Do you Speak Social Investment?

At The Nonprofit Center, we recognize the need to support nonprofits seeking to start social enterprises as part of their search for new, sustainable funding streams. But one of the big questions is where to find start-up money. While certainly there are some who could find the funds in their reserves or in an unrestricted endowment, others may seek a PRI (program related investment) from a foundation, and still others may be able to get a bank loan, there are plenty for whom none of these is a realistic option. So, that leaves social investors.

But let’s back up a bit. Social enterprise is, itself, such a variably used term that it requires a definition before it can be discussed. Different people attribute the coining of this term – or its variations, such as social entrepreneur and social entrepreneurship – to different people, such as Peter Drucker and Bill Drayton, and others less well known. But, truthfully, origins don’t matter here as it has morphed beyond the original concepts.  Jerr Boschee, who runs The Institute for Social Entrepreneurs (who is any person who runs a social enterprise) has a very inclusive and appealing definition. According to Boschee, a social enterprise is “any organization, in any sector, that uses earned income strategies to pursue a double or triple bottom line, either alone (as a social sector business) or as part of a mixed revenue stream that includes charitable contributions and public sector subsidies.”

The appeal of this definition is its clarity and the fact that it crosses sector lines. Too many people limit social enterprise to “innovative” for-profit companies creating products and systems- from creating bottles that purify water as it is collected, to selling shoes, to breaking down the technological divide – to improve the quality of life for people in varying situations. The structure of these organizations can vary, from any of the standard business structures, such as an LLC or a C or S corporation, to the newer options of a B corporation or L3C, available in some, but not all, states. But if these organizations are looking at an innovative approach to solve any of society’s many social problems and have declared that profit will not be the sole motivator, they can be considered a social enterprise. But social enterprises have existed for a long time in the nonprofit sector, as nonprofits have historically used earned income strategies – from fees for services to membership programs to sale of goods, new or used, to property rentals – to fund their (once if not currently) innovative solutions for helping address societies needs and ills.

In fact, the nonprofit sector has had the support of social investors from its start – we just called them donors. But in the 1980s, the terminology did shift, at least for a while, and people did talk about investing in nonprofits – their programs, their missions, their clients, their leaders. But that, if we are to be honest, was really just semantics. None of those investors ever expected a financial return – just the warm and fuzzy return of knowing they were helping (and perhaps the benefit of a tax break). This model has worked, and can continue to work for some time to come. But the sector needs more.

Enter the possibility of the true social investor – the investor who wants at least a double bottom line (financial and social return; some may want a triple bottom line—financial, social and environmental) to which Boschee refers. Social investors are willing to take a smaller financial yield knowing that they are also getting a social return—addressing health and social problems, turning lives and communities around, providing opportunities that would otherwise not be available, and knowing that they are giving a nonprofit, in whole or in part (a program), the means to become self-sufficient. But social investors are also taking greater financial risk, particularly, it is easy to argue, when investing in a nonprofit that most likely does not have a long track record of running successful, profit-making businesses, though they may be excellent at producing great social impact. And to woo social investors there must be the potential to make sufficient profit to both pay the investor and have money to reinvest in the business to ensure its continued success.

There are funders out there encouraging other funders to make better use of PRIs and use them to help nonprofits start social enterprises; there are investors out there who want to be social investors, given the opportunity; and there are those who already self-identify as social investors who just want good opportunities.  But despite my saying earlier that we have had social investors in the sector from our very beginnings, this new investor is different; s/he cannot be spoken to in the same way, cannot be convinced to invest with the tactics used with donors, cannot be persuaded with iffy data and warm and fuzzy anecdotes.  No, these investors require different data, a different language, a different approach.  They need a very sound and comprehensive business plan, with solid projections based on rock-solid market research; they need to be given honest, hard data about the timeline for making profit sufficient to repay the initial investment and any interest promised; they need unwavering proof that demonstrates an organization’s ability to deliver on what is described.  Even though they may be getting 0% to 5% interest on the investment, social investors need to be as sure in their decision to make that investment as they are when seeking a 25% return.

Being ready to approach social investors takes nothing more than doing the basic fundamentals of running a good mission-driven business. That means having a solid strategic plan which lays the context for the investment; an organization-wide system for gathering and using impact data that demonstrates the social benefit; a senior leadership succession plan that will ensure organizational stability; and a solid strategy for ensuring financial sustainability and the ability to repay the investment – with interest, if expected.

Social investors should like the nonprofit sector and we can each learn from the other. But first we must learn the language of those we are inviting in.