This article originally appeared on Forbes.
As impact investing becomes more and more popular, discussions are becoming more sophisticated around measuring impact and benchmarking financial returns. Yet while investors clarify their needs and requirements to invest, there is still work to be done to get start-up social entrepreneurs investment-ready. It requires asking entrepreneurs what they need and better defining the spectrum of “impact investment readiness.”
What I’ve seen, and what data from Echoing Green Fellowship applicants show, is that unlike typical start-ups operating in mature markets, entrepreneurs who seek or receive Echoing Green funding largely need subsidized financial runway to innovate , learn, and de-risk new business models that address institutionalized social problems largely deemed intractable. Particularly for social enterprises, a longer timeline to, or lack of, potential robust financial returns to investors makes them a difficult sell to angel networks, venture capitalists, and other traditional sources of early investment.
However, while many entrepreneurs use grant money to help get off the ground, it comes with its own challenges. As one of our Fellows running a hybrid organization said, “In the beginning, [I felt] the more grants, the better—it’s great not to give away equity… [Now] I understand that I can’t use grant money to build infrastructure or operations.”
It’s clear that impact investment can play a crucial role in launching and sustaining social enterprises, but it’s also clear that basic education on the landscape of impact investment among emerging social entrepreneurs is needed. In a white paper we published with support from partner the U.S. Global Development Lab at USAID, analysis of Echoing Green’s applicant data showed that most entrepreneurs have tried or are trying to get impact investment. While the term “impact investing” is well-known, roughly one in five don’t know what it means specifically for their organization.
Additionally, emerging social entrepreneurs report needing distinct types of investment-readiness support to grow. Founders of hybrid organizations indicate a need for a broader range of organizational supports, while for-profit organizations report primarily needing access to investors. However, what I’ve seen is that along the spectrum of “investment-readiness,” Fellows and other social entrepreneurs may identify themselves as investment-ready while feedback from investors indicates that earlier-stage support is still needed to secure investment. As a result, emerging leaders in social enterprise aren’t getting funded, and their innovative business models won’t become tomorrow’s success stories of the impact investing market.
It’s important to consider both sides of the table – investor and investee. We need to spend more time talking to each other – what these social entrepreneurs really need to become deal ready – and then co-create solutions. As this incredible pipeline of social entrepreneurs operating innovative profit- and impact-generating models grows, a new approach to finance and support that cultivates these innovative leaders must also emerge.