Investment leads to Investment

It takes success for the private sector to invest in social ventures. Currently social ventures are beginning to hit the mainstream at a rate that hasn’t been seen historically. Investors by and large are still unfamiliar with how to operate with social ventures as they are caught between the non-profit and for-profit spectrum of businesses.[1] For investors to be interested in pursuing social enterprises there needs to be a track record of success on behalf of these enterprises. Investors look for investments with relatively low risk and the possibility for return. An individual social enterprise making money isn’t enough to develop an astute assessment of whether or not the enterprise will succeed because investors are not familiar with the social enterprise market because it is still developing. An investor can’t look through a history of businesses with similar business structures in similar markets because the social enterprise market is still emerging into prominence within the finance sector.

The “Funding Gap” article states that social entrepreneurs don’t have trouble finding investment for them to start up their business, they instead run into trouble when trying to expand their business. Funding isn’t just about the company you’re investing in making profit. A large part of the investment process involves risk-reward analysis. As more investors begin to invest in the social enterprise market then the market will begin to develop. Large investors IGNIA and the Acumen fund are paving the way for more investment to occur in the market because of their investment. Funding social enterprises creates survivorship bias within the market. Of the many investments these large funds will make, only few can realistically be revolutionary. If the amount of successful social enterprises grows, then outside investors who may not care about social impact may be persuaded to invest in a social enterprise because of the success of other enterprises. As investment companies with a social focus continue to grow and see success in their investments, then a self-perpetuating cycle can be established where social enterprises succeed with capital investment which would spur more capital investment from diversifies sources which would again in turn promote increased investments.

Social enterprises are on the cusp of seeing increased investment from sources outside of socially conscious investment firms. Socially conscious investment firms were necessary catalysts for the social enterprise market because they contribute in making success stories. Its these success stories that will be referenced when other private equity shops or banks are pursued by budding social enterprises seeking investment. Many investors want as close to a guarantee as possible that their investment will pay off. A thriving social enterprise market will be proof enough for many investors and lead to increased investment into social enterprises.

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[1] Chertok, Michael, Jeff Hamaoui, and Eliot Jamison. "The Funding Gap." Stanford Social Innovation Review 6.2 (2008): 44-51. World of Good Inc. Web. 12 July 2015.