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If social enterprises are business undertakings, should they be receiving philanthropic donations?

If social enterprises are business undertakings, should they be receiving philanthropic donations?

Not to sit on the fence or anything, but the answer is, it depends! Social start-ups often struggle to access traditional forms of funding – they have no track record, are looking at social not purely financial returns and there is no easy exit available, so private equity is typically not interested.  Similarly, those banks that are willing to lend to such businesses, and these are few and far between, offer rates that the business just can't afford, as again the fact that the business is looking at social as well as financial impact is overlooked.  It is also true that many social enterprises fear taking on such finance as they fear that they will not be able to achieve their social aims whilst achieving the necessary financial return to service it.  From a social enterprise perspective, what is needed is a simple, affordable, patient product that takes into account the triple bottom line (social, environmental and financial).  Alternatively, they need more social or angel investors to be willing to take a risk on them but without having to give away a big stake in their business to secure this. In the absence of such products and investors, grants are very much in demand and are needed to fill this gap.

At the other end of the spectrum, social investors are complaining that they cannot find social businesses who will take their cash, either as equity or a loan. Social finance intermediary organizations have sprung up and multiplied, but there is a noticeable gap between the money they have raised and what is actually invested into social enterprises.This either suggests there are a lack of social enterprises looking for finance out there or that the social enterprises that do want financing are not considered a worthwhile investment.

In the end, like with any other business investment, it comes down to risk – how much of a risk are the investors, whether social investors, banks or other, willing to take and what do they want in return?  Firstly, is the business sustainable?  Secondly, do investors see potential for success and return - and on that point, what are they defining as success and what sort of return are they expecting (topics for further discussion perhaps)? So it seems that what is really needed is a way of de-risking the financing of social enterprises.  We have seen this attempted through social impact bonds, another idea is to encourage more mixed financing (so both philanthropic and social financing are part of the deal) but more work is needed in this area.  Until then, the decreasing number of grant making bodies will be under siege from social enterprises needing that boost and if social business really is the future, then we better hope they are able to take the strain whilst the commercial world plays catch-up.

Hazel Peck