2014-03-28

Co.Exist

3 Factors That Show Social Enterprise Might Start Seeing Bigger Exits

Investing in companies designed to create social impact hasn't traditionally meant you're going to see a huge return. But the landscape is slowly changing.

Stewart Craine, cofounder of Barefoot Power and now Village Infrastructure Angels, walks into investor presentations with a pair of well-worn, highly scuffed shoes with the soles falling off. They are his "investor shoes," illustrating the ridiculous distance he has traveled in pursuit of investment for his businesses, which work with world’s poor.

Any founder in any industry can empathize with this, and they know the ultimate measure of success for many in entrepreneurship is to achieve an exit--to be purchased by a bigger company or complete an initial public offering (IPO) on the stock market for fabulous amounts of money.

In Silicon Valley, these exits can happen in a very short period of time and can create enormous wealth. Some of the recent successful exits, if you haven't been reading the newspaper:

While Silicon Valley can churn out these kinds of cash explosions, social enterprise is still struggling to get more than a couple of runs on the board, as shown in the table below. That is not to say that the occasional investor doesn’t come away with amazing amounts of money. For example, ACCION Microfinance Network’s $1 million investment in Compartamos Banco in 2000 was worth an astounding $270 million at the time the stock went public on the Mexican Stock Exchange in 2007.

Yet ACCION’s success is a total outlier, and the length of time it takes a startup social enterprise to exit is far longer than the typical 10-year life of most investment funds. This is a clear problem.

Of course, there are plenty of successful exits that do not go the IPO route, and in many respects comparing tech companies to social enterprise is unfair. However, showing the biggest successes side by side is useful in highlighting the challenges that social enterprise faces in attracting capital from investors.

What needs to change for better, bigger, quicker exits to happen? Here are three factors that suggest social enterprise could be on the verge of far more financial success.

1: More aggressive investors are showing interest.

In a very positive sign, high-profile investors from Silicon Valley, such as Paul Allen of Vulcan Capital and Vinod Khosla of Khosla Ventures, are starting to invest in social enterprises in Africa and Asia. I can only hope they are the first of many from Silicon Valley, and that they bring their more aggressive investment approach to social enterprise because it currently takes too long to do a deal.

Craine talks about it taking him six years to stitch together a $6 million Series A from 60 different investments for Barefoot Power. Craine certainly paid dearly for being a pioneer in the small scale solar market, but still, this is insane. Thankfully, Series B for Barefoot Power was from less than 15 investors and took only two years. Deals need to take months, not years, or founders are going to spend all of their time raising money and not building a business.

2: Money is flowing into the existing middle market.

Some industries just need a little shove. Leapfrog Investments certainly thought that was the case when they launched their microinsurance fund, which currently has $300 million under management--and invests in companies that provide tiny insurance policies for the poor in underserved markets like Ghana, Nigeria, India, and the Philippines.

Leapfrog’s ability to place $10 to $60 million investments into high-potential micro-insurance companies has helped grow an industry that was ready to explode. As Tina Rosenberg noted in a New York Times article,

In 2005, only seven of the 50 largest insurance companies in the world offered microinsurance. Now 33 of the 50 do. ... they are eager because this is where they’ll find growth. A report by Lloyds, the insurance market manager, places the potential market for microinsurance at between 1.5 billion and 3 billion policies.

3: There is an increasingly clear separation of charity and social enterprise.

Social enterprise is special because it can merge a social mission with a business model, but there can be too little emphasis on the business side of the equation. For a long time profit remained a dirty word--even though profit is a pretty important part of a rapidly growing a business. If you don’t have a business model, you are a charity; don’t expect investors to come knocking on your door. Good intentions are not enough.

Financial success for social enterprise is critical because it allows companies to attract more resources, and to reach more needy customers. Big exits are especially important because much of the wealth and experience gained from working for successful companies is plowed back into more startups.

Paypal, Google, and Twitter (whose IPO supposedly created 1,600 millionaires) were all good news for Silicon Valley. We need some more big wins for social enterprise, because if the industry continues to be higher risk for lower payoffs, I fear the industry won’t get very far at all.

[Image: Abstract via Shutterstock]

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1 Comments

  • John Wojewidka

    Good to see social enterprises are making headway. Particularly because we started one (kynded.com) and it's been very difficult to get funding support. We've lived only with bootstrap efforts and very inconsistent small investments, even though we actually have a sustainable business model. The biggest resistance is bringing social good to businesses and society still appears to be a weakness to most investors.

    But! Fast Company (and others), stop painting the start-up world as a tech-heavy, home-run-only proposition. There is no comparison between what happened, and what's important, to a infinitesimally small minority (Facebook, et al) and - literally - millions of other start-ups. Most people DON'T go into business to become the next Facebook. They aren't looking for a billion dollar home run. They are trying to carve out an existence that gives them more control, freedom and impact. And that makes them happy, which is what all of this trouble is about.