Many social entrepreneurs have come to believe that having a social mission makes it more difficult to raise money because the vast majority of investors are interested in one thing only—maximizing profits. In our opinion, this is a simplistic and overly negative view. For one thing, while the capital market is preponderantly old-school in terms of its preoccupation with financial ROI, that isn’t always a negative for social entrepreneurs. When the social mission is integrated into the brand in a way that builds value, this will be viewed as a positive by even the most conservative investors.
For another, there is a small but growing niche of investors who actively seek out social investments over conventional ones. Organizations like Omidyar Network actively favor social enterprises. There is also a community of angel investors who give generous terms to social enterprises they believe in. Some of these high net-worth individuals look to foster positive change and get their money back so they can re-invest it in other social enterprises. Any profit that comes their way is a welcome but unnecessary extra. Conventional entrepreneurs will only get this deal from friends and family. The philanthropic investor is a rarity, but not an urban legend.
A separate issue concerns the investor perspective on hybrid organizational forms. Does Benefit Corporation status reduce access to capital? Our answer is probably—a little. Benefit Corp. status creates uncertainty about matters of importance to investors such as whether the financial mission will consistently have top priority. Because uncertainty is typically seen as a risk factor, this makes the investment potentially more dangerous. The result: investors will drive a harder bargain. In addition, a more extensive educational process is required where newfangled organizational forms like Benefit Corporations are involved. This, too, can be a disincentive to investment. Don’t know it, don’t get near it.
Our assessment is preliminary, simply because Benefit Corp. legislation is quite recent and there isn’t much empirical evidence available yet. Our conclusion seems logical, though. The entire purpose of Benefit Corp. statutes is to put other stakeholders on an equal footing with shareholders. One would expect this to concern more than a few investors.
B Corp. certification is, in our view, a different kettle of organizational packaging. Whereas Benefit Corp. status invites the perception that it increases risk because it confers a legal duty on Board members to de-prioritize financial ROI relative to the social purpose, B Corp. certification is a brand strategy devoid of legal obligations. While there are modest costs associated with B Corp. certification, it’s a plausible business strategy that won’t typically be associated with increased risk.
The bottom line is that investors won’t do you any favors if you’re a social enterprise. It doesn’t matter how noble your purpose is: without a compelling business plan, you’ll be left at the starting gate. But if you’re offering investors an attractive opportunity, and if it’s rendered all the more compelling because it has an integrated social mission that builds the brand, you’ll be at an advantage in the capital market.
If, on the other hand, your social mission is viewed as a cost center and business liability, you’ll be carrying extra weight in the funding sweepstakes.
So: in response to the question, are social entrepreneurs advantaged or disadvantaged in the capital market?, our profoundly middle-of-the-road answer is: that depends.
These are tough times for entrepreneurs. Funding is tight and lines of credit hard to come by. Investment dollars can be found, though. If you’ve got a winning opportunity, if you’ve integrated your social mission with your business model, and if you play your packaging-and-connecting cards right, you’ll get your money.
[Excerpted from The Art of Social Enterprise: Business as if People Mattered, by Carl Frankel and Allen Bromberger, to be published in 2013 by New Society Publishers]