Next week, I'll be hosting a forum on the Skoll Foundation's community website, SocialEdge, which describes itself as "the global online community where social entrepreneurs and other practitioners of the social benefit sector connect to network, learn, inspire and share resources."
I'll be addressing the following issue: When entrepreneurs start a social venture, they are immediately in conflict: they have a short-term focus on achieving financial return for their investors, with a long-term focus of building a community's intangible assets as their mission.
A social venture itself is usually specifically about developing intangible assets within a community: social connectedness, intellectual resources and skills, creative expression, personal health, a safer and cleaner environment. But the entrepreneur/investor relationship (typically through an equity deal) is at odds with this because the equity partner is mostly interested in return on financial capital: in an equity deal, this is the only measure of success.
Microfinance has emerged as a solution by providing debt, which changes the expectation for the scale of financial returns. However, microfinance typically manages risk of course by lending small amounts and also by focusing on how building a community's intangible assets manages the risks associated with default.
Social Enterprises often require a scale that microfinance can't address, and while the service area may be in desperate need of intangible asset development, the social enterprise is rarely a "distressed property" in terms of its social, physical, and intellectual assets.
But a hybrid is possible:
- apply concepts from microfinance to Entrepreneurship in developed countries (heretofore the VC playground)
- use debt to provide seed capital for ambitious ideas -- de facto very high risk
- mitigate the risk through the same focus on intangible asset development: providing resources to develop the social and intellectual assets associated with the building the enterprise.
"A not-for-profit social network of entrepreneurs providing financing for early stage companies through debt guaranteed by a mutual guarantee fund. The financial risk is mitigated by the mutual guarantee fund. The risk on the 'management' side is mitigated by the social network: loans are by invitation only, so you will have to be approved by your peers to get in. And the typical scalability issue faced by General Partners in a VC fund (which causes the famous 'funding gap') is also resolved by the social network: the size of loans and the number of entrepreneurs involved is no longer a problem, and if anything it helps stabilize the results of the group as a whole."
Interestingly enough this hybrid model may also help Angels and other investors improve their return on capital in the end: Marc relays that a study of over 1300 VC and PE firms worldwide shows that the returns they bring on average, and despite the well advertised successes such as Yahoo or Google, is 3% below S&P500 (after fees; 3% above, before fees). So market rates are actually competitive returns, and beyond that it will help investors manage their cash flow, providing a steady revenue stream for the lifetime of Entrepreneur Commons, instead of the feast-or-famine of funding rounds and exits.
So the Entrepreneur Commons is one insightful way to solve the problems of
- providing seed capital for social ventures that facilitates non-financial asset building
- providing financially competitive market returns for investors
- providing liquidity for investors.
The discussion, beginning Tuesday, July 29 and running two weeks on SocialEdge, asks:
- Do you know of other mechanisms that address these issues?
- If you are yourself an Entrepreneur or an Angel or other type of investor, have you seen these dynamics yourself? Have you seen them resolved?