This is included in the (highly recommended) report of the Alternative Commission on Social Investment, published last week
The ideas are explore in more depth in the piece on If social sector funders were actually like Venture Capitalists
Some of this generalises, perhaps at times unfairly, but the key issue is the talents and skills of the people in any institution. And the hype failing to live up to reality in some arenas of social investment is a talent issue for me – that shouldn’t be glossed over too uncritically.
The big issue I see is that the people making investment decisions are still locked within the mindset of many of the very large institutions from which they have come – regardless of sector. They often have sweet FA idea about what it means to run an organisation with a turnover of <£5m – the different market dynamics that social sector organisations face in terms of ‘revenue streams’, just what operating a start-up is like, funding gaps, how strategic planning is substantially different at that scale. Big city firms wouldn’t go near the start-up size enterprises that the social sector is trying to support and therefore one shouldn’t expect those from that background to understand the issues intuitively.
Silicon Valley seems a good analogy for a market that finds ways to allocate significant sums of capital to organisations with hardly any discernible/proven early-stage business model (like most social sector organisations?). Someone can likely prove me wrong, but the best VC firms (it seems to me – like Andreessen Horowitz or Founders Fund) are those where the principals/partners founded huge and successful companies. Show me a social investor who used to be a successful social entrepreneur and so can have a really intelligent conversation with potential investees about having been there and done that.
There is a challenge that social entrepreneurs don’t typically ‘get rich’. But lots of VC firms only have a small core of founders’ money, backed by other investors. So you need not be massively rich to have a lot of money to invest. Crucially they are held accountable though – bad investments will lose them money. At a SIFI or Foundation?
I also get the feeling that in a good VC firm the Principal is making the decision – and is also doing a good deal of the venture hunting. Whereas with SIFIs, you go through a tonne of committees before you get to a decision-maker and then the final decision is still made by an investment committee with people that might only be doing their investing part-time (who you might not even meet). Venture Capitalists are professionals, venture philanthropists and social investors are relative amateurs. In the VC world, investing in new ventures is the full-time job of the person who makes the investment decisions, and they work at it. Or at least it has been their full-time job, they have grown up in the space, they have lived it and breathed it. It might even be a good chunk of their wealth. This is not some sideline, nor some career change, a part-time secondment or something where success or failure, you still get paid at the end. Although venture philanthropists and social investors often have well qualified staff teams, most social investors and venture philanthropists operate where the decision making power still sits with people who do their philanthropic activities as a sideline, on boards of trustees, or part-time as social investment advisors. Investment committees are typically populated by ‘private sector expertise’.
I was struck speaking to a very successful social entrepreneur who has a big funder on their board and the funder was saying: “yeah we can get you money for that’. The social entrepreneur thought: “no, you can’t, because you’ll go back to the office and I’ll have to fight through all your underlings and then your board and the idea will die a horrible death.”
I want to look into the whites of the eyes of an investor and have them tell me my business is crap – not one of their team tell me that I couldn’t fill in their box ticking exercise. I think I could name you 5 or 10 people – successful social entrepreneurs – who if they were allowed to make investment decisions and sit on the boards of their investees could transform the social investment market. They just know how to fix stuff for real, rather than advise you to attend another training session or live in some hypothetical world where lots of social enterprises are magically going to scale in the next two years.
The market needs a mixed landscape of talent – many founders would make terrible investors I’m sure – but it seems too concentrated in the wrong ways at the moment. And it leaves a lot of organisations with too little respect for those that have funded them along the way. Either investees are ungrateful, or we have a problem.