need to have proof of concept.
How scalable is the business model?
Many great social businesses are highly successful in a contained environment, creating a marketplace in one small village or targeting a niche consumer. As an investor, it is important to understand the organization’s capacity for growth—be it through market penetration, geographic or product extension.
What are the historic cash flows and projections for the next three years?
Understanding an organization’s operational costs and revenue projections is critical to calculating your return on investment and the time in which this will likely happen.
What is the exit plan?
Some common forms of exits are government funding, secondary sales or acquisition. The social sector has seen few successful exits via initial public offerings for a social enterprise, outside of the renewable energy space. Additionally, social investors must consider mission-alignment to preserve the social mission.
Is the management team experienced?
Investing in a start-up is not too different from hiring employees. You want to take a look at their track record and expertise and make sure this aligns with the business and social mission. Certain intangibles like willingness to receive feedback, capacity for change and learning agility will be critical considerations as well. Being an effective social investor means going beyond writing a cheque to build the capabilities of the team.
Is there any non-financial capital that an investor can contribute to help develop the capabilities of the organization?
Think about your own strengths and how this can be leveraged to help the social enterprise. All investors should think of their network as capital and if you are willing to open your wallet you should also be willing to open doors for the organization—be it to forge strategic partnerships, find co-investors or open new markets.
And one final question that transcends the three risk areas: What are my realistic expectations of returns?
Much of the excitement around social investing comes from inflated expectations of market rate returns and huge social impact. While there may be some such cases, there is a reason this type of investing is said to require “patient capital”. Investors truly looking to achieve social impact are unlikely to see market-rate financial returns right away and there needs to be an honest assessment of the investor’s own expectations for social versus financial returns.
Naina Subberwal Batra is chief executive of Asian Venture Philanthropy Network (AVPN), Singapore. AVPN (www.avpn.asia) is a funders’ network committed to building a vibrant and high-impact philanthropy and social investment community across Asia.