All Ideas
Data and Papers on Impact Investing
April 7, 2015 | Cheryl L. Dorsey and Min Pease

Mind the Gap: It’s Time to Change the Investment Timeline for Emerging Social Enterprises

This article originally appeared on Skoll World Forum.

There’s a lot of debate about what’s next for impact investment – will it go mainstream, or stay a niche market? Whatever happens, it’s clear that the landscape of social entrepreneurship has shifted dramatically in the last decade, and for-profit and hybrid business models are here to stay.

We saw the impact of that shift at Echoing Green this year: our Fellowship applicant pool hit 50 percent proposing for-profit or hybrid models to address the world’s most pressing problems. Almost ten years ago, in 2006, they represented only 15 percent.

As we see the social entrepreneurship field evolve to include those using profit and impact-generating models, investments made to power those businesses must also change. Young leaders who are launching brand new, innovative ideas to change the world need time and “runway” to be able to truly measure and report on their impact and financial returns.

Echoing Green, as one of the few seed funders of entrepreneurs, knows how important it is to invest in the individual leader and not just the business model at an early stage. We like to say that we bet on the jockey instead of the horse.

Take Javier Lozano, 2011 Echoing Green Fellow and founder of Clínicas del Azúcar, a chain of low-cost diabetes management clinics that provides access to preventative and supportive care to underserved Mexicans. Javier decided to run his company as a for-profit because its services cost less than what its customers—low-income diabetes patients—are willing to pay, making the model sustainable and able to scale to serve a large population facing a rapidly growing social problem.

Clínicas del Azúcar estimates it has prevented more than 1,100 diabetes-related complications, reduced patients’ chances of developing one by 50 percent, and reduced clients’ annual cost of medical care by 80 percent. Overall, the company estimates that it has saved patients and society more than $2 million in medical care costs.

Javier is one example of the 600 emerging leaders around the world to whom we’ve provided $36 million in funding and strategic assistance through our highly competitive Fellowship program. We give support to those working across a wide variety of geographies, sectors, and legal structures, and look for high potential talent to move the needle in social innovation. This, we believe, is the smart investment.

As our annual snapshot of for-profit and hybrid fellowship applicants shows, high potential talent can be found all over the world, across sectors. This year continued a four year trend toward an international and less U.S.-concentrated social entrepreneurship pool: for-profit and hybrid applications received from U.S. citizens has steadily decreased from 60 to 39 percent, with non-U.S. applicants largely coming from Nigeria, India, Kenya, and Uganda, and we received applications from eleven new, geographically diverse countries. These are global social entrepreneurship hubs to not only watch, but actively support.

We also see more emerging entrepreneurs applying for-profit or hybrid models to a wider variety of issue areas like education, food and agriculture, and health and healthcare. While there is more diversity across topics, some issues continue to consistently attract applicants using for-profit business models. The Echoing Green Climate Fellowship, for example, received the highest proportion of applicants with for-profit elements, at 59 percent. The fellowship, which launched in 2014, is specifically targeted at next-generation social entrepreneurs working on innovations in mitigation and adaptation to climate change.

What we’re hearing from Fellows seeking and receiving investment, and what we see in fellowship application data, are gaps in support and funding in the phase between seed funding and growth. To really prove the impact investing market’s sustainability, investors shouldn’t all be waiting for evidence of market rate returns in later stage companies, but need to start betting on these young jockeys and provide early stage investment to unleash tomorrow’s impact and financial success stories.

Echoing Green is addressing the gaps in support resources for start-up businesses by helping our Fellows become investment ready and creating tools and resources specific to early stage social entrepreneurship. We’re also elevating our for-profit Fellows’ collective voice in the impact investment community to insert their shared challenges and opportunities into market-building conversations.

Next-generation ideas take not only time, but perseverance. We’ve evaluated tens of thousands of “jockeys” of social enterprise since 1987, and while the enterprises they lead comprise a wide array of sector and geographic areas, their leadership profiles look remarkably similar.

Our support to all Fellows, regardless of legal structure, is based on the individual’s needs – emerging talent using all kinds of business models is important to move the social entrepreneurship field forward. As a collective ecosystem fostering global social innovation, we must coordinate our support to emerging leaders so they can get the investment they need every step of the way. We provide seed funding – we like placing the early bets – and we need others to step up, double down on young leaders, and provide follow-on support and investment.

Photo courtesy of Essmart