by Hotfrog CEO Laurie Lane-Zucker
I started my gig in the social entrepreneur space about five years ago after an experienced venture capitalist and board member of a couple social entrepreneur groups rather forcefully insisted to me in a meeting that the digital media project I was incubating in my small nonprofit organization would be far better served as a for-profit social enterprise. Yours is a great, big idea, he told me, and you will need a good amount of capital to do it right. You will find that capital much easier to come by as a social enterprise, he stated confidently.
Initially hesitant but inspired by his confidence I decided to research it further and then to actually take the plunge. Since then, I have travelled far and wide in the social entrepreneur space, am now a member of a respected SE group, and am founder and manager of the growing Impact Entrepreneur Group on LinkedIn, which has over 900 participants from 40 countries and puts me in touch with a lot of others working in the social/impact enterprise space.
Since the time I entered into the world of social entrepreneurship, I must admit that certain aspects of it left me scratching my head. The space is full of a great many extraordinary, passionate people and inspiring projects. But lurking in the shadows behind these change makers and initiatives are strange, um, idiosyncrasies that kept showing their faces. When these idiosyncrasies popped up I initially interpreted them as quirky phenomena that added a certain spicy edge, a quality of uniqueness and even character to the space. Over time, however, I got concerned. Let me share a couple examples.
From early on, I came across a frequent disconnect between the entrepreneurs in the space and some of the space’s institutional leadership. One of the first people I hired as a consultant to help in my business’s development had just closed up shop on her own social venture for lack of investment. When I told her the reason I was going down this path was in part because I had been assured there was much more funding available than in the charitable space, she scoffed and told me not to believe it. “There is hardly any money to be found,” she reflected bitterly.
More recently, when I mentioned to the co-founder of one of the most respected networks in the space that I was not seeing a lot of early stage money, he fervently contradicted me: “There’s tons of money available!”
Another interesting idiosyncrasy I came across early on was how many consultants there were in the space. More consultants, it seemed, than actual entrepreneurs. Indeed, there were people who could help you with every aspect of building a company — legal, operational, financial, etc. You name it, whatever you needed there were five, ten or even more experienced consultants standing by to help you. This was terrific for those of us who were building a young company, and I made full use of a number of them. But the question was always there in the back of my head why many of these consultants — in most cases, extremely intelligent and creative folk— were not themselves still entrepreneurs. As I got to know many of them, I found that in quite a few instances they had tried building a social enterprise but it had not worked out. Not enough investment, they often said. However, since they knew the space well and remained committed to its social and environmental values, they decided they could still contribute and make a living by helping others build their companies. Sounded reasonable, but something about it still struck me as a tad off-kilter. At a time when the world desperately needs a new type of company, a new paradigm for business, and there was supposedly all this investment money available, why were all these talents forced into consultancy?
Another idiosyncrasy I found was the way some angel investor groups interacted with entrepreneurs seeking investment. Despite having memberships filled with accredited investors (i.e. millionaires, multi-millionaires, and billionaires) who were quite capable of paying membership dues, a large percentage of these groups charged entrepreneurs not insignificant fees, sometimes multiple fees. A few hundred dollars to apply to this group. A thousand or fifteen hundred dollars to present to that group.
Some angel groups ask entrepreneurs to pay much more than that for exposure to their investors. I was approached by one angel group head that invited me to present to his meeting in New York. I could choose, he pitched, to buy an “Executive Presenter” spot for $9,500, a “Standard Presenter” spot for $12,500, a “Premium Presenter” spot for $14,500, or a “Corporate Sponsor Premium” spot for $17,500. Since I, like most social entrepreneurs, didn’t have that kind of money to spend on a few minutes presentation that included no assurance whatsoever of future investment, I politely declined.
This lack of assurance about future funding, indeed the very apparent elusiveness of available funding, is upheld by some in the leadership of the social entrepreneur space as part of the implicit “grail quest” of our noble enterprise. Lots of money is out there, entrepreneurs are assured, and if you can’t find it then you and your enterprise clearly must not be worthy in some way, or you are not trying hard enough. “Your pitch must need fixing.”
But the facts, or at least the few facts that are available, suggest that the money just might not be out there.
We know that:
- Given the ratio of applications to funded companies provided by the two main angel groups serving the space (i.e. 12 deals funded out of hundreds reviewed), you might have a better chance of getting into Harvard than obtaining early stage funding from an angel group;
- According to a recent Foundation Center study, only 4% of U.S. foundations (presumably an obvious source of investment in social and environmental initiatives) are engaging in Program and Mission-Related investments in social enterprises;
- Based on information shared by senior advisors to major educational institutions, colleges and universities are even less inclined than foundations to use their billions of endowment dollars for social/impact investments;
- Most investment funds that have been set up in the social/impact spaces (i.e. Impact50) are focused on mezzanine and growth stage investments (in other words: if you are already making money, we may invest our money; if you are not, then you are too early);
- The funding dilemma also hits those trying to address the gap in early stage financing, according to Lauren Burnhill, CEO of One Planet Ventures, who tried unsuccessfully to launch a new impact investment business model. Mission-driven organizations like Habitat for Humanity, Women’s World Banking and ACCION International have all tried to raise early stage equity funds in recent years and been forced to return to the drawing board more than once. All three organizations are working on new initiatives for 2012, but “the fact remains that all the hype about investor interest has been difficult to translate into funding commitments. For-profit social entrepreneurs and social sector non-profits alike struggle to raise early stage money,” states Burnhill.
Burnhill, whose blog “The Money in the Middle” addresses how resources move from investors into social enterprises, notes that impact investment intermediation gets little attention, but lies at the heart of the early stage struggle. “Angel networks and competitions that finance a dozen initiatives but leave thousands in the cold aren’t enough, given the breadth and range of problems that social entrepreneurs are trying to resolve. We talk about “access to finance” for microentrepreneurs, but access to finance for social entrepreneurs must become a higher priority for foundations, development finance organizations and would-be impact investors.”
Having lived with these idiosyncrasies for some time, and been in touch with many other entrepreneurs who have had similar experiences, I recently started wondering if these oddities were in fact connected. Did they point to something systemic? Then the thought struck me:
Is Social Entrepreneurship run like a human capital Ponzi scheme?
Ponzi schemes succeed because they are based on the illusion — versus the reality — of created wealth. People are tempted to join in because they are told, often in whispers, that if they join the return will be very, very good. It works as long as more and more people buy into the myth, and as long as there is just enough evidence of apparent success. For Bernie Madoff’s customers, this confidence was built on the testimony of his early investors to their friends that they had successfully cashed out their unusually consistent, profitable investments.
Huge pyramidal structures (this is why they call Ponzis “pyramid schemes”), indeed whole industries, can be built on this illusion. Until, of course, it all comes crashing down. Witness derivatives.
I greatly fear that the Social Entrepreneurship space may be a human capital Ponzi bubble that will inevitably burst. Thousands of entrepreneurs around the world, spurred on by the multiple crises humanity faces and the promise of efficient capitalization are racing to create companies that serve the social and environmental good. They read about a few success stories. They read new studies that support the “emerging industry” and its vast potential. They read about major institutions that are publicly giving their names to the cause.
And so they dive in.
But does the pool have any water in it?
The Rockefeller Foundation, which has spent recent years making grants and organizing meetings to design the impact investing infrastructure, recently came under intense criticism on the Impact Entrepreneur LinkedIn group after their CEO gave a beautifully crafted speech about the power and promise of impact investing and celebrating RockFound’s key role in designing the space.
It was duly noted on IE that RockFound has not yet done ANY actual impact investing with their endowment funds!
I firmly believe that the kind of entrepreneurship that I have been party to over the past five years represents one of the greatest hopes for humanity and the Earth. I think it is crucial, therefore, to bring attention to the possibility that we entrepreneurs (and consultants as well as other well-intentioned intermediaries) are currently acting as pawns in a human capital Ponzi scheme. If I am wrong, and believe me, I would LOVE to be proven wrong, then I should hear a chorus of boos in response to this article. The long lists of completed investments, particularly early stage, will flow forth through cyberspace to rebut my case. And far from being embarrassed, I will be overjoyed.
If I am right, however, then we need to immediately set about correcting the situation. I believe the impact (“certified triple bottom line”) space offers a legitimate way to right the ship. Just as B Corp/GIIRS certify companies and emerging investments vehicles, there needs to be similarly sophisticated and rigorous analyses done of the number of deals closed, their type and size, and who is doing them.
Jed Emerson, the guru of “’blended value,” a core concept in the impact space, believes this kind of transparency is “good and needed and will in turn make it possible for folks to see what is needed.” Emerson, for his part, is focusing on the “imbalance of capital flows—with more money able to move to ventures that are later stage, but not enough actors being able to invest in the early stage opportunity.” He calls the social enterprise space an “awkwardly developed emerging market.”
What is also awkward (and a little strange) is why some obvious players are not yet sitting at the table.
We need to be much more public about who is NOT investing. One highly regarded authority in the impact space who participates on Impact Entrepreneur recently suggested a series of Occupy Capital campaigns. Tactics: Occupy Ivory Towers, Occupy Foundation Offices, Occupy Family Wealth Offices. You get the idea.
Let’s tear away the shroud of illusion that covers the Social Entrepreneurship Ponzi scheme and replace it with a legitimate foundation.
I prefer to characterize impact investing as a “practical philosophy” — it evolves best through experimentation. Invest. Invest. Invest. Talking about the space’s promise goes only so far. Indeed, if the only-talk goes on for too long it can be reasonably exposed, whether intentional or not, as contributing to Ponzi’s legacy.
If we are really serious about serving the bottom of the pyramid (and the Earth), then we should make sure that the top of the pyramid is not going to collapse and destroy the entire structure.
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Laurie Lane-Zucker is the Founder and CEO of Hotfrog, an early stage “global impact” digital media company, and the Founder and Manager of the Impact Entrepreneur Group on LinkedIn. He is the former Executive Director of The Orion Society and former contributing writer and editor for Orion Magazine.
Category: impact investing