Funding Social Enterprises

The global financial crisis has raised fundamental questions about capitalism. Questions of morals in society and business have regained momentum, demanding more acceptance of responsibility for a sustainable, value-oriented society, particularly from business. With this in mind, the growing social business sector might be one of many solutions to the transformation of the capitalist system.

Using the methodology of capitalism for social outcomes, social enterprises have inherently long-term goals and, in the process of fulfilling these goals, they benefit society. But although the sector has grown fast, it is still very small. One reason is the lack of funding. In the aftermath of the crisis, investors willing to put their money into potentially high-risk and moderate-return social enterprises may be particularly hard to find.

Tax incentives could foster investment in social businesses, making it more attractive for investors to put their money into such ventures. In addition, social enterprises can be funded partly by charity supporting the purely social activities of those companies. What is the optimal mix between private, institutional and governmental funding and charity? Which ones should these enterprises target primarily?

What kinds of institutions and private actors would be willing to invest in social businesses? How can relatively small social enterprises be visible and attract large investment funds, particularly in regions where traditional market infrastructure is lacking? These funds would be able to raise the capital that is needed to bring the enterprises’ social impact to a larger scale.

Most financial assets are focused on investors that want to maximize their financial return. Are some of these asset classes nevertheless relevant for social investment or are new asset classes needed? Since social businesses target social issues at large, what is the role of broad-based measures such as “crowd funding”? Are there regulatory procedures that need to be changed to allow different kinds of funding with different kinds of risks, duration of investment and measurement of returns?

For investors to fund social businesses, social impact needs to be transparently and clearly measured. If social businesses want to attract big institutional investors, then it must become easier to compare investment opportunities in social (and financial) terms. If this is not done, it will impede investments in those enterprises. Hence the measurement needs to be clear and precise. Should governments define and regulate how social impact is measured?