I spoke on investing in early-stage social enterprises at the recent Triple Bottom Line Investing (TBLI) conference (29-30 May 2008). The talk starts off with elements from William Easterly’s new book - The White Man’s Burden. I would recommend it strongly to anyone intending to join donor agencies, foundations and international development agencies. I think it’s possibly the biggest mistake anyone can make in development - joining these traditional agencies.
Easterly contrasts the 2 archetypes typically found in the development sphere - Planners and Searcher. Planners represent most traditional development actors. These groups tend to have a very top-down approach to development; proposing mainly ineffective big plans that require a lot of resources.
Searchers, on the other hand, are ready to admit they’re clueless about the solution and are more interested in getting to know the needs of the bottom of the pyramid and devising solutions to meet these needs. The creation of microfinance is a clear example of an entrepreneur like Muhammad Yunus spending time with the poor and actually developing an innovative, sustainable and scalable solution. In essence, Searchers are social entrepreneurs.
In order for more innovative “searcher”-like solutions to be implemented, appropriate financing mechanisms have to be created. Some of the biggest problems with traditional development financing include:
1) donor agencies base their performance on the amount of money doled out as opposed to the impact created on the ground
2) social impact is difficult to measure and quantify; and cannot be universally applied nor can they be scaled
3) projects that receive grant funding shape themselves as grant recipients - they operate to receive grants and provide the necessary reporting to the donors; no thought is put into the long-term financial sustainability of the project; as a result, these projects become too grant-dependent, are unable to develop or stay afloat in markets
4) donor funding is in the wrong areas or maturity stages of the markets
5) lack of feedback and accountability - as a result, there’s no incentive to make the right solutions work
when in reality, the landscape should look like this:
1) donor agencies should collaboratively develop or come to a consensus on outcome indicators and relevant data to ease the process to measuring and benchmarking impact; impact should not be measured by the amount of money spent but by the quality of work it is spent on
2) donor funding should act as pre-investment instead of investments. it should be directed to most risky investments or underdeveloped markets
3) innovative social investments (loans, equity, jobs contracts etc) should be paired with maturing social projects; this will help these projects make the transition from grant-based projects to sustainable social enterprises
As a result, there is a crucial need to bridge the gap between pure grants financing and financing mechanisms designed for social enterprises.
The gist of my presentation can be found here:
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