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H009ZJ PDF Eng

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Digital

Article

Social Enterprise

Social Impact
Investing Will Be the
New Venture Capital
by Sir Ronald Cohen and William A. Sahlman

This document is authorized for use only in Concepcion Galdon & Pola Nachyla & Waya Quiviger's MIM-EN_Ene2024_ECI - Social Entrepreneurship and Innovation -- ENT at IE Business
School from Jun 2024 to Feb 2025.
HBR / Digital Article / Social Impact Investing Will Be the New Venture Capital

Social Impact Investing Will

Be the New Venture Capital
by Sir Ronald Cohen and William A. Sahlman
Published on HBR.org / January 17, 2013 / Reprint H009ZJ

During the past century, governments and charitable organizations

have mounted massive efforts to address social problems such as poverty,
lack of education, and disease. Governments around the world are
straining to fund their commitments to solve these problems and are
limited by old ways of doing things. Social entrepreneurs are stultified by
traditional forms of financing. Donations and grants don’t allow them to
innovate and grow. They have virtually no access to capital markets and
little flexibility to experiment at various stages of growth. The biggest
obstacle to scale for the social sector is this lack of effective funding
models.

But the problem is not money, per se. Take a look at the social sector in the
U.S. There are $700 billion of foundation assets, and 10 million people
working for non-profits. These are huge numbers. Yet there are massive
inefficiencies in capital allocation. Too often donors starve organizations

and entrepreneurs by refusing to cover overhead. This makes it impossible

for social organizations to scale. Interviews conducted in 2000 by the
Social Investment Task Force in the United Kingdom, revealed what most
nonprofit leaders already know: Almost all social sector organizations are
small and perennially underfunded, with barely three months’ worth of
working capital at their disposal. And that hasn’t changed in the last 12
years.

Compare that to the world of venture capital. If a business entrepreneur

came to us with a plan for growing a new business without spending a
penny on overhead, we would show him or her the door. Why should it be
any different for a social entrepreneur?

We believe we are on the threshold of a major change not unlike the early
days of the modern venture capital industry. In the mid-1960s and early
1970s, a new type of investment vehicle was created: the professionally
managed venture capital partnership. This organizational innovation drew
investment capital from institutional players like pension funds and
endowments and allowed for appropriate time horizons. Soon venture
capital became a core part of many economies and those bold moves
changed everything. Entrepreneurship has never been the same.

Just as the formation of the venture capital industry ushered a new

approach and mindset toward funding innovation within the private
sector, impact investment has started to bring opportunities to harness
entrepreneurship and capital markets to drive social improvement. This in
time will bring much needed change to the social sector.

We’re already beginning to see innovation. People are developing new

securities that link social performance to financial returns. There are new
experiments — models that use the tools of finance to try things in
different ways — sometimes creating income streams from novel concepts,
like funding cancer research. There are also hybrid organizations like the
Acumen Fund, Bridges Ventures and Root Capital that channel patient

capital to high social return investments around the world. There are even
organizations like Endeavor and Social Finance that help entrepreneurs
gain access to global capital markets to fuel growth in employment and
social impact.

Within the last two years, government agencies in the U.K., U.S.,
Australia, Canada and Israel at the national, state, or even county levels
have begun exploring the potential of social impact bonds. These are
financial instruments that pay an investor if the cost or incidence of
something (foster care or prisoner recidivism) is reduced, with comparable
or better results, than a government program. If so, the investor makes
money; if not, they lose money.

As more and more examples emerge from all regions of the world —
addressing issues as diverse as recidivism, drug discovery, sleeping
sickness, literacy, food deprivation, and poverty — one begins to get the
sense that there’s no stopping this idea whose time has come.

Things will change rapidly over the next five to ten years. If investors can
find the same courage the early institutional backers of the venture capital
industry found, we will see talented social entrepreneurs build large,
effective organizations that move the needle on a social issue and deliver
acceptable financial returns at the same time.

To get there we need success stories — like the early investments venture
capitalists made in companies like DEC, Intel, Scientific Data Systems,
Teledyne, Genentech, Apple and Tandem — that build confidence and
unlock private capital. When investors believe they can earn acceptable
returns, money will flow. And smart people will feel they can succeed
because they can attract capital.

We live in a world awash with capital — some $200 trillion in financial

assets according to McKinsey & Company. We also live in a world of
remarkably low interest rates. If we can create instruments — like social

impact bonds — that can deliver a financial return of about 7%, a high
social return and limited downside risk, then we can meet two needs. We
can provide reasonable returns that are uncorrelated with equity markets
and attract capital to entrepreneurs who can develop innovative and
effective ways of improving the fabric of our society.

Follow the Scaling Social Impact insight center on Twitter @ScalingSocial

and give us feedback.

Scaling Social Impact

Insights from HBR and The Bridgespan Group

• Every Business Is (Or Should Be) a Social Business

• To Grow, Social Enterprises Must Play by Business Rules
• New Research: If You Want To Scale Impact, Put Financial Results First
• Collaboration is the New Competition
• Go to the Insight Center

Sir Ronald Cohen is Chairman of Big Society Capital and The Portland
SC Trust. He co-founded Bridges Ventures and Social Finance UK, and is
director of Social Finance USA. In 2012 he received the Rockefeller
Innovation Award for innovation in social finance. William A. Sahlman
is a professor at Harvard Business School where he focuses on
entrepreneurial finance, the process by which both social enterprises or
for-profit companies gain access to necessary resources to pursue
opportunities.