Several years ago, waiting for our 4-seater prop plane to take off from the Bolivian Amazon, I watched in fascination as a small team of men cleared the runway with machetes. We couldn’t see the end of the runway and it was littered with potholes, no doubt making it challenging to gain the speed needed to take off. Once in the air, the small plane bounced around in turbulence. All in all, a bumpy ride — not for the faint of heart.
The same can be said for the journeys of our social enterprise partners. The pathway to scale is overgrown with obstacles, and entrepreneurs often can’t see more than a few feet ahead of them at any given time. Gaping holes between funding inflows make it difficult to gain momentum. And the large amounts of funding purportedly available in the impact space are often not the right flavor of capital.
To continue the analogy just a little further, at Miller Center, we see our role as clearing that runway, laying down tarmac, and stocking the right kind of fuel so that the best social enterprises that are ready to take off can focus on flying the plane and not on wielding machetes.
Tugende, a tech-enabled asset finance company in East Africa and one of Miller Center’s leading social enterprise partners, recently closed a second Series A tranche of $3.6 million in equity financing to help meet intense demand for income-generating assets. Speaking to the CEO, I asked how he planned to spend his time now that he’s finished fundraising. He laughed and said, “That would be amazing, but we are never finished. In fact, we are working hard to close more debt to support our working capital requirements and getting ready to launch the Series B.”
Another recent success story among our social enterprise alumni is Ugandan fintech startup Numida, which supports semiformal micro and small businesses with digital working capital loans. The company recently closed a $2.3 million seed round, but the founder describes a similarly bumpy story of extensive time fundraising, a disjointed approach by impact investors, and long periods of due diligence even for very small sums.
What is the problem we’re trying to solve?
Sadly, these stories are best case scenarios for social entrepreneurs all over the world — because the money closed. An informal survey of Miller Center alumni indicates that founders generally spend over half of their time fundraising, and only about half of our program participants are successful in meeting or exceeding their “justifiable asks”. Even when they achieve success like Tugende and Numida, they typically have very short cash runways and are quickly back on the fundraising hamster wheel. The same survey indicated that the average maximum runway these companies ever have is 6–9 months.
Some in the social enterprise space will say that this is just the way business is done, and that the job of a social entrepreneur is to constantly fundraise. And that life on the conference circuit and jumping from accelerator to accelerator searching for the next investor are acceptable tactics to secure the funding future of your social enterprise. But at what cost? As we look to social entrepreneurs to solve some of society’s most pressing problems, how can we expect them to spend so much of their time and psychic energy fundraising rather than running their businesses and creating impact?
Miller Center believes that this model creates an unjust and suboptimal equilibrium that prevents social entrepreneurs from scaling, and perpetuates a neo-colonial power dynamic in the impact investing ecosystem. Why do we say this?
At first glance it would appear that there is plenty of capital to fuel the growth of social enterprises like Numida. The Global Impact Investing Network (GIIN) says there is more than $700 billion in assets under management dedicated to impact investing. The problem is that the focus, amounts, terms, and instruments on offer doesn’t always work for many of the social entrepreneurs we support.
- Focus. The vast majority of this capital is focused on the global north — the US, Canada, and Europe.
- Amounts. According to the GIIN report, the average ticket size for direct impact investments is greater than $5 million. The vast majority of our social enterprise partners initially seek between $50,000 and $2 million in investment.
- Terms. The GIIN data also suggest that most of this capital expects market rate returns. While some impact investments can and should generate market rate returns, many of our social enterprise partners address issues where there are clear market failures and they generate many positive externalities that are not priced by traditional markets. Here, blended capital solutions and venture philanthropy are needed to support the growth of these innovative solutions, thus requiring us to accept below market rate financial returns.
- Instruments. The lion’s share of this capital is deployed as either traditional risk-averse debt (fully collateralized, etc.) or in funds that attempt to replicate the Silicon Valley venture capital approach to equity investing. Our experience shows that these traditional financial instruments are often misaligned with many impactful and scalable social enterprises in our network. While there is much buzz around innovative finance such as program related loans (PRIs) and soft loans with below-market interest rates, and revenue royalty structures, the actual prevalence of these instruments in the impact space is rare.
Beyond this intrinsic mismatch between supply and demand in impact investing, there are also ecosystem challenges to overcome, including a lack of transparency, fragmentation, and systemic bias.
- Lack of Transparency. While a few aligned funders have an interest and ability to serve this segment of the social enterprise market, entrepreneurs often find it challenging to find and connect with them. Investors’ thematic interests (investment theses) and funding criteria are often opaque and require insider information to truly understand. Consequently, social enterprises spend far too much time chasing the wrong funders.
- Fragmentation. Most funders in the space have very narrow stage mandates. Whereas it is typical in venture capital for a single fund to invest in a seed, series A, and series B round, it is rare for an impact investor to join in multiple rounds throughout an enterprise’s lifecycle. What’s more, there is little coordination to prepare and hand off portfolio companies to the next stage of investor. This lack of sequential connectivity forces enterprises like Tugende or Numida to get right back on that fundraising hamster wheel immediately after raising a major round.
- Systemic Bias. Finally, the impact investing ecosystem suffers from systemic bias against local leaders and women-led enterprises. My OpEd The Real Reason Women Entrepreneurs Struggle to Raise Funding in “Times of Entrepreneurship” details many of the hurdles women face. Local leaders — here we refer to those leaders with a deep connection to the communities they’re working in, an intimate understanding of the problems they face, and profound insight into viable solutions to those problems — also face enormous challenges. Our initial research suggests that local leaders raise 7 times less than their expatriate counterparts. Lack of access to networks presents difficult barriers, and one we can help address with our accelerator model. But the role of racism and white saviorism in the development and impact spaces cannot be overlooked.
Our evolving approach
Miller Center aspires to become the go-to partner on the demand side of capital in the impact investing space — connecting our social enterprise partners to suitable funding and working dynamically to ensure our most scalable and replicable enterprise partners have a path, not just to their next fundraising round, but to the full range of capital they will need to achieve their visions.
We have accelerated more than 1,200 social enterprises over the years, fusing our unique blend of global changemakers, deep executive mentorship, and Santa Clara University’s resources and values. We understand that access to appropriate and timely finance can make the difference between scale and, well, survival.
Our new approach entails forging strategic partnerships with a range of funders and investors to connect our social enterprise partners to the right capital at the right time in their growth trajectory. In short, to clear that runway. We aim to span the spectrum of funding — from the more philanthropic through to the more commercial. We want to catalyze grants, reimbursable grants, low-interest loans, revenue sharing, convertible capital, guarantees, commercial debt, and equity. We plan to accompany our partner social enterprises on this journey by supporting their efforts to develop their justifiable ask for their immediate funding needs, AND to imagine the trajectory of future funding as they scale.
Watch for upcoming articles on how we plan to achieve this vision. We invite you, our community, to provide input along our journey. We believe social entrepreneurship is a critical lever in ending poverty and protecting the planet. But it requires capital investment and we must find better, more accessible ways to fund the remarkable entrepreneurs creating innovative and sustainable solutions to the world’s challenges.