Euclid Network CEO Stephen Barnett reflects on the power play between investors and investees — and suggests a new way to consider the relationship.
This post was originally published on Pioneers Post.
Investment readiness sounds so positive, doesn’t it?
“Someone might invest in us, says the social entrepreneur or charity leader to themselves, “we’d better be ready”. This a semantic game, but it says something about where the power lies in social finance. The social investors/lenders have the money and the investees need it.
Depends how you look at it.
You generally need to repay the financial element of a social investment. So before the lender is confident enough to hand over the money, they want to know that you’ll be up to the job of repaying it at X interest over Y period and creating whatever social and/or ecological impact you promised. So really the question becomes: are you both ‘impact ready’ and ‘repayment ready’? It’s much longer term than just being ready to receive the funds in your bank account on a given date.
Who’s ready for whom?
This point came out loud and clear at a session on filling the gaps for investment-readiness, at last month’s Euclid Summit. Acquiring and demonstrating a broad set of entrepreneurial competences is key to resilience, and (consequently), a way to “show the ‘investability’ of your organisation”, our panelist Elin McCallum, director of Bantani Education said.
Next comes the question of who should be ready for whom. Investment readiness is generally framed in terms of the entrepreneur’s readiness to meet the terms and expectations of the investor: that’s the power dynamic. Let’s turn the tables though: are the social investors ready to work with us? Are they ready to offer the kind of finance that we need? Are they ready to offer the kind of non-financial support that we need?
From our partners and members around Europe, I keep hearing that social investors have more money than they know what to do with: there are not enough ‘investable’ social ventures.
Rethinking what’s acceptable
But maybe it’s a different problem: perhaps we should ask whether there is an adequate volume of acceptable finance for social entrepreneurs or charities.
As one Glasgow-based social entrepreneur (cited by Pioneers Post) said: “We have to adapt our business models to the social investors’ rates of return… Maybe it’s the investors that aren’t investment ready? What would happen if you dropped your level of return [from 7%] to 3%? Maybe some of the enterprises would be investable. Maybe their business models would stack up.” Is it not then the social investors that need to rethink their business models so that they can live with a lower return from their portfolio? Or maybe we can meet each other half way.
According to research by EVPA among venture philanthropy organisations in Europe, most of them (59%) often or always adapt their financing model to meet the needs of their investees. Of course, the perspective of the borrowers may be different – a perspective that Euclid Network will be highlighting over the next years.
At least one area of agreement: the supply and demand sides of the social finance market are not yet well-matched. The European Commission’s expert group on social entrepreneurship (GECES) report of 2016 [PDF] called for “concrete measures to unlock and attract more funding that’s better suited to social enterprises”. One estimate, by the European Investment Fund, estimates that for the entire European social enterprise sector, the financing gap is over EUR 500 million per annum.
Shifting the power?
But here’s another area where the semantics put the power on the side of the money. What if the supply side referred to the supply of social impact or value creation, and the demand side was the social investors who were wanting to support and assist?
Now, I have two post-scriptum caveats to my rant. First, I trained as a linguist so I care about words and enjoy playing with semantics like this; second, I have not practised social finance either as investor or investee.
As a network of intermediaries and capacity-builders, Euclid Network is setting out on a strategy to add to the power of civil society leaders and social entrepreneurs in the social finance market across Europe and the MENA region – thanks to long-term structural support from the EU. Read more about our work in this area here.