Why nowadays there is a need of the combination of philanthropy and business?
- Everyone realize now, that the magnitude of social problems is so big, that neither government, nor the social organizations or private sector can solve them on its own. So to address those environmental, social or economic challenges there is a need for cooperation of different stakeholders. The other thing is that the business community and entrepreneurs have more experience in scaling solutions and reaching new markets. While social organizations often face problems to grow their impact and scale – for different reasons, like access to funding or lack of business competence in the teams. Hence, this cross-sector partnership is needed. And when it comes to introducing solutions at the state level and making them a part of legal system, we need all the parties to cooperate, including the government.
How to make such type of business, with impact, really effective in solving the social problems?
- A lot needs to be done with impact measurement. It starts with the theory of change for a particular business – what is the problem we want to address, what are the roots of this problem, how we want to address it, with what means (finance, skills), what is our ultimate objective that we want to achieve. And then how we want to measure whether the solutions, that we are applying, are effective. So I think the impact measurement is really important. It can help us to understand, that we are actually reaching our goals by spending our money, time and competencies in a best possible way.
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How to fight with trend of creating various NGOs or funds, which are only wasting grants money without real impact?
- First of all, it needs a bit more time to explore whether the NGO indeed is not having real impact. One would need to explore the conditions in which given organization is operating and also understand the social problems and the ways to tackle it. Social change takes time and there are no quick fixes. Therefore, the grants are important financial instrument and should be used to test different approaches, to prototype and take risk. It should not be the case, where grant is used only for creation and functioning of an organization. Grant cannot be the only source of revenue for organization. Obviously it creates dependency. From a social investment perspective the donor, grant maker has negative return, but it should be positive on the impact side and the results should be transparent and satisfactory for the donor. Hence, the issue is not the grant in itself, but its allocation: was it effective? Was it helpful to sustain the organizations’ work long term or they will struggle to fund those activities in a month or two, again? Same time, grants could be part of the bigger spectrum of capital deployed. For example, there is a social enterprise, which wants to test their service on the market for free to some vulnerable groups of society. And maybe at some point it can start to charge little fee for that service to build in their own revenue, to be less dependent on grants that may come or not. In this case grants could help them to kick-start, but later they cannot rely only on them to sustain its work. The other risk of using grants might be is negligence about competition and not paying enough attention to quality of activities or services. Because with free, even though restricted funding, there is less pressure on the quality of your services or activities.
What are the main challenges for impact investment?
- First of all it is the understanding of the concept. Social investment is about building of sustainable organization or company that can deliver social impact on the large scale and long term. Second is the knowledge of how to do it, the tools to implement this approach in a right way. In the future the impact investment should become a norm. Some years ago, with the rise of the concept of corporate social responsibility, there was a buzz about companies, which need to be responsible for their employees, supply chain, communities. Today social impact should be embedded in the business model of every company. In ideal world, every person, who starts its business, should think about social impact from the beginning and how to incorporate it in their activities, no matter if you are a founder or an investor. In an ideal world, we should be eradicating those businesses that are creating damage. However, we need companies in gas and oil, meat industry or textile and there are ways to mitigate environmental and economic risks, which they are causing. Impact investing is one of the ways to do that, as we see companies developing inclusive business models or engaging with their suppliers to improve the conditions of work but also source of their raw materials (i.e. organic cotton and recycling in textile industry).
In Central Europe we face other challenges. Dependency on grants decreased the level of entrepreneurship in the social sector, ability to scale some of the good solutions and to convince investors to invest in such projects. In Visegrad countries, most of the EU member states in CEE, we observe the first generation of people, who are inheriting and managing family business from their parents. In Ukraine you can see this process too. There is a second generation of people with wealth coming and also engaging in different philanthropic and social activities. They are more aware and more eager to engage in social investment possibilities. Other countries in CEE are still catching up economically and they are still building their businesses in national markets, already contributing to charities. So we need more awareness for them, that they can allocate their money in a more efficient way, often to the same causes or organizations. Of course there are problems with the sector infrastructure – we have lot of incubators or acceleration programs where different social projects can obtain funding to start, but then there is this financing gap, the so-called “Valley of Death”, where those social start-ups cannot find funding to stabilize and grow their businesses – often at the range of €50 000 – 250 000. So the challenge is to fill in this funding gap, and move from this early stage and help them to grow.
How to make impact investment more profitable?
- If you go to impact investment to make money, then it is wrong. This is not a place where you will have big profits. One of the impact investors from Italy said that we are here for social impact, not for an easy life. So if you want to make a change and create sustainable company or organization, that can deliver solutions for long term, this is your place. And maybe you can have some small return of your investment, up to 4% or 8%, but at least you will know, that your company is really changing things for better for people, for environment, eventually for you. Impact investors strive for sustainability and increasing social impact of their investment. And in most of the cases the companies they invest in need to have sound business model, with revenues coming in, just like other regular businesses. But impact investors are ready to compromise small financial return over social impact, it will be more important for them.
Could you share some examples of successful social investment?
- Auticon (https://auticon.com/), it is a company set up to employ people with Asperger syndrome. Currently they have 8 offices in 8 countries, they employ 270 people, two third of them are with Asperger syndrome. They hire them as specialists. And it’s a very successful business with social mission. Because those people are unable to find job on the market, they need some kind of pension or social benefit. In Auticon they are delivering quality IT services. There other examples, like elderly houses. There are models of elderly care, where these people stay in special houses 24/7. And the revenue model is usually a combination of private money, because these people have some retirement, public subsidy or contract, and sometimes investment in property development and purchase of the land. One of the investors, who have other businesses, started such elderly house as social business. He bought a land plot, which was not in a very attractive place, so not very expensive, he invested in facility for 120 pensioners, developed it. According to his calculations, after 8 years it is going to be paid back and he will invest in a next facility. So the money is working, but at the same time it is an impact investment. Maybe he even got some additional positive publicity around that engagement, which is entirely fine in my opinion.
Government involvement – is it a necessary tool or just another obstacle?
- I think it’s a necessary help, especially when it comes to supporting companies and organizations at early stage, and then scaling. Government can also address the gaps in the ecosystem – i.e. the “Valley of death” mentioned earlier. If we really want to scale some solutions, incorporate them into legal frameworks, to make provision of welfare services better – then we need the state to involve. The most important here is to provide regulation to encourage and to support, but not to overregulate, because in some countries there are so many barriers. In Belarus there are plans to make some legislation regarding social entrepreneurship and social organizations and businesses are concerned that it might be a problem, rather than encouragement.
The other thing is that the government could provide incentive frameworks for the investors. For example in UK, where the social investment market is quite advanced, there is a lot of social enterprises in communal services like providing homecare, basic healthcare or transportation – that would be normally contracted by governmental agencies or traditional commercial entities. There is tax relief for investors, if one invests financially in a social business, one can deduct up to certain amount from its tax base. In France they have 90/10 funds, those are saving schemes for employees in large companies. Employees are putting aside their money for retirement, like saving accounts and 10% of those savings is actually going to a state fund, which is distributing money to support social investment. There is also a role for government to take risks on early stage of the project, with subsidies or grant money.
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Ewa Konczal. She has Master degree in Marketing and Management. Worked in India with Global March Against Child Labor, and in Egypt with AIESEC and Egyptian-Polish Businessman Association. Ewa has over 15 years of experience in social entrepreneurship as Representative of Ashoka in Poland and as Ashoka Director for Central and Eastern Europe. Since May 2014 – Central and Eastern Europe Manager in the European Venture Philanthropy Association (https://evpa.eu.com).