Picture: ISTOCK
Picture: ISTOCK

Any economy is driven by innovation. This requires a vibrant entrepreneurial culture, creating start-up companies that are able to come up with new ideas to disrupt markets and propel change.

Over the last few decades, venture capital has become a vital part of this process. It provides much needed finance to start-ups and small businesses with growth potential to allow them to turn ideas into marketable products and services.

Elon Musk’s involvement with Tesla is a good example. He provided much of the initial capital the company needed to support production. Like most successful venture capitalists, however, Musk did far more than make money available. He became heavily involved, offering the company business development expertise and technical support to ensure he had the best possible chance of earning a return on his investment.

Business innovation is not limited to businesses focused on turning profits. Social enterprises with the potential to make social and environmental contributions, particularly in underserved and underresourced areas, are becoming a vibrant sector of the local economy.

IT PRESENTS A HOLISTIC AND RESPONSIBLE FORM OF SUPPORTING SOCIAL ENTERPRISES AND DEVELOPMENT

A survey published by the Gordon Institute of Business Science, the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s Graduate School of Business, the SAB Foundation and the government of Flanders, titled "Social Enterprises in SA — Discovering a Vibrant Sector", defines social enterprises as ones that "either prioritise their social and environmental mission or strike a balance between their purpose and profits".

With all the societal issues facing SA, these organisations have enormous potential to drive social and economic change. However, they find it even harder to attract funding than other start-ups. Banks and other traditional lenders are not familiar with their business models and often do not understand the concept of "good business" – investing in products and services that will deliver a social benefit.

Funds directed to this sector come predominantly through grants and donations. This is not ideal, and is unlikely to be sustainable, for two primary reasons. Firstly, given the large number of organisations that compete for grant funding as well as the onerous reporting requirements, there is a significant time cost incurred in applying for this money, with a disproportionately small chance of success. Secondly, grant funding awards are seldom accompanied by technical assistance or appropriate monitoring and evaluation, which leads to low success rates. So while grant funders often have well-placed intentions, their desired outcomes are rarely achieved.

In light of the challenges faced in grant funding, there is an emerging solution to this issue: the rising interest in venture philanthropy. This is an approach that recognises the potential in social enterprises when they receive appropriate and tailored support. Like venture capitalists, venture philanthropists do not just hand over money, but look to get involved in the business. They also expect similar levels of accountability.

The benefits to social enterprises extend beyond financial assistance to technical and business support, as well as assistance in the development of detailed monitoring frameworks to track their social impact metrics. As a result these enterprises are able to collect quality data on the positive social impact they have created that can be leveraged to attract more funding from various sources, such as development institutions, corporates and high net worth individuals interested in positive social outcomes.

From the venture philanthropist’s perspective, they benefit from having a much better idea of how their funds are being utilised, and the positive social impact created thereby. This is in contrast to pure grants or donations, which typically require some level of reporting, but that reporting may not necessarily demonstrate whether the social enterprise is actually achieving its goals. As such, venture philanthropists commit to work alongside the organisation to ensure it has the best chance of creating a positive return on investment, both financially and socially.

For instance, a social enterprise working to provide small-scale renewable energy connections in rural areas would be expected to set targets for the rollout of these projects. The venture philanthropist could then keep track of how many connections it has facilitated, and how much money has been generated to invest further.

Venture philanthropy presents a holistic and responsible form of supporting social enterprises and development. This strategy has gained traction internationally. In Europe, where venture philanthropy has been active for more than a decade, bodies such as the European Venture Philanthropy Association have made investments of €6bn and more in socially minded organisations.

In Asia, the Asian Venture Philanthropy Network has developed a community of organisations promoting effective social effects across the continent. Its members supported social enterprises in 21 different countries last year, with 75% of the funding going to investments below $250,000.

These examples illustrate the potential for moving away from grant and donation funding only as means of supporting social enterprises. This opportunity should not be discounted in SA, and in fact a few organisations, including the SAB Foundation and E-Squared, are beginning to head down this path.

According to Trialogue’s Business in Society handbook, local corporates committed about R9bn to corporate social investment (CSI) grant funding in 2016/2017 alone. There is a real prospect of channelling a great deal of this more efficiently through venture philanthropy initiatives, as the outcomes are potentially much better for both corporates and the initiatives they are supporting.

Not only will this lead to greater accountability, but it will increase the probability of CSI funding being channelled towards organisations that are actually having a social impact and generating a financial return as well. These investments will be supporting entrepreneurship and building the economy while meeting development imperatives. Venture philanthropy has great potential for successful implementation.

• Moetse is the impact investing project manager at the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business (www.gsb.uct.ac.za/berthacentre).

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