scales with money cash coins
© Dreamstime

When Robyn Scott founded the Apolitical website, she thought the venture’s offer of market-rate returns and high impact would make it doubly appealing to investors. Instead, it made it more difficult to fundraise.

“It put us in a tricky middle ground,” she says. “Traditional investors loved us but thought because we talked about impact, we must be sacrificing returns. Impact investors were often uncomfortable with the capital demands and longer timelines required for our global ambitions.”

Her company offers policymakers free access to articles about innovative public sector policies as well as networks to discuss them with practitioners. It charges governments for training, while private sector subscribers pay to showcase their products and services on Apolitical’s platform.

Scott’s experience highlights some of the challenges facing entrepreneurs in scaling up their social impact enterprises: from varied perceptions and definitions, to gaps in capital and expertise, as well as inconsistency in the different ways would-be funders conduct assessments.

“Many investors think women can’t be focused on both impact and returns,” she says, referring to herself and her female co-founder. “Impact investors also want lots of rapid, concrete indicators that are easy to measure like staff retraining, surgeries conducted or wells dug which are vivid, faster to materialise and easier to measure. Ours are . . . longer term but could help governments improve the lives of millions of citizens.”

Measuring impact is one pivotal issue which triggers much debate among investors and frustration among companies seeking funding. There is little consensus.

Some highlight the narrow benefits of a project but neglect broader costs to wider society. Many impose additional costs in their efforts to measure impact; few rigorously assess and compare actual outcomes with alternative scenarios.

A second, broader, problem is access to capital itself. While many start-ups complain that there are plenty of good projects but insufficient funding, many investors claim the reverse. “The challenges for impact companies are like those for any start-up: the proportion that get the funding they need is a small fraction of the total,” says Jon Shepard, director of Enterprise Growth Services, a social enterprise advisory service within EY, the consultancy.

He argues that compared to purely commercial businesses, impact companies more often tend to use less well-tested technologies, such as mobile pay-as-you-go systems, for which consumer behaviour and market trends are also uncertain. By their nature, they tend to focus on low-income customers rather than more “investable” enterprises targeting more lucrative higher income clients and premium markets.

That points to the need for very well honed pitching skills alongside a robust underlying model. “A lot comes down to the personality, persistence and profile of the entrepreneur,” he says. “Some will simply not take ‘no’ for an answer. They are very good at pitching, being on the conference circuit and putting themselves in the minds of investors. They have to be able to demonstrate a sustainable business as model as well as a social case.”

Tim Brady, a partner at Y Combinator, which provides seed funding and support for early-stage companies, agrees on the importance of communication skills. “A lot of founders are engineers who see problems so they start by describing them,” he says. “We say ‘talk instead about what happens if you solve the problems’.”

Others, such as the Aspen Network of Development Entrepreneurs and some online tools allowing projects to compete for investment, can play an important role in providing networks, advice and sometimes investment and partnership.

Yet if founders often spend large amounts of time presenting their ideas and fundraising, there is also a risk of distraction. Kevin Starr, head of the Mulago Foundation which supports social impact investments, argued in a Stanford Social Innovation Review article that many start-up competitions are wasteful because they offer only modest funding, reward the wrong organisations and focus on innovation rather than implementation.

Shepard highlights two other hindrances for start-ups. One is a shortage of talented staff, notably among middle-level recruits who — unlike founders — may be less inclined to take financial risks working outside the mainstream. Yet they are essential to a company’s success.

For Scott, who recently closed a second round funding of £1.5m, a final frustration is the relatively small universe of impact companies. “One challenge is the lack of precedent,” she says. “If you’re in a category of market rate returns and high impact, there are not a whole lot of companies you can point to. Once we get more, it will be much easier.”

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article