Integrated Capital for Social Enterprises
July 17, 2014
Originally published on the Stanford Social Innovation Review
by Don Shaffer
A thriving social enterprise sector is essential to increasing community resilience and improving the lives of those who’ve been marginalized by the global economy. Social enterprises—which are in business to solve social and environmental problems—are willing to tackle complex systemic problems, build new infrastructure, and develop products and services that address pressing needs even if their profit potential is not obvious or will develop only over a long term.
These enterprises’ ability to succeed is hampered, however, by the current division of capital resources into overspecialized sectors, such as venture investing and charitable foundations, that fund only narrowly defined types of enterprises at particular stages. This situation won’t produce the breadth of social enterprises we need to solve systemic problems, because these enterprises confound the expectations of conventional funders in many ways:
- They may have to build a supply chain or other systems (rather than just plugging into an existing infrastructure), which results in relatively high up-front costs.
- They may have slower revenue growth or relatively low profit margins—by definition, they aim to maximize social value before profit.
- They may have hybrid business models that put them outside conventional for-profit and nonprofit funding models (for example, a revenue-generating business with nonprofit charitable status).
- They think about growth as a way to serve their mission, not as an end in itself. They may intend to remain rooted in a community and serve as a model to others, for example, rather than pursuing rapid and far-reaching expansion.
To build a thriving social enterprise sector, we need to rethink the purpose of capital and employ an integrated capital strategy. Integrated capital is the coordinated and collaborative use of different forms of capital (equity investments, loans, gifts, loan guarantees, and so on), often from different funders, to support a developing enterprise that’s working to solve complex social and environmental problems.
Don Shaffer is President & CEO at RSF Social Finance