Innovation funding Innovation: The Social-Impact Bonds

There is no doubt about the funding gap that exists for social entrepreneurs. These entrepreneurs aim to develop a business that in addition of supporting a social mission also generates a financial return. Social enterprises at the early stages of their inception critically need financial backing to survive and grow. We can only see the full impact of these innovative businesses once they have passed their initial development phase and are in good financial health.

To face this challenge we need to think of creative financial tools to fill this funding gap. One such interesting innovation was the British social-impact bonds. This is a derivative tool tied to the performance of a social enterprise in a defined population. Private investors investing in this bond, channel money to a selected social organization. On the part of the social organization, this tool gives them long term capital to scale up their innovative model. On the part of the investors, financial returns are made by the public sector on the basis of improved social outcomes. If outcomes do not improve, then investors do not recover their investment. This can be measured by a suitable social performance metric.

A diagrammatical view of the Social Impact Bond working can be seen below.

This innovative financial instrument has many advantages, including:

1. Provision of long term capital for promising social innovative ideas.

2. Transfer of risk to private capital markets.

3. The use of public tax money only if the enterprise provides promised social benefits.

For more information please go to the link below:

Source:

http://www.socialfinance.org.uk/work/sibs

http://www.economist.com/node/16789766?story_id=16789766&CFID=145242723&CFTOKEN=80436283

To think about this innovation more objectively, let me propose the following questions:

1. There are many stakeholders involved in impacting a social problem. How can we identify a single entity or group of social businesses for the purpose of funding through this bond?

2. Will this innovative social bond attract enough profit seeking private investor’s money?

3. Can philanthropists be attracted to make a potentially profitable investment such as this?

4. What defines a good social metric? To what extent will we be able to measure the social impact?