From Solar System to Ecosystem: A New Way to Finance Social Entrepreneurs

Have you ever taken a planet walk? Along a hiking trail, you start with Mercury and Venus, about the size of golf balls, a few meters apart on pedestals. You walk past melon-sized Mars and Earth to a giant Jupiter, and so on. The realistic size differences are compelling. And the distances? Well, let us say you’d better prepare to reach Pluto.

A planet walk in Somerset, England. (Image courtesy Felix Oldenburg)

For social entrepreneurs, finding capital is like taking a planet walk without water or a map, trying to adapt to the rules for each planet of the social finance solar system. Foundation Planet has no expectations for return but may be quite demanding in restricting spending to a specific purpose (including the purpose of making the foundation look great). Government Planet is super-sized but has a squashing gravitational field of administrative burdens and delays. Impact Investing Planet predicts it will grow massively but only works for a still-small target group of investees. And so forth for private donors, banks, venture capital, and other groups of funders.

There may be plenty to improve on for each of these funders, but the experiences of 3,000 Ashoka Fellows in 70 countries reveal that the main challenge is universal: Funders live worlds apart, in largely self-contained systems with their own ways of doing things.

This simple fact has massive consequences: Most social entrepreneurs face prohibitive fundraising costs, do not get the right funds at the right conditions, and hardly ever get funds when they can best use them to grow their innovations to scale.

Unless we turn the social finance solar system into an interconnected financial ecosystem, we are not going to solve the world’s toughest problems at scale, despite the presence of growth-ready solutions driven by brilliant social entrepreneurs. Consider a few possibilities: Indonesian social entrepreneur Tri Mumpuni could build green micro-hydro power solutions in every community. Teach for All founder Wendy Kopp could recruit top university graduates to teach in tough schools in every city. Gynecologist Frank Hoffmann could prevent deaths from breast cancer with his blind tactile examiners. And Bart Weetjens’ Hero Rats could de-mine former battlefields at scale for minimal costs.

Blaming social entrepreneurs or their lacking financial skills for the failure to secure growth funding is a popular but deeply cynical view on the side of social investors. The real failure is the lack of interconnection among investors.

The social finance system needs to learn two lessons: Every solar system has a center. That’s where the social entrepreneur should be. We should turn the tables, and have fund-pitching rather than fundraising conversations. And every funder should think about making the smartest possible deal, leveraging different risk and return expectations of other funders.

This is not revolutionary thinking. Earlier this year, HBR pointed to the huge untapped potential of combining philanthropic with investment capital. And most success stories of innovations in fact are stories of investors working hand in hand (although rarely by design). A Monitor report a few weeks ago revealed that the microcredit sector required $20 billion in development funds before it became self-sustaining.

We are present at the creation of a much smarter financial ecosystem. Social impact bonds may be hyped but are a great illustration of the kind of interplanetary alliances we need to see more of.

What’s next? Foundations could create guarantee funds that enable a new wave of social investments, banks could provide working capital with philanthropic backing, local governments could issue Human Capital Performance Bonds … This is a time for collaborative entrepreneurship.