The Power of Networks

Building on Martin’s post about the Emerge conference last weekend, I wanted to share the insights from one of the sessions that I found particularly interesting. This session from the “Do It” breakout stream addressed the question of networks in the social enterprise space and how intermediaries could support social entrepreneurs. The discussion was animated by experts from well-established programmes such as Ashoka, the Schwab foundation and the Skoll Centre.

As we come to the end of the On Purpose programme and we’ve had nearly a year to learn about the realities of the UK social enterprise sector, I often find myself reflecting on what the sector really needs and what is the current missing piece of the puzzle that will allow it to grow exponentially. It became evident to me that money is not the issue. In fact, we are nearly at a point where there is more capital to invest in social projects than there are projects that satisfy both the social purpose and the commercial viability. “Investment readiness” seems to be the buzzword of the month. What it really means is that unfortunately this sector still has a long tail of small starters, relatively few more established groups trying to prove their business models and a scarcity of success stories which many aspire to (HTC, Fifteen, Big Issue).

Going back to the question of networks, could this be the magic ingredient? Andres Falconer (Managing director of Ashoka) opened the conversation by referring to networks as the holy grail of social enterprise and presented the way Ashoka endeavours to niche out individuals who could unleash the potential when paired with the right network and support. Similarly, Mirjiam explained how the Schwab Foundation moved away from granting financial prizes to simply offering their chosen members connections to other leaders and access to high profile circles such as the Davos Summit. Sarah Orr (Director of the Kravis Leadership Institute) explained how relationship building spanned from cooperation to coordination and ultimately collaboration, where the level of risk and interaction increases respectively. Then they all consecutively exposed their own approaches to finding these rising star entrepreneurs who they were going to help and plug into their web. Schwab has five criteria on the project idea; Ashoka looks for personal traits through in-depth interviews.

All these sounded like quite coherent and straightforward arguments until Indy Johar, co-founder of the newly established Hub Westminster, dared to challenge the status quo. He urged us to re-question the underlying principles in which these well-recognised entities operate and the way we’ve been framing the challenge, while proposing new ways in which the system could adapt. First of all, he urged us to abandon the theory of the hero entrepreneur. In his experience, the most successful ventures were founded by at least two people. By overly focusing on the single person, we are mystifying their capacities and hampering the rest of the supporting team. Members of the audience who were social entrepreneurs themselves were pleased to pitch in his favour: they could not have done it without their teams, they are still looking for more support and they do not feel like super-heroes. Indy also brought an innovative approach to the concept of due diligence. Although he admits not having the answers to this one, he’s convinced that something must be wrong if it takes so many and so long due diligence processes to in the end not find enough good social entrepreneurs to fund. Maybe that’s why he’s so pleased to host Village Capital at the HUB as an alternative model. Based on the group-lending mechanisms of microfinance, Village Capital is a social enterprise incubator where the seven organisation members decide among themselves who gets the funding prize of £50k at the end of twelve weeks.

Rather than picking out winners, Indy is more in favour of a user-based approach, where the individual builds the network once provided with the conditions. This would look more like a many-to-many exchange, building the network from the bottom up rather than with the pretense of a magic hand from above designing the ideal connections. That’s probably one of his inspirations for co-founding the HUB Westminster, in his words: “a place for unlikely encounters.”

Ultimately, all panel members agreed that there was probably room for more than one approach to support social enterprise initiatives and that, although these established programmes had been crucial for kick starting the movement and for building it from scratch, it was probably time to rethink the approach and open it up to others. Indeed, more and more individuals are willing to contribute with their unique skills. From university students to private sector consultants, the passion and interest are growing, but many do not find it easy to channel it given the nearly exclusive focus on the social entrepreneur persona.

In the end, hands were shaken and large smiles exchanged; nevertheless someone had rocked the boat.

Peter's Blog Post for Business Fights Poverty

Peter Babudu, one of this year's On Purpose Associates, talks about how Start!e will directly address one of the major challenges that impact investors currently face: finding investment-ready social enterprises. Start!e has been set up as an incubator to facilitate the rapid creation of social businesses that protect the environment and reduce poverty, accelerating qualified and viable ideas from conception through financing to sustainable operation. Check out his post for Business Fights Poverty here.

Introducing iX

By Stephanie Denamps

With the expansion of the social enterprise sector comes the need for social finance: designated capital that is earmarked for particular projects where the financial returns must be measured alongside the social benefit. This capital needs to be patient (returns will be made in the long term), flexible and innovative (returns are hard to grasp and measure) and most probably has to accept below commercial rates of return. Fortunately, such pools of capital are already coming together and the interest they get is on the rise. There are social business angel networks connecting high net worth individuals and other philanthropists with flourishing social enterprises (ClearlySo being the largest one in Europe). There are intermediary social finance funds such as Bridges Ventures, UnLtd and Venturesome that lend money to social enterprises expecting a long-term financial return. The Big Society Bank (or Big Society Capital, as it’s now called) will gather funds from dormant bank accounts to fuel these intermediaries and ultimately to spur social business activity. Loans and social impact bonds are the most common instruments so far, but the sector is relentlessly on the lookout for the next financial product that can align social and financial returns.

Alongside all that, there has been a related initiative taking place at a larger scale: a worldwide social impact stock exchange. The iX is in fact the first Impact Investment Exchange Board, developed and launched in collaboration with the Stock Exchange of Mauritius (SEM). A couple of weeks ago, some of the On Purpose Associates attended an event, organized by the ICAEW (Institute of Chartered Accountants in England and Wales) and hosted by Nexii, to introduce the founders of the first approved and regulated stock exchange dedicated to social enterprises. During the presentation we learned about the key benefits of this platform. For the social enterprises that get listed, it brings great visibility, credibility and access to new sources of capital. For social investors, it’s a visible, accessible and trusted pool of social enterprises. To both sides it guarantees the time and cost efficiency of an organised exchange. The Mauritius stock exchange itself is recognised by its good international standards and regulations, advantageous listing fees and absence of tax on capital gains and dividends. Multi-currency trading (Euros, British Pounds and US Dollars) also means that currency risk is reduced. Finally, this project nicely fits the sustainability aims of the island.

Without questioning the need for and the merit of this initiative, it’s worth highlighting a few concerns that arose as the presentation unfolded and the audience raised questions.

Size: The projections so far are to have 15 listings by the time it launches in September 2011 and up to 35 within 18 months. This is really a drop in the ocean when we think of the number of social enterprises aspiring to grow and needing access to dedicated capital. The truth is that the entry requirements are prohibitive for smaller organisations. There is a US$3700 entry fee plus an annual fee varying with the size of market capitalisation. To be eligible, the organisations must have a least one year of published financial statements, over 100 shareholders or over 10% of public debt holders. Most importantly, they must have over US$700 thousand of capitalised market value (or public debt).

Social Impact: Although a condition for entry (and yearly renewal) is primacy of the intent to generate positive social or environmental impact, each organisation is free to demonstrate its mission and impact as it chooses. There are no standardised metrics of social impact or common indicators that gets reflected live for all enterprises at it does for the share price. Instead, once they are listed all organisations become comparable mainly by their financial attractiveness, and the impact side of things runs the risk of falling behind the scenes. Admittedly, reflecting live social impact in a stock exchange way would be very difficult. It is not even granted that all organisations could convey the impact they generate using the same metrics. Therefore, it will rely on the investors to do the proper background check and reading the lengthier reports that the enterprises are required to submit at the time of their listing and the subsequent performance reports. This is not unrealistic, but one must be aware that this is how it works and not expect otherwise.

Other similar platforms: There are other trading marketplaces being developed to bring investors and enterprises together effectively and reduce transaction costs for impact investing. Some people may have heard of Pradeep Jethi’s Social Stock Exchange (SSE) to be launched in the UK, and there are already an Asian Impact Investment Exchange (IIX) founded in 2009, which will eventually seek to attract dual listings from social enterprises outside Asia, and Brazilian and Portuguese initiatives. Although they may all be addressing the same issue and appear to be redundant, there is an argument for the need of multiple social stock exchanges. Just as for the traditional securities market, most social enterprises and investors will likely prefer to engage in platforms that are in their proximity, both geographically and culturally. Therefore, each social stock exchange will be stimulating their regional activity to start with.

The iX may not be perfect as it stands and it may not be the solution that fits all social enterprises or all groups trying to support them, but it is A solution. It certainly has room to exist and a role to play in the promotion and aggregation of social enterprises. It’s still in its nascent phase and needs to be seen as a long-term project, as most things are in this sector. We need to adopt the patient approach if we want to ensure a sustainable growth of social businesses and social investment, and we must absolutely not succumb to the preference for perfection, speed, volume or short-term gains. Who knows, in the future this may be the alternative to the current financial system and its unruly market crises.