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The Social Impact Investment Mirage (Blog)

A mirage in the Sahara Desert

(Photo by iStock/GarySandyWales)

Last year, our social impact startup hit a milestone that eludes 96 percent of female founders: we hit one million dollars in revenue. It felt like reaching the summit of a mountain nearly everybody had said would be impossible to climb.

We started NeedsList with the idea of creating a “wedding registry for aid”—a software solution to match needs to resources in times of crisis. We envisioned the company to be more than just a tech startup—our ambitions were to help repair our failing humanitarian aid system, which is slipping further and further behind in its ability to provide resources to communities with every additional crisis.

In our first six years we succeeded not only in raising venture funding but also in hitting that elusive revenue target and tripling our impact. In June, we secured a partnership with Google.org to scale our model. This year, we are on track to double our revenue again. That means we are finally starting to see something resembling the pinnacle of startup success, the hockey stick.

Nevertheless, we don’t feel like celebrating. We know that for social entrepreneurs trying to solve global challenges, the system is rigged. Underneath every accomplishment lies a profoundly broken funding landscape for social innovation. We also know that many of these accomplishments were only possible because we are white, hold US passports, and are well-networked. This article will explore our often disheartening journey to raise investment through impact investors, corporate partnerships, grants, and contests. We will share our experience, and those of our peers, to argue that this funding ecosystem needs to be reimagined to truly support social entrepreneurs and collectively address the global problems they are tackling.

The False Binary Between For-profits and Nonprofits: Where the Troubles Begin

We decided early on to incorporate NeedsList as a for-profit, purpose-driven company. Our reasoning was straightforward: We didn’t want to be seen as competing for funding with the nonprofits using our software. We also had a solid plan to make the platform financially sustainable by charging a fee to the businesses who were using the software. We bought into the notion that a for-profit company was the way to scale and achieve impact. We weren’t alone. We recently spoke to Aline Sara, founder of Natakallam who told us, “We incorporated as a for-profit, because we wanted to ensure a sustainable business model that would have less reliance on donations and thus, potentially, a greater impact in the long run.”

Investors interrogated our decision. At pitch events, despite our sound business plan for generating additional revenue, they repeatedly asked us why we weren’t a nonprofit, as if being a profitable company that also solved global problems was immoral.

Manal Kahi told us she had a similar experience. Kahi is the CEO and founder of Eat Offbeat, a refugee-driven food company that delivers meals conceived and prepared by refugees. Eat Offbeat has served over 250,000 meals in NYC since its inception and has won multiple awards for its impact. But as Kahi relates, investment has been elusive. “When we talked to investors about a socially conscious, socially impactful business, they immediately put you in that bucket of ‘nonprofit’ and are reluctant to invest … that’s one of the biggest walls we’ve hit.”

Due to the persistent idea that only nonprofits can and should solve pressing societal issues, many social entrepreneurs feel they are in a bind. Either we rely on grant and donor funding, or must continually justify to investors and the public that our entrepreneurship is relevant to solving some of the most pressing issues of our time.

The Investment Mirage

An even bigger hurdle is how few funding mechanisms there are for early-stage impact companies. Those that do exist tend to be inadequate or will lock a company into a venture capitalist model that demands rapid scale and returns at any cost. Grant funding is nearly nonexistent. And despite the hype about impact investing, few funds exist to support entrepreneurs at the proof-of-concept or seed stage. In 2020, only 2 percent of all investable assets went to impact companies. Add gender and racial bias to the mix—in 2021, only 2 percent of all VC funding went to women, while startups led by Black female and Latina founders received less than 1 percent—and you start to get a picture of how starved early-stage impact founders are for investment.

Our story is emblematic of this struggle. Despite earning revenue from the day we launched our beta platform, we labored for nearly 18 months to secure an $800,000 pre-seed investment. Mentors usually gave us the same advice: Go after gender lens investors. Apply to accelerators. Pitch at as many competitions as you can. So we did. The problem we are trying to solve cuts across every demographic imaginable and gender lens investors are a tiny proportion of all investors, but we went after them anyway. We were accepted into a prestigious impact accelerator in Norway. We won a Village Capital accelerator at the Ben Franklin Technology Partners in Philadelphia. We pitched at multiple corporate-sponsored events.

At the end of 2020, we decided to stop entering contests and pitch competitions. Despite the reality that they are one of the most accessible ways to get your company in front of potential investors, we were disillusioned with these events. Corporations have jumped on the social impact entrepreneurship bandwagon full hog, often sponsoring pitch contests with promises of cash prizes and commitments to champion women or BIPOC-led companies in their advertising. But the premise of these events seemed odd. We pitched at numerous events sponsored by big brands who gain free marketing exposure from social impact “ambassadors” for their brands. They offer, at best, a pittance in prize money compared to the investment they put into event management, communications, and printing oversized checks for photo opps. And why were we competing with other impact founders for tiny cash prizes or the vague promise of “mentorship” and connections? Sara, the founder of NaTakallam, agrees that these events are for the funders, not the social entrepreneur. “Competitions can be costly on the entrepreneur, with long applications, politicized judging and relatively small cash prizes compared to the organizers’ gains in marketing and positive PR. It is not rare, especially for women and minority founders, to sometimes feel used as a marketing tool, or wonder if all the time and effort were worth it in the end.”

At worst, these contests can be exploitative of entrepreneurs desperate for visibility and funding. Consider the widely publicized Laudato Si’ accelerator, which encouraged startups solving problems related to the climate crisis to compete for an opportunity to go to the Vatican and receive a $100,000 prize. After participating in a lengthy application process, the winning startups were informed that if they wanted prize money, they would need to crowdfund the awards themselves.

Corporate promises of “partnership” and leveraging their buying power from social enterprises can also be elusive. Consider SAP’s 2020 5 & 5 by 25 announcement. The company has pledged to procure five percent of its spend from social enterprises and companies led by underrepresented founders by 2025. In other words, the company is implying that 95 percent of its procurement spend will still come from traditional, white male-led companies. 

What about public sector funds or foundation grants? While the vast majority of these are still restricted to nonprofit or charitable organizations, the good news is that there is a growing openness in these sectors to fund for-profit entities that are working on social impact solutions. NeedsList has benefited from government grants to test and scale our software in other countries, and this funding has proved critical to allowing us to prove our model.

The downside is that public funding is extremely slow, with lengthy application and reporting requirements that require inordinate amounts of time and resources for compliance. Consider this: Even at the beginning of the pandemic, NeedsList didn’t receive “rapid response funding” for a grant that was approved in June 2020 until early 2021. Startups don’t have the same in-house staff as universities, larger companies, or INGOs. One funder required us to submit boarding passes to prove our attendance at an event that they hosted where we were among the speakers, and another asked for screenshots of Zoom calls including the participant list to prove that we did in fact hold meetings. These and other onerous requirements stifle innovation, and sometimes, kill it completely.

What’s Next

It’s time to rethink social impact funding. The COVID-19 pandemic, conflicts, and climate catastrophes over the past decade have exposed inadequacies in institutions across the globe. As these problems scale, so must investment in promising solutions. To continue the status quo of measly investment in social innovation will only guarantee failure. 

When it comes to social investments, both philanthropic and impact investors need to speed up both the pace and size of their funding. One straightforward way to do this is to immediately approve investments to scale solutions based on meeting milestones at seed stage. Funders could also boost investments in emergencies to existing grantees based on trust and partnerships. As Katherine Clayton of Omnivis suggests, we could build on venture philanthropy’s promise to lower barriers and write checks quickly. “If we could put the same speed into investing in impact-focused companies that we do into Web3 companies then we could create more impact,” she argues. “Speed is what allows you to do that.”

Second, when it comes to dollars invested, the reality is that the speed of investments must be accompanied by larger checks in order to meet the Sustainable Development Goals set by the United Nations General Assembly. The Sigma School writes, “to meet the global need, much more capital will need to be directed for impact investing … trillions of dollars are still needed to effectively address the critical social and environmental challenges that face the world today.” Accelerator programs focused on social impact are few and far between, and unlike traditional tech accelerators, almost none provide any standard upfront investment. Impact accelerators lead to faster growth and greater impact for social enterprises, but they need to be accompanied by cash, not just pitch days and mentorship. Instead of looking at incremental changes, from 2 to 5 percent as with SAP’s initiative, how about flipping the narrative and challenging firms to invest 95 percent of their spend in companies owned by women and people of color or in social enterprises?

It is equally essential that the public sector dramatically scale both social impact financing and other policies to foster innovation. Some governments are paving the way in terms of accountability and procurement. The government of Canada, for example, has begun to set commitments to purchase from women and BIPOC-owned businesses. The UK has introduced social value as a measurement of investment and Germany is beginning to hold corporations accountable to ethical supply chains. These policies address the supply side of social financing, but it’s equally crucial to address the need for further investment in social innovation. We advocate emergency financing, social impact bonds, accelerator programs, loan forgiveness for social innovation, and additional public investment in scaling successful solutions.

We also believe that the philanthropic, private, and public sectors need to reject the Silicon Valley model that prioritizes scale and returns at any costs, and competition over collaboration. Doing so requires understanding interdependence over the myth of the solo entrepreneur. Coralus, formerly SheEO, is ahead of the curve in supporting women and non-binary entrepreneurs with a model designed to transform the playing field itself by “pooling community resources and crowdsourcing decision making” to actively invest in businesses supporting the SDGs, without the expectation of individual return.

We need to invest in multisector, holistic solutions. Let’s bring together entrepreneurs with promising solutions, give them a few million dollars, and encourage them to work collaboratively. Let’s ditch funding “contests” and set up collaboratives, with investors funding partnerships to solve urgent problems. Let’s demand that people directly affected by the problem be involved in the design of the solution from start to finish. Let’s compensate all “finalists” for their time and energy with cash. And while we are at it, impact investors should be scouting for seed-stage companies with growing double bottom lines in the same way VCs scout startups based on the potential for financial returns.

The truth is many social entrepreneurs are trying to solve problems that are deeply entrenched, systemic issues that may not fit with the world of accelerators, venture capital, scale, competition, and large returns. Trying to force companies into this paradigm ends up pushing social entrepreneurs to create products that only solve problems at the margins. This mindset and “winner take all” competitions create fragmented rather than holistic solutions addressing root causes.

We have the resources, the models, and talent to address these challenges. All that is missing is our willingness and our imagination.

Read more stories by Amanda Levinson & Natasha Freidus.

 

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