The Role of Socially Responsible For-profit
Entrepreneurs & Philanthropists in the
Development of Social Enterprises
Conference Presentation
«Social Entrepreneurship A Vector of Change in the EU»
Dr. Maximilian Martin
Ljubljana, 15 April 2011
CONTEXT: THE GREAT CONVERGENCE
A Historical Phenomenon
Expected Social Return
High
Impact Economy
«Four Revolutions»
«Vision of shared
value»
Private sector
Philanthropy
Low
Low
High
Expected Financial Return
Source: Martin
© Maximilian Martin 2011
THE VALUE VECTOR
Driving Investment, Powering Change
In philanthropy, capital will be deployed increasingly
based on the principle of creating social value,
as opposed to nurturing donor-grantee relationships.
In business, capital will increasingly be deployed
based on values instead of market anonymity.
Source: Martin
© Maximilian Martin 2011
IMPACT ECONOMY
Social Entrepreneurship & Sustainability Capitalism
Supply
Demand
?
Annual income, México (USD)
7.4%
$23,832 +++
14.8% $9,814 - $23,831
A/B
19%
$3,253 –
$9,813
31.3% $1,907 - $3,252
C
17.8% $758 - $1,906
9.7%
$0 - $757
LOHAS
C+
D+
D
70%
E
BoP
Fuente: Martin, Ignia, Innternt
© Maximilian Martin 2011
ENTREPRENEURSHIP & TRANSFORMATION
Stepping it Up
$55.00 T
$55
$50
Enabling Factors
Total Dollars ($ Trillions)
$45
$40
Impact Investing has the
potential to grow to
about 1% of total
managed assets, which
would result in about
$500 B of capital
channeled toward social
and environmental
impact.
$35
$30
$25
$20
$15
$10
$5
♦ Government funding is
scarce
♦ Companies look for
authentic engagement
♦ Increasing number of
social businesses
$7.2 T
$0.50 T
$0.31 T
U.S.
Global Social
Philanthropic
Screening &
Giving
Shareholder Advocacy
$0.03 T
♦ Risk capital available
Microfinance
Global
Managed
Assets
How to get there? A Framework for Action:
Beyond Government:
A Multi-Trillion Dollar
Social Capital Market
Source: Monitor; Martin
Beyond
Philanthropy:
Five Frontiers
Beyond Profit:
Authentic
Engagement
© Maximilian Martin 2011
Powering
Change: The
Value Vector
ADAPTATION
Challenges & Opportunities
© Maximilian Martin 2011
MAPPING OF INSTRUMENTS
Support According to Phase
Source: Adapted from Busink
© Maximilian Martin 2011
INVESTOR PREFERENCES
The Etic View on Social Business
♦
General demand for investments with a meaning (such as social or environmental
impact), and investments in frontier markets is rising.
♦
Capital is there: a substantial percentage of investor portfolios is still in cash after the
financial crisis (30+%).
♦
Investors like liquidity, steady returns and bond-type instruments.
♦
Many venture capital and private equity funds still have «dry powder», assets that
were gathered prior to the financial crisis, and have not yet been invested. This
means that sourcing fresh capital for illiquid, long-term investments is hard.
♦
Investors and investment intermediaries like larger deal-sizes and co-investments.
♦
There is a sense that many social entrepreneurs are too small to be truly investable
without hidden subsidies or foundation grants that pick up some of the due diligence
and monitoring cost.
♦
There are questions about the institutional durability of social enterprises.
© Maximilian Martin 2011
SOCIAL ENTREPRENEURS’ PREFERENCES
The Emic View on Social Business
♦
There is a tradeoff between maximizing social impact and maximizing profit.
♦
There is a profit distribution challenge: communities vs. social entrepreneurs vs.
investors.
♦
Fundraising takes an enormous amount of time, distracting from operations and
grassroots communities; moreover, as all capital markets, impact investment markets
are also characterized by an unequal power relationship between capital providers
and capital seekers (here: impact investors and social entrepreneurs).
♦
Impact investment has a flawed DNA: conceptualized primarily by investors with
limited input from social entrepreneurs and stakeholder communities, the ultimate
accountability element of the equation has to be worked out.
♦
Terms are mainly shaped by investors, replicating conventional investment
approaches, with an added feel-good advantage of doing good and doing well.
♦
Impact Investing 2020 could become just another marketing concept.
© Maximilian Martin 2011
THE «INSTRUMENT» SCHOOL
Taking Advantage of New Mechanisms
Observation "Instrument" School
Starting point The social capital market is highly inefficient
Problem
Social entrepreneurship is underfunded
Solution
Gather and aggregate capital
Constraint
Availability of capital
Needed Step New legal and investment vehicles
Example
L3C
Source: Martin
© Maximilian Martin 2011
THE «INVESTIBILITY» SCHOOL
Taking Advantage of Capacity Building
Observation "Investibility" School
Starting point The social capital market is highly inefficient
Too few social enterprises are ready to become
Problem
recipients of investment
Solution
Make organizations "investible"
Constraint
Absorption capacity
Needed Step Social enterprise capacity building
Example
Ashoka-McKinsey Summer Study 2010
Source: Martin
© Maximilian Martin 2011
TOWARD A SOLUTIONS FRAMEWORK
Unbundling the Value Chain is Key
Lead Question:
♦
Where do I need
philanthropy now
and in the future?
♦
Where can I use
investments now?
♦
Where can I use
investments once I
am at scale?
Reporting practices,
governance practices,
physical infrastructure
Productivity of
human
resources
Infrastructure
Human Resources
Cost-effective
platforms and
technologies
Technology
Rewarding
excellence
and efficiency
Procurement
Logistics Operations
Value
Chain
AfterMarketing
Sales
& Sales
Service
Responsiveness to
clients after
delivery cycle
Innovative
supply chain
management
Environmental
impacts
Organizational
design features
Source: Martin
© Maximilian Martin 2011
Entrepreneurial
marketing, pricing
and positioning
A GROWING EXPERT SYSTEM
Reaching Scale
Key idea:
SE industry as an alternative
expert system to development
industry and charity industry
Budget: Ashoka current annual budget of US$50mn; Red Cross US$1.3bn
Infrastructure: Global Fund spent US$40mn in software, Pictet spent US$400mn
Fellows: Today 2000, UNHCR alone has 10x more people on the ground
© Maximilian Martin 2011
A MATURE GLOBAL INDUSTRY 2020?
Social Entrepreneurship Comes of Age
If SE Industry manages to deliver…
♦ It will grow exponentially
♦ It will provide solutions across all issues
and geographies
♦ It will fundamentally change the way private
and social sector interact
♦ It will be the innovation powerhouse
for high-impact economic solutions for governments
in times of tightening budgets
© Maximilian Martin 2011
BACKUP
© Maximilian Martin 2011
FROM SOCIAL ENTREPRENEURSHIP
To Synthetic Social Business (I)
♦
Since the turn of the millennium, a veritable field of social entrepreneurship has emerged.
More and more mainstream institutions looked to funding quality social entrepreneurs. But
the field remains highly fragmented – for social entrepreneurs and more classical
nonprofits alike. This holds back investment by raising costs and complexity. Consider that
of 200,000 nonprofits founded in the US between 1970 and 2003, only 144 had reached
revenues in excess of US$ 50 million by 2003. Fragmentation lowers the entry barrier for
innovation, but it imposes higher transaction costs and renders expansion more difficult.
Compare the due diligence and portfolio management costs to be borne by a 100 million
US$ debt or equity investment vehicle with 100 portfolio investments of US$ 1 million each
to a more standard private equity investment vehicle of the same size where the average
investment is US$ 10 million. Assuming a typical private equity screening ratio of 100
opportunities for every investment made, the first vehicle would have to find, screen and
monitor 10,000 opportunities, whereas the latter has to find, screen and monitor only
1,000. Moreover, in terms of effort-reward ratio, it is typically harder for social businesses to
achieve full financial viability than for purely commercial ventures.
Source: Martin
© Maximilian Martin 2011
FROM SOCIAL ENTREPRENEURSHIP
To Synthetic Social Business (II)
♦
Moreover, in the 2010s we are about to reach a point where the relative supply of highperforming individual social entrepreneurs is becoming constrained vis-à-vis demand for
such talent. The problem is straightforward: There are not that many “Dr Vs / Aravinds” that
can be scaled further if additional finance is tapped through financial engineering. On a
sustainable basis, and as a rule of thumb, one can find about one additional Ashoka-quality
social entrepreneur per annum per 10 million inhabitants. This means that we could in
principle source 680 new social entrepreneurs per annum (at a current global population of
6.8 billion).
♦
One solution that is likely to be adopted on a wider basis going forward is to leverage
social entrepreneurship talent through structures. This means setting up institutions and
design and maintain incentive systems that reward aligned socially entrepreneurial
behavior throughout an organizational pyramid and set boundaries on what not to do. We
can refer to this approach as “synthetic social business,” where social entrepreneurship is
incubated systematically in incubators such as hearts in South Africa.
Source: Martin
© Maximilian Martin 2011
FROM MICROFINANCE TO
Inclusive Financial Services (I)
♦
Assuming an average loan of US$ 500-1000, the current market size is at US$ 75-150bn,
suggesting a 30% annual growth of the industry over the past ten years, when market size
was estimated at US$ 15-30bn. Underlying market demand is much bigger. Estimates
indicate that there are at least 500m micro-entrepreneurs worldwide. Each would require
on average at least US$ 500 p.a. to sustain their family and activities, yielding a target
market of at least US$ 250bn. About 10%-20% of market demand is currently being met.
♦
From an investment perspective, about 250 MFIs around the world are currently
commercially self-sustainable and interesting targets for foreign investors. India in
particular is a “hot” MFI theatre. Pre-financial crisis, the balance sheets of many MFIs were
growing at an average rate of 25%-50% p.a. Most capture savings locally and are at least
partially owned by local investors. In the 2010s, we can expect a further development of
the microfinance industry along three vectors, completing the industry’s shift from
microfinance to inclusive financial services.
Source: Martin
© Maximilian Martin 2011
FROM MICROFINANCE TO
Inclusive Financial Services (II)
♦
(1) The mainstreaming of microfinance means increasing attention to the corporate social
responsibility of MFIs e.g. social governance; labor climate; contribution to financial inclusion; fair
treatment of clients; diversity and quality of products; social responsibility towards the community;
and environmental policy.
♦
(2) As MFIs look for opportunities to grow their business, they will gradually cover all segments of
the unbanked from micro to small to medium entrepreneurs – and also social entrepreneurs.
♦
(3) Following the evolving financial product needs of the micro, small and medium entrepreneurs
to improve their living standards, MFIs have already moved from microcredit into micro-savings,
micro insurance, and micro-remittances. Via such “horizontal growth”, many MFIs now transition
from a single product offering such as micro-enterprise loans to a framework of inclusive financial
services covering the entire span of daily needs and correspondent capital requirements, from
micro-housing to micro-utilities, micro-energy, micro-insurance, etc.
♦
As the decade progresses, increasing scale, vertical, and horizontal integration mean that
investors will also face more choice and opportunity in each of the five possible pathways to
invest in microfinance: direct equity, specialized funds, lending and guarantee schemes,
investment banking and structured products, and IT-based peer-to-peer investment.
Source: Martin
© Maximilian Martin 2011
FROM DEVELOPMENT ASSISTANCE
To Bottom-of-the-Pyramid Investing (I)
♦
The deconstruction of the development assistance paradigm needs to be understood in
the context of a fundamental mindset change concerning the role of markets and business
in development. Since the 1980s, the problem of underdevelopment started to be
reconsidered in terms of opportunity and business, as the now widely adopted term
“emerging markets” suggests. Originally coined by World Bank economist Antoine van
Agtmael, it has partially substituted earlier concepts such as Third World or developing
countries. Development assistance is increasingly questioned as problematic and
transaction costs often assumed to be even higher than in the social capital market,
whereas market-based investment solutions are instead seen as a more effective way
forward. Thus the recent re-conceptualization as the so-called “base of the pyramid” (BoP)
as a gigantic market with four billion people and pent-up demand for a whole range of
goods and services in areas such as education, health, housing and sanitation.
Source: Martin
© Maximilian Martin 2011
FROM DEVELOPMENT ASSISTANCE
To Bottom-of-the-Pyramid Investing (II)
♦
We currently witness the early days of BoP investing. Over time investments at the bottom
of the pyramid are nevertheless likely to become another emergent asset class that will
draw interest from commercial capital market players. The rate of change seems to be
faster than in the history of the microfinance industry. Dedicated BoP investment vehicles
(BIVs) were beginning to be created in the 2000s. Similar to the MIVs which would have
had no portfolio MFIs to invest in if there had not been philanthropic money and
development assistance to get them off the ground, different forms of grant funding of
portfolio companies at some point in their lifecycle is similarly essential to BIVs. As a rule of
thumb, proof of concept needs grant money, whereas scaling up requires commercial
money.
♦
BIVs therefore often operate in partnership or with the assistance of philanthropicallyminded or multilateral players who want to draw commercial capital into the development
equation and are happy to establish joint capital pools. The original grant pool can be
enlarged via investment arrangements that combine investors and philanthropists into
consortia or funds, taking into consideration their different risk tolerance, return objectives,
and expertise sets. Going forward, the joint capital pool approach where philanthropic
organizations and businesses collaborate to jointly develop a solution that neither of them
could orchestrate alone will become widespread.
Source: Martin
© Maximilian Martin 2011
FROM CLASSICAL PUBLIC GOODS
To Privately-funded Provision (I)
♦
Grants remain today’s core business of philanthropy and social entrepreneurship, and
many of the fundamental challenges humanity faces in the 21st century cannot be tackled
by markets alone. Free markets do not internalize externalities such as environmental
destruction or negative public health impacts on populations that are not working in the
formal sector. To address these and other challenges, private or public subsidies are
required. In some cases, subsidies can and should be temporary, and directed toward
establishing functioning market places. In other cases concerning pure public goods such
as, say, human rights, subsidies are required on a permanent basis to achieve the social
objective in question. But if subsidies will continue to play such an important role in
philanthropy, we need to ask how grantmaking itself is being transformed by the changes
under way.
♦
Thinkers such as William Petty, Adam Smith, and John Stuart Mill argued for centuries for
the large-scale provision of public goods by governments. They only became a reality with
the rise of the welfare state in the industrialized world in the twentieth century. Today, public
goods are omnipresent and their provision is expensive. Given the state of public finances
in the European Union and around the world, long-term demographic trends, as well as the
inherent limitations to the risk-taking capability of the public sector, a window of opportunity
has opened up for providing public goods through market-based solutions. Germany’s
federal social spending alone exceeds €154 billion a year; we need to find ways to create
greater impact with the resources allocated. This requires creating incentives that reward
excellence in public goods provision and continuous improvement and innovation.
Source: Martin
© Maximilian Martin 2011
FROM CLASSICAL PUBLIC GOODS
To Privately-funded Provision (II)
♦
To allocate capital efficiently, techniques and concepts of capital markets and investment
banking can be applied to financing solutions for public goods. Reducing transaction costs
will free up resources and create greater impact. Market-based funding solutions make
sense in one of three cases:
(1) whenever addressing a problem now is cheaper than addressing it in the future when a
public commitment is actually paid out,
(2) when the most efficient solution provider is not a government agency, or
(3) when new market places need to be constructed to create a comprehensive solution.
♦
One promising way forward are social impact bonds: capital market transactions where
private investors provide risk capital to fund a more efficient solution to a social problem,
and are then later rewarded with appropriate financial returns if the solution they backed is
successful and saves public money.
Source: Martin
© Maximilian Martin 2011
CONTACTS
Dr. Maximilian Martin
35, Rue de Montchoisy
CH-1207 Geneva
Switzerland
M +41 79 592 99 92
maximilian_martin@impacteconomy.com
© Maximilian Martin 2011
DISCLAIMER
No Offer: No information provided in this document regarding services or products shall constitute or be construed as an offer to sell or as a
solicitation of an offer to acquire securities or other instruments in any jurisdiction where such offer or solicitation is prohibited by law or in
which the person making an offer or solicitation is not licensed or registered to do so or to any person to whom such offer or solicitation is
contradictory to local law or regulation. Any such prohibited offer or solicitation is void and we will disregard any communication received in
respect thereof.
Distribution of funds: This document contains information concerning investment funds that are registered and managed in different
jurisdictions. As a consequence, this information is not directed at persons who are prohibited from accessing this information by laws and
regulations which prohibit the publication or access to the information in question by virtue of the nationality, place of residence, domicile or
registered office of the person or entity concerned or on other grounds. The investment funds stated on this document are not licensed for
marketing in all countries of the world.
Risks: The future performance of an investment cannot be deduced from previous value since the investment may fall as well as rise. In
addition, investments in foreign currencies are subject to exchange rate fluctuations. Thus, the investor may not get back the amount
invested. We recommend that you get advice from your advisor prior to making an investment.
Exclusion of liability: We expressly disclaim any liability for losses or damages, whether direct, indirect, foreseeable or unforeseeable,
incurred or suffered by any user of this document or of the information provided in this document. By accessing this document, each user
fully releases the document author and all of its affiliates and its respective partners, directors, officers, employees and agents from any and
all claims, right and recourses for such losses or damages.
Information provided by third parties: This document may refer to information provided by third parties. We have not verified whether such
information is reasonable, accurate, reliable, complete or up-to-date. Links to other sites do not constitute our approval or endorsement of
such sites or its products or advertisements. We are not liable in connection with any such information provided by third parties.
No reliance and no warranty: This document may include technical or editorial inaccuracies or typographical errors. The information on this
document has been prepared solely for information purposes. While we have made every effort to ensure that the information on this
document is accurate at the time of publication, we make no representation or warranty in any manner, expressly or by implication, as to the
accuracy, reliability or completeness of the information provided in this document. We shall not be obliged to remove outdated information
from its document or to expressly mark it as outdated.
Confidentiality: Any confidential, proprietary or sensitive information transmitted by a user by means of this document may be read and/or
copied by unauthorized persons.
Copyright: The entire content of this document is subject to copyright with all rights reserved. Without my prior written consent this document
or any part thereof may not be copied, transmitted (by electronic means or otherwise), modified, linked into or used for public or commercial
purposes.
© Maximilian Martin 2011