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Smoke, mirrors and social investment 20 June 2013

Posted by cooperatoby in social economy, Social enterprise.
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It’s three weeks now since two contrasting events were held in Brussels on social innovation. The first promoted the modern ’social investment’ philosophy, which holds that trying to use taxation to provide public services is at best old-fashioned and at worst electoral suicide. Let’s give capitalists the chance to redeem their reputations by putting their money to a socially useful use.
The second was the riposte of the continental ‘European social model’: we have been doing social innovation for ages in an inclusive and evolutionary way.

Both events were fascinating in their own way, and the conjunction was even more fascinating. The first gave a (for me) unique insight into the way social investors think, and pointed out some paradoxes. In particular, when triple-bottom-line investors use incredibly complex tools to calculate financial benefit and risk, why do they not want similar tools to calculate social and environmental benefits and risks? They seem to prefer to stick with good old ‘relationship banking’, putting their faith in the intent of the entrepreneurs, not their fancy projections and SROI ratios. I confess I’d been naïve and over-rationalistic: I thought that measuring social impact would encourage social investment – instead it looks like any old smoke and mirrors will do the job so long as it is pitched convincingly. If no one will believe quasi-scientific impact measurements, then they might as well invest in a fairy tale that they are comfortable with.

Prizes for new ideas

The first event was the European Social Innovation Competition, held on 29th May in the cavernous purple-lit ‘Black Box’ room of the Egg, the conference centre converted out of a factory on the wrong side of the tracks in Anderlecht. This was energetically animated by Ann Mettler from the Lisbon Council think tank, and lent gravitas by the appearance of President Barroso and his sizeable retinue to hand over the prizes. The ten finalists, selected from 605 entries, presented their social innovations and the three winners (none of whom I had predicted) were given their €20,000 prizes. Someone joked off the record that only in Europe would there be three winners rather than one!

Much more interesting to me was the round table of investors, ably chaired by Euclid’s Filippo Addarii, who addressed the question “Why do I invest in social innovation?”

Looking for profitability, scalability and liquidity

Why do I invest in social innovation? L-R: Filippo Addarii, Giuseppe Ambrosio, Eva Varga, Nicolas Hazard, Nikolaus Hutter & Matthew Weatherley-White

Why do I invest in social innovation? L-R: Filippo Addarii, Giuseppe Ambrosio, Eva Varga, Nicolas Hazard, Nikolaus Hutter & Matthew Weatherley-White

On the right of the values spectrum was Matthew Weatherley-White of the Caprock Group, which is based in Idaho and operates mostly on the west coast of the USA. It manages a cool billion dollars of impact investment. But what impact is it trying to make? He was quite open that he is a financial investor first and foremost, but will go below the market rate of return if the impact is there. He uses three screens: a path to profitability, scalability and some sort of ‘liquidity moment’ in the future. Though he is not necessarily looking for an exit, what he’s offering is patient capital, not permanent capital.
Nikolaus Hutter of Toniic Europe, based in Vienna, makes small early-stage angel-style investments, and treats social benefit as a potential source of competitive advantage.
Nicolas Hazard represented leading French social enterprise Groupe SOS, which employs 10,000 people in sectors such as health, education, housing and work integration. It is active in 30 countries and turns over $800,000 a year. It wants to help other social enterprises to scale up, and started its own fund because it was dissatisfied with funds that invested then walked away. It invests sums up to €500,000, accompanies this with coaching for 5-7 years, and expects to earn a 5% return.
Eva Varga was there from NESsT, which adopts a portfolio approach and mixes money with capacity building. It invests sums of between $10,000 and $100,000, some of which invests in the form of grants.
At the lefthandmost end of the spectrum came Giuseppe Ambrosio of the Unicredit Foundation, a pure philanthropic body based in Milan which uses half its €5m budget to support voluntary work by the bank’s 160,000 employees, and the other half to aid local communities in 22 countries.

More faith in laughter than impact measurement

The panellists answered some straight questions, or tried to. On the issue of impact measurement a deep Anglo-Saxon/continental rift opened up. Matthew Weatherley-White is sceptical of attempts to quantify social impact because they create an illusion of certainty – he prefers to gauge an entrepreneur’s intent and allow them the flexibility to react to changing circumstances. He also fears that measuring impact might divert an entrepreneur’s energy from running the business.
By contrast SOS has developed an assessment tool which looks at over 600 criteria grouped in 40 areas, both financial and non-financial, and commissions experts to carry out the assessments. NESsT uses a tool which tacks a more modest six indicators.
Widely used sets of metrics include IRIS and GIIRS, the differences between which are explored here. But there is a persistent quest for simplicity – and a study carried out by Toniic showed that only a handful of indicators are used across all investments.
There is no standard approach, so the advice for entrepreneurs looking to raise finance is simple: choose a method that suits you, to show that you’ve thought about the issue.
A second useful tip is surprisingly simple and unscientific: that if you make your potential investor laugh, then things are going well. Impact investment turns out to be a surprisingly of-fashioned business, based on personal liking and the coincidence of attitudes and interests.

A revolution in investment

What emerged from the debate is that impact investment is the investment of the future – because any other sort of investment is by definition unsustainable. Many impact investors would be quite happy if what they do were described simply as ‘investment’. Nikolaus Hutter described working towards a world in which social and environmental sustainability are hard-wired into investment decisions, not just financial sustainability as at present. At the moment only half a percent of investment is impact driven, but maybe one day the world really will be otherwise, with investors trying to level up rather than down to the legal minimum of acceptable behaviour.
Matthew Weatherley-White pointed out that as impact investors become more common, so the returns will fall! He was almost saying that Caprock has chosen quite cynically to invest in early-stage impact investments because it’s a niche where returns are still high. Which I rephrase to say that it’s a dynamic equilibrium – and the point is to shift it in the right direction. At the moment investors are caught in something of a prisoner’s dilemma, pressured by competition to make short-term gains even though taking a longer-term view would benefit everybody.

In a nutshell – advice for entrepreneurs
• choose an investor who understands you and whose conditions are acceptable
• seek and accept offers of coaching like those offered by NESsT
• negotiate everything (such as intellectual property rights)
• show that you have thought about social impact, and choose a simple way to measure it
• be happy if you make the panel laugh



1. Social innovation is more than start-up support | Toby at tipp(l)ing point - 8 March 2016

[…] what you can’t measure”), but it’s also useful in building customer loyalty and essential in getting impact investors on board. Also see EVPA guide. Public funders like the ESF are also keen to fund social innovation – but […]

2. Social innovation – the continent fights back | Toby at tipp(l)ing point - 30 June 2013

[…] expert conference organised by Heinz Becker MEP on 30th May, the day after the Social Innovation Competition award ceremony, advanced quite a different view of social innovation from the transatlantic one being advanced by […]

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