Ashoka Ireland: Funding social change requires a new business model
The Irish branch of a global organisation is helping bring finance to some of the world’s most dynamic social entrepreneurs
A different approach to funding and lending to social enterprises is at hand, as many thousands worldwide operate in a commercially viable and sustainable way
Of the many challenges facing social enterprises, finance is possibly the biggest. This is not surprising. They don’t, after all, usually run on normal business lines. Instead of actually generating cash from their own activities, they seek philanthropic and charitable donations to support their missions.
This model has little appeal to lenders or traditional investors, who want at least a reasonable prospect of getting their money back with some return on it on top.
“We have found that the biggest barrier to them scaling up their enterprises is money,” says Mizzoni. “Ninety-nine percent of the time, the enterprises started as charities or not-for-profit organisations dependent on grants or philanthropy. The social entrepreneurs end up spending nearly all their time trying to keep their heads above water and trying to raise funds to pay their teams and so on.”
The problem is often exacerbated by the way the social entrepreneurs see themselves and their work.
“Social entrepreneur is a description which is foisted on many of them,” says Sir Steven Wilkinson of the Ashoka Ireland Social Finance Committee. “Most of them are mission- driven individuals, and they have organised their enterprises to deliver on that mission.
“It is often the case that the social entrepreneurs themselves, particularly the older ones, would see running their enterprise on business lines as antithetical to their beliefs – almost a heresy.”
But a new breed of social entrepreneur has emerged in recent years, according to committee member Maura Moore .
“These modern social entrepreneurs want to make a social impact by putting people and communities ahead of private or personal gain while operating in a commercially viable and sustainable way,” says Moore, who is head of professional services and non-profits with AIB.
This has opened the way to new thinking on financing social enterprises.
“Social finance is a different approach to funding and lending to social enterprises,” Mizzoni says. “It means making investments in organisations which provide a social dividend as well as a financial return. It is neither a for-profit venture or a charity – it sits in between the two. Ashoka has been pioneering this internationally for the past five years, and we are now bringing it to Ireland.”
The concept is one where the investor or lender is willing to accept a lower rate of return on the basis that the social impact of the enterprise involved offsets the reduced gain. Mizzoni says investors will accept rates of return as low as 5 per cent. This contrasts sharply with private equity funders in traditional businesses, who usually look to at least double their money over five years.
If the social dividend is great enough, Wilkinson says investors might even willing to accept a slight loss on their capital in some cases .
“The social finance ecosystem is still in its infancy in Ireland which Ashoka Ireland and others are addressing,” Moore says. However, there is a “growing awareness of it among donors, philanthropists, foundations and funds as more role models of social enterprise gain momentum and business schools produce more social entrepreneurs.”
Investors, business leaders and government, Moore adds, “generally accept that having a desirable social impact will likely mean making a lower rate of return. They acknowledge, in effect, that there is a cost to having a social impact, particularly if it involves experimentation and disrupting the status quo.”
Work is needed to establish the concept of social finance in Ireland, she says.
“Significant education and awareness is needed before social finance – often involving hybrid instruments with debt and equity features – goes mainstream. Financiers may require commercial viability, operational sustainability and some clear social benefit. Investors, foundations and investment managers will also wish to make prudent investments that have societal impact and a financial return without fear of facing a tax penalty.”
These challenges are by no means insurmountable. AIB has been in a position to back social entrepreneurs such as Michael Kelly, founder of Grow It Yourself (GIY), a social enterprise that helps more some 150,000 people and 5,500 food projects, schools and workplaces In Ireland and the UK to grow their own food.
Another member of the Ashoka Social Finance Committee is Paul Sullivan, who directs a number of investment funds . He says the committee is looking at the international experience to see what has worked for different social enterprises, and is now looking to apply that knowledge here.
“It’s early days yet, and we are still very much at the exploratory stage,” Sullivan says. “We are not looking to reinvent the wheel. We are looking at the experience elsewhere with particular types of funding instruments and mapping that onto this country to see what might fit.
“We are also working with social entrepreneurs to help them build the capabilities required to attract social finance,” he says. “We also have to look at how you can get a quantitative indication of the value of a social outcome. That can be challenging, but it’s one of those things that you’ll know when you see it.”
Offering a return to investors is as much a question of mind set as anything else.
“The projects have to be economic,” Sullivan says. “This does not necessarily mean they have to be commercial. There is a difference between the two. There has to be an understanding that profit is not a dirty word. The enterprise may be a not-for-profit, but there can still be a profit distribution to investors – paying a dividend is not necessarily a bad thing.
“If there are no dividends, it is not really going to appeal to a social financier.”
Steve Wilkinson points out that funding can be a mix of debt, equity and other finance and the returns both social and financial. The enterprises can adopt a mixed model as well.
He points to another dividend that he and the other Ashoka volunteers receive.
“The real return for people like me is just engaging with people who are glowing with passion, purpose, empathy and enthusiasm for how they are going to change their little patch of the world. You come away carrying a little bit of that glow with you.”
* This article was corrected on Monday, May 9th