Social impact investing
Explorative study into social impact investing industry
in Western Europe
Name: Sam van der Heijde Student Number: 2588877 (VU)
11427876 (UVA)
Date: June 2018
Assignment: Master Thesis
Programme: MSc Entrepreneurship Name of supervisor: Thompson, N.A. VU email address: 2588877@vu.nl
Preface
I would like to express my gratitude to my thesis supervisor Dr. Neil Aaron
Thompson, who has been a tremendous help during the master thesis process. Furthermore I
would like to thank Ashoka Netherlands for the opportunity to do a research internship at
their company about the subject of impact investing. They have been a great help in getting in
contact with some very insightful social entrepreneurs/investors. To the latter I would also
like to thank you for taking the time out of your busy schedules and sit with me and share
your expert opinions.
The copyright rests with the author. The author is solely responsible for the content of
the thesis, including mistakes. The Faculty of Economics and Business is responsible solely
for the supervision of completion of the work, not for the contents.
Sam van der Heijde
Amsterdam, June 2018
Abstract
Recently, scholarship has been interested in a relative nascent subfield of social
finance, also known as social and environmental (S&E) impact investing. S&E impact
investing is the process of investing financial capital into companies and organization who
have the intention to pursue both social and ecological and financial goals. This study
investigates why social impact investing continues to struggle in Western Europe and
possible ways to overcome these challenges. I find that there are a number of reasons why the
industry is lacking size. The most supported findings are that social entrepreneurs lack
business expertise; there are not enough viable investment opportunities; and there is a
certain time element that impedes the number of impact investments in Western Europe.
Furthermore I find empirical evidence that the industry as a whole is subject to a liability of
newness. Through an analysis of a series of external factors suggested by Stinchcombe
(1965) and my findings, I argue that besides a certain learning period, the industry could
benefit from governmental regulating policies, professionalization in the sector,
training/education, proof of concept, more standards in impact investing and in particular in
impact measurement and management.
Table of contents
1. Introduction
5
2. Literature review
6
2.1 Social entrepreneurship
6
2.2 Social and environmental impact investing
8
2.3 Social impact measurement and management
9
2.4 Challenges to the expansion of impact investing
11
3. Methods
12
3.1 Research design and approach
12
3.2 Sample selection process
13
3.3 Data collection
14
3.4 Six dimensions of social impact investing
14
3.5 Data analysis
16
4. Results
17
4.1 Reasons there are few impact investments
17
4.1.1 Lack of business experience
17
4.1.2 Lack of investment opportunities
18
4.1.3 Time element
18
4.2 Impact measurement and management
19
4.3 How can we overcome the impediments
20
4.4 Role of governments and regulatory institutions
21
5. Discussion and Conclusion
23
5.1 Discussion
23
5.1.1 Study’s findings vs recent articles
23
5.1.2 Liability of newness of the social impact investing industry
25
5.1.3 Theoretical and practical implications
27
5.2 Limitations and suggestions for future research
28
References
30
Appendix A Interview guides social investors and entrepreneurs 33
1. Introduction
Climate change, global famine and the violation of human rights are just a handful of
the major issues facing the world today. Existing institutions and markets have failed to
catalyze the social changes necessary to provide basic human needs (Seelos & Mair, 2005).
Practitioners and, more recently, scholars have introduced the notion of social
entrepreneurship as a way to stimulate this change. Although social entrepreneurship is
difficult to define, as the concept means something different to different people, Mair and
Marti (2006) view the phenomenon as “a process involving the innovative use and
combination of resources to pursue opportunities to catalyze social change and/or address
social needs”(p. 37), which I adopt for this study.
Recently, scholarship has been interested in a relative nascent subfield of social
finance, also known as social and environmental (S&E) impact investing. S&E impact
investing is the process of investing financial capital into companies and organization who
have the intention to pursue both social and ecological and financial goals (Glänzel &
Scheuerle, 2016). This relatively new form of financing is alluring to many who have the
desire to do good while doing well (Brest & Born, 2013). It differs from pure philanthropy,
like donations and grant-giving, in that the investments are made with an expectation of
financial return. There is no suggestion that impact investing will replace philanthropy, but
the increasingly extensive and complex social and environmental challenges we face today
demand a more dual approach to organize social change (Huang et al., 2014). An estimated
$6 trillion is to be likely invested in social enterprises by 2052 (Fulkerson and Thompson
2008).
However, there are many impediments for S&E impact investing. Research finds that
social entrepreneurs still find it hard to monetize the blended value they create (Lyons
Thomas & Kickul Jill, 2013). Insecure income models, difficulties in accurately measuring
risk, limited business skills of social entrepreneurs and lack of intermediary structures are
some of the reasons why S&E investment deals fail or remain below targets. Although this
area has been of increasing public and scholarly interest, there have only been a number of
anecdotal success stories of social impact investing in Western Europe (Brandstetter & M.
Lehner, 2015). Therefore, there is a pressing need to better understand why an industry so
highly promoted and promising, is yet still lacking in size. This leads me to my main research
question: Why are there so few impact first- or social impact investments in Western
Europe compared to commercial investments?
To answer this research question, I take an explorative approach, because of the
nascent stage of research on the subject. The study is based on 9 in-depth interviews with
actors of the social impact investing industry. My results reveal that the social entrepreneurs
lack business expertise; there are not enough viable investment opportunities; and there is a
certain time element that impedes the number of impact investments in Western Europe.
Furthermore, I suggest, and find empirical evidence, that the industry as a whole—including
the diverse group of actors consisting of investors, fund managers, governmental institutions
and social entrepreneurs—is subject to what Arthur Stinchcombe introduced in 1965, as a
liability of newness.(Gianpaolo, Roberto, & Sara, 2012). As a way to overcome this liability,
I review a series of external factors suggested by Stinchcombe (1965) and compare them with
my findings. I argue that besides a certain learning period, the industry could benefit from
governmental regulating policies, professionalization in the sector, training/education, proof
of concept, more standards in impact investing and in particular in impact measurement and
management.
I begin with a review of the literature on the concept social entrepreneurship.
Hereafter I delve deeper into the literature of social impact investing, including a subsection
dealing with social impact measurement and management. Next, I critically evaluate the
liability of newness construct in the light of social enterprising. I will then introduce the
chosen research method and a presentation of the results. After a discussion, I draw out some
conclusions for practitioners. And finally I discuss the limitations of the study and provide
suggestions for future research.
2. Literature review
2.1 Social entrepreneurship
Social entrepreneurship cannot easily be defined as the concept means something
different to different people. Mair and Marti (2006) set out to define the phenomenon “social
entrepreneurship” by examining both concepts “social” and “entrepreneurship” separately.
The authors base their conceptualization on three successful cases of SE around the world.
They reveal one common denominator: “all three creatively combine resources—resources
that often they themselves do not possess—to address a social problem and thereby alter
Most debate in literature about the concept exists in defining the boundaries of what
we mean by social. Simply stating that social entrepreneurship contrasts regular
entrepreneurship because it is an expression of altruism and the latter is a desire for profit
maximization is perhaps too short sighted. Regular or “commercial” entrepreneurship also
has a social aspect, since entrepreneurs are often not solely driven by a profit motive. They
enhance social wealth by creating new jobs, new technologies and new industries. Definitions
of social entrepreneurship can thus range from very broad to narrow (Austin, Stevenson, &
Wei-Skillern, 2006). The narrowest definition states that social entrepreneurship involves the
application of business expertise and market mechanisms in the nonprofit sector. However on
the other side, many scholars argue that any form of innovative activity with a social
objective in corporations, commercial ventures, the non-profit sector or hybrid-structured
sectors, can be considered social entrepreneurship (Austin et al., 2006; Brandstetter & M.
Lehner, 2015; Mair & Martí, 2006; Martin, 2015). Consequently, they argue that the
phenomenon is not by any means confined to the non-profit sector only.
An explanatory factor for the many different interpretations of social enterprising or
social entrepreneurship is related to regional, and perhaps cultural differences. This was
emphasized by Kerlin (2006), who found distinct differences in conceptualization of the
concept social enterprise between the US and Western Europe. For one, in the US academic
circles, social enterprise is viewed very broad including profit-oriented businesses who
endeavor in social activities to hybrids that mediate profit goals with social targets, to social
purpose organizations (non-profits). In Western Europe, on the other hand, there are
variations within the two streams of thought. The first school of thought explains social
enterprises as firms who use innovative approaches to tackle social needs (mainly nonprofit
organisations and sometimes for-profit sector, related to “corporate social responsibility”).
The second stream views the field of social enterprises belonging to the third sector, and
includes social cooperatives. The comparative overview of both regions shows that the
emphasis of the social enterprise in US is more on revenue generation and in Western Europe
on social benefits; and that there are many types of social enterprises in US versus only a few
in Western Europe.
Overall, the common denominator I find in contemporary social entrepreneurship
literature is that the central driver for social entrepreneurship is the social problem being
addressed, i.e. the social entrepreneur aims to optimize social impact (Austin et al., 2006;
Brandstetter & M. Lehner, 2015; Mair & Martí, 2006; Martin, 2015). Therefore, the working
definition of the concept of social entrepreneurship I employ for this research, is “[...]social
entrepreneurship broadly, as a process involving the innovative use and combination of
resources to pursue opportunities to catalyze social change and/or address social needs”
(Mair & Martí, 2006).
2.2 Social and environmental impact investing
Recently there has been a scholarly interest in the subfield of social finance—also
known as social and environmental impact investing. S&E is described as a hybrid investing
method focused on more hybrid goals seeking to intentionally generate quantifiable social
and financial returns (Brandstetter & Lehner, 2015).
S&E includes various forms of financing such as loans, equity, green bonds or impact
bonds, grants, guarantees and quasi-equity. The spectrum is wide, comprising pure
philanthropy to loans with considerable interest rates. Both Glänzel & Scheuerle (2016) and
Lyons & Kickul (2013) therefore separate the concept into two forms, namely “impact first”
and “finance first”. The impact first form leans more towards the pure form of philanthropy,
in which the investor seeks to optimize social or environmental returns and financial benefits
are merely seen as an additional gain. The opposite applies to the finance-first approach,
which consists of commercial investors who seek sub-sectors that yield market-rate returns,
while hoping to achieve some social impact. Often though, the situation is not as black and
white as these two concepts suggest, investors seek to find investable opportunities that
incorporate a combination of both financial and social goals.
In their assessment report the Rockefeller Foundation (2012) investigated the progress
made by the global social impact investing industry as a whole in the years 2008-2012. They
present the context of the industry including the structure and key actors, the challenges in
building the impact investing marketplace and a list of recommendations to grow the
industry. Figure 1 shows the actors in the impact investing industry. The asset owners and
managers invest their capital in the demand side actors, which consist of the social
enterprises, cooperatives and finance institutions. The third group, the service providers,
consists of all the actors that play a facilitating or intermediary role in the impact investment
market place.
Figure 1: Actors in the Impact Investing Industry
2.3 Social impact measurement and management (IMM)
Social impact measurement and management is one of the most active areas in the
impact investing domain. The growing demand in demonstrating social and environmental
performance is driven by funders, nonprofit leaders and social entrepreneurs looking for
tangible proof that the social organizations and the invested funds are making a difference
(Ebrahim, A. & Kasturi, V., 2010).
There are already a number of available impact measurement systems. For example,
Brandstetter & Lehner (2015) suggest that adapting the Black-Litterman model of Black and
Litterman (1992) to the specific needs of impact investing as a viable way to bridge the gap
between financial and social logics
.The model proposed by the authors incorporates both
‘Financial risk and return’ and ‘Social & Environmental (S&E)-impact and S&E-impact
risk’. Besides the latter, there is a multitude of other measurement systems being utilized
(Antadze & Westley, 2012). Among them, is the widely recognized IRIS database; a catalog
of generally accepted performance metrics. Other examples of measurement tools are SROI
and GIIRS; these can be considered more integrated overall impact measurement systems.
(Rockefeller Foundation, 2012)
As previously explained, the key difference between traditional investments and SII is
that the latter aims to realize more hybrid goals. These hybrid goals consist of both financial-
and social impact targets. (Brandstetter & M. Lehner, 2015; Glänzel & Scheuerle, 2016;
Lyons Thomas & Kickul Jill, 2013) Traditional finance measurement tools have been around
for decades and the investment industry is more or less in agreement about what constitutes
solid financial forecasting and management. The opposite is true for social impact
measurement and management (IMM), which is a relatively nascent performance
management system. Investors are hesitant to place capital in new social ventures due to the
fact that the current performance measurement metrics are not up to the task. This concern
was also raised by Brandstetter & Lehner (2015) who state that compatibility and industry
wide agreed measurement metrics regarding the potential social and environmental impact
and risks of these investments are necessary to enable institutional investors to include impact
investments into their portfolios. Social enterprises are, thus, under growing pressure to
measure and demonstrate their social impact (Arvidson & Lyon, 2014).Some even argue,
that, as long as the impact investing characteristics do not match conventional portfolio tools,
the expected market growth of the industry as a whole will be depressed (Brandstetter & M.
Lehner, 2015).
The paper of Arvidson & Lyon (2014) aims to find out how the social organizations
deal with this growing pressure. They find that the process of the social impact measurement
and management simultaneously creates discomfort and enthusiasm within organizations.
They explore the concept of decoupling and find that organizations make different strategic
choices in response to their external environment (see figure 2.). Depending on a number of
factors such as financial independence, control over resources, organizational values and
logics, organizations can response to directives from resource holders in different ways.
Organizations that are at first sight resistant and reluctant to report impact measures, may
symbolically comply to ascertain relations with stakeholders (3). This could lead to strategy
evaluations and eventually there could be a fifth strategy where the organization proactive
decides to employ voluntary social disclosure. This article shows that impact measurement
and management is not just a reporting tool, but that organizations can use IMM to exert
control, improve services, market their own organization and encouraging performance.
Figure 2 compliance, resistance and control
2.4 Challenges to the expansion of impact investing
Later in this thesis, I argue that the social impact investing industry is subject what the
American sociologist Arthur Stinchcombe introduced in 1965 as the liability of newness. The
liability of newness is a theoretical concept put forward by the author as an explanation for
the large number of deaths of young organizations. The basis of theory is that young
organizations need a learning period to become familiar with the new roles as social actors in
a certain industry, which is often accompanied by lack of interpersonal trust between
co-actors and low levels of legitimacy (Gianpaolo et al., 2012). Unlike traditional investing,
which has a learning experience of a century; social impact investments are only a “thing” of
the last decade. The social actors of the sector, including asset managers, asset owners,
demand-side actors and service providers must re-invent and learn their roles, and also
heavily rely on social relations among strangers.
Stinchcombe claimed that trust is important to build organizational capabilities. He
noted that as time passes, trust will develop and eventually the organizational capabilities will
improve. Besides this time period Stinchcombe (1965) also stressed that social and economic
macro-structures are crucial for increasing survival chances of new ventures. The author
summarized a series of practically relevant external factors, which may positively affect new
venture formation and survival. These are the following (a) general literacy and specialized
advanced schooling, (b) urbanization, (c) a money economy, (d) political revolution (e)
density of social life, including an already rich organizational life.
Although some of the
above are perhaps too outdated (b & c) and exceptional in nature (d) to consider as
influencers of the impact investing industry, they are a good starting point for a discussion on
how the social impact industry can overcome impediments and grow as a sector in Western
Europe.
In their editorial, Lyons & Kickul (2013) hope to convince researchers and other
academics to do more research on social enterprise financing. Since the industry is expected
to grow to an estimated 6 trillion $ of investments to be made into social enterprises in the
next decades, they advise practitioners and scholars to examine the strategies, financing
vehicles and impediments of the social finance landscape.
3. Methods
This study investigates why social impact investing continues to struggle in Western
Europe and possible ways to overcome these challenges. I do so by empirically delving into
the reasons why the industry is still relatively small and how this could be overcome can
bring scale to the pursuit of social and environmental mission. Little research goes into detail
about the challenges in social enterprising financing from a practitioners’ point of view. As
such, I conduct interviews to explore this issue with social impact investors as well as social
enterprises. The next section goes into detail about the chosen research design and approach,
sample selection process, data collection and finally the data analysis.
3.1 Research design and approach
Methodological fit, is explained by Edmondson and McManus (2007) as “internal
consistency among elements of a research project - research question, prior work, research
design, and theoretical contribution” (P. 1155) Solid methodological fit is deemed necessary
to boost rigorous and accurate field research (Edmondson & McManus, 2007; Yin, 2003).
The authors suggest that nascent research topics, i.e. topics that have captivated little research
or consider new phenomena is best explored by using qualitative research methods.
Since it is my goal to gain insight in what drives the growth of the relatively young social
impact investing industry, or more specific what restrains it from growing towards it’s
potential, qualitative research design seems appropriate to investigate the complexity inherent
in this phenomenon.
I use semi-structured interviews as my chosen method because it provides structure
and also allow informants the freedom to express their views in their own terms. For the
empirical part of the study I use the six dimensions deemed crucial for growing the S&E
impact investing industry. (Rockefeller Foundation 2012) These are unlocking capital,
placing and managing capital, demand for capital, assessing impact, creating an enabling
environment and building leadership. Later in this chapter I elaborate on these dimensions
and explain how they are implemented in the research design. The six dimensions of the SII
opportunity to interview the actors more than once. During the data collection process I will
discuss any unexpected findings from the first interviews in the later interviews as well in
order to validate them.
3.2 Sample selection process
Sampling in qualitative research involves both setting boundaries and creating a
conceptual frame (Miles, Huberman, & Saldana, 2013). The boundaries of my sample are
dependent on my time limits and resources, and my research questions. Since this thesis
study is concerned with the experiences of experts in the social impact investing industry in
Western Europe, the samples tend to be purposive. A prerequisite in my sample selection
process was that the social entrepreneurs had in fact received some form of impact investing,
or were in the process of receiving set investment. Furthermore, investment intermediaries
such as social venture capital funds and investment advisors were selected based on their
respective relevance to the social finance market.
Due to time and resource limitations the sample consists of Dutch impact investors
and social entrepreneurs only. However, the geographical scope of these actors is in all cases
not limited to the Netherlands, but comprises several parts of Europe and in some cases other
continents as well.
The combination of having strict prerequisites to our sample and the small number of
actors in the social impact investing industry led to us having fewer participants than
desirable for qualitative research. Especially the social entrepreneurs who had received
financing were often unable to participate due to lack of time. However, the high level and
long average duration of the interviews led to theoretical saturation.
3.3 Data collection
This study draws on an open-ended enquiry of 9 interviews, one interview per
participant. Data was collected between November 2017 and March 2018. The sample was
10 actors of the social impact investing industry. One interview was disregarded due to a
corrupted audiofile. The elaborate nature of the remaining 9 interviews was deemed aplenty
to call our study rigorous. Table 1 reveals more details of the participants and the associated
organizations. The names of the participants and organizations are kept secret due to requests
of the participants. In some cases the interviews were held in person, but most of the time the
communication was via Skype. Also, each interview was recorded with the permission of the
participants. The average duration of the interviews is 40 minutes ranging between 23 and 64
minutes.
3.4 Six dimensions of social impact investing
According to the Rockefeller Foundation (2012) six dimensions deemed crucial for
the growth of the SII industry. These are unlocking capital, placing and managing capital,
demand for capital, assessing impact, creating an enabling environment and building
leadership. The dimensions are shortly explained and some of the challenges according the
Rockefeller research are summarized. These can be interesting as an aid to find out how the
European impact investment industry has progressed perhaps explain why the industry is
relatively low compared to commercial investing. The interview guides for the interviews
with the investors and social entrepreneurs can be found in appendix A.
Unlocking or raising capital:
This dimension is about the amount of money that is available for impact investments.
Research from the Rockefeller Foundation suggests that the type of capital being offered
often does not match the demand for this capital. It will be interesting to see how our
participants think about the available capital for impact investing.
Placing and managing capital:
As the wording of this dimension already suggests, this dimension is about the possibilities
for impact investors and fund managers to place there capital, i.e. the type of available
products, the exit opportunities of these products, models of risk assessment that force a
trade-off between impact and risk-adjusted financial returns and transaction costs.
Demand for capital:
This dimension is about the demand side of impact investing, i.e. the capacity of ventures to
effectively prepare for capital infusion and to use it effectively. Often less attention is
directed toward this end of the spectrum by practitioners and scholars, but I deem it an
element that needs to be investigated.
Assessing impact:
As earlier mentioned, Impact measurement and management is one of the most active areas
in the impact-investing domain. And therefore it will be interesting to explore how the
various participants think about this element and how they implement it in their business.
Creating an enabling environment
This dimension is about the roles governments and other institutions can play to support the
impact investing industry. Governments can encourage impact investing through appropriate
investment rules, targeted co-investment, taxation, subsidies and procurement.
Building leadership:
“For impact investment to continue its steady growth, leaders will need to use more of a
collaborative approach to utilize more skills than charisma a lone (Rodin & Brandenburg,
2011).
The questions asked to each participant were: Why are there so few impact first- or
social impact investments, What role could governments and regulatory institutions play,
How do you and other investors measure and report impact? Should there be one general way
of measuring impact? How can we overcome impediments? What would you advise other
social entrepreneurs who are in need of financing?
Important to note is that the first part of the interview will be more open of nature.
The above-mentioned dimensions are only later being utilized to give structure to the more
semi-structured part of the interview.
3.5 Data analysis
The recorded interviews were transcribed using simple software for transcription
called Inqscribe. The transcribed interviews can be found in appendix B. Firstly the data was
analysed to simply provide an indication of the background, demographics, work experience
and motivations of the participants. The second step of the data analysis was a thematic
analysis. All the data was inductively organized into first order codes for each of the
questions. This meant reading and re-reading of transcripts to search for themes that are
relevant to the research questions. Subsequently I sought for similarity in all the codes for
each question, eventually resulting in the second order codes. These second order codes bring
meaning and structure to the data. I only take into account the findings that at least had 3 or
more number of second order codes. Table 2 shows part of the codebook for the question:
Why are there so few impact first- or social impact investments? This is not the complete list
of codes for this particular question, but represents a good indication of how the data was
analyzed.
4. Results
This chapter contains the findings derived from the data of the nine in depth
interviews. The findings are organized along five topics or questions relevant to our main
research question, these are: Reasons there are few impact investments, Roles of governments
and regulatory institutions, Impact measurement and management, How can we overcome
impediments, Advise to other social entrepreneurs. This section only contains a few examples
of quotes to substantiate the narrative. The nine transcribed interviews can be found in
appendix B of this report. Finally the complete overview of all findings is presented at the
end of the chapter. (Figure 3) Important to note is that I have taken into account the findings
that at least had 3 or more number of tags.
4.1 Reasons there are few impact investments
Overall the 9 participants gave a lot of food for thought on why there are so few
impact investments. The findings that received most support from the participants are that the
social entrepreneurs lack business expertise, there are not enough viable investment
opportunities and there is a certain time element that plays a pivotal role.
4.1.1. Lack of business experience
That social entrepreneurs often lack business expertise has been subscribed as one of
the challenges many of the impact investors experienced. This is illustrated by a quote from
one of our participants: “Very often these entrepreneurs that we invest in are very socially
driven. And, sometimes, they are not as commercial as they actually need to be in order to be
successful. It is a very social character that we deal with, and that is also why we think that
we can help them by commercializing their business. So that is often a challenge.” (P3,
Appendix B.3) The respondent, at the same time implies that this commercializing of their
business is not necessarily a huge issue as it is something they, as investor, can assist the
social entrepreneur with. Another fund manager, however, points out a possible drawback of
being an educator on your own deal. “We need to do a lot of education in many cases, which
is troubling the negotiations that you have. Because, you are negotiating on terms for an
investment. And you need to educate the entrepreneurs at the same time on very basic
investment requirements. That is not always very practical.”(P6, Appendix B.6)
4.1.2. Lack of investment opportunities
Interestingly, almost all participants were in agreement that the origin of the lack of
impact investments is not related to a scarcity of capital. This leads to the rationalization that
the roots of the problem perhaps lies on the other end of the spectrum, namely there is a lack
of available investment products. Our data confirms this, as four of the six investors and one
social entrepreneur with investment banking background all claimed this to be a reason for
the low number of investments. This is illustrated by the quote of P2 (appendix B.2), who
states that: “There is a lot of interest in impact enterprises, but there is just not that scale-up
social impact enterprises to invest in. Large majority is start-ups, or are basically small
enterprises. And sometimes people don't even do that for a living, but do that next to their
job. And these are too small companies to really invest in, especially for banks or even the
larger crowd funding institutions. The amount of investment they need, is just not enough.
And that is one of the key issues for impact enterprises, is how to get size into scale up.”
4.1.3. Time element
The finding that has received second most support among our participants is that there
is a certain time element that explains why the industry is still relatively small compared to
the commercial investment world. On the one hand there have not been many successful exits
in the social impact investing short history. P9 (appendix B.9), explains that this creates
turmoil among asset owners “And again this also comes back to the time thing. There haven't
been great examples of exits. And that obviously makes people nervous as well, so how am I
going to get out of this.” Besides successful exits, the investors recognize that there is a
certain learning period associated with the nascent industry. “But also processes for a few
years. Getting to know, visiting a lot of congresses, talking to a lot of people. Reading a few
books, following a course on Oxford. Getting to know the world of impact investing. But not
just me, several people within the bank.” (P1, appendix B.1)
Conclusive my results reveal that the social impact investing industry is still relatively
small compared to commercial investing for a threefold of reasons. Firstly there is a lack of
investable social initiatives, partly related to the funding gap that exists for startups.
Furthermore social entrepreneurs lack business skills, something that can already create
problems during initial negotiations. And finally, there is a certain time element related to the
nascent stage of the industry.
4.2 Impact measurement and management
The main difference between regular investing and social impact investing is that the
latter aims to pursue more hybrid goals including social objectives. Since Impact
measurement and management is such a key part of impact investing I believe it deserves a
separate section.
Interestingly, most of our participants do not use a specific impact measurement tool.
Out of nine participants only two actually measure their impact through a validated tool.
Most of the participants either do it intuitively or use KPI’s/Metrics, which are output figures
and not records of actual impact. Measuring the actual impact is quite difficult and this is also
subscribed by one of the participants: “on the other hand, it is really hard, because sometimes
another thing we looked into for instance. Because we really have an impact on the
community as well. But these are more soft measures, that is really hard to put a figure on it.
There is ways to do that, but that is really hard, because our impact to the community. We've
been really looking into it and we came quite far in determining how we could do it.” (P2,
appendix B.2)
There is a mixed response among our interviewees regarding the question if there
should be one general way of measuring impact. There is a general consensus that it would
make things easier. One of the main benefits is explained by one of our participants, who
states that: Well, it would be nice of course, because then you can really compare companies.
And then you really have, kind of a impartial way of comparing impact companies with each
other. (P2, appendix B.2)
On the other hand it is probably too early days for such a complex phenomenon to be
reduced to one or a few methods. A quote by P6 (appendix B.6) illustrates that point:
“Too early. It is too early. In impact measurement there is a lot to be explored. And I think it
is beneficial that there are still a few.. not like.. When I started in this sector and was looking
for a way to report on impact, we did a survey and the findings were, that there were some
250 ways of measuring impact. That is over the top, that is useless. You need to narrow it
down. But by now you see it narrowed down into some main methodologies […]But it is too
early to standardize.
Conclusive our results reveal that there are a wide number of impact measurement
methods being employed by our respondents, most of them, however, prefer KPI’s/metrics
over the more integrated impact measurement tools. The participants agree for the most part
that more general way of measuring impact can be beneficial to the sector, but they also
indicate that it is too early for such a thing to be implemented today.
4.3 How can we overcome the impediments?
One of the most common challenges derived from our data is that entrepreneurs often
lack business expertise. The interviewees agree that there is a role for the impact investors,
intermediary organizations and more experienced entrepreneurs to play a facilitating role in
training or educating social entrepreneurs, help present propositions to millionaires and
overall commercialize their business. Two quotes that highlight these findings are the
following: “Very often these entrepreneurs that we invest in are very socially driven. And,
sometimes, they are not as commercial as they actually need to be in order to be successful. It
is a very social character that we deal with, and that is also why we think that we can help
them by commercializing their business
.”(P3, appendix B.3) and “If other entrepreneurs are
a bit more experienced on or a bit more further a long the line, can help out. And that can be
investors as well, because I know there are investment circles that do these type of things as
well. Yeah definitely.” (P2, appendix B.2)
As mentioned the second most mentioned reason for the low number of social impact
investments is the time element issue. The participants are in agreement that there is a need
for a proof of concept. This is illustrated by a quote from P1 (appendix B.1):
“That would be
very helpful. Not just an idea and maybe it will all work. Show it first in a small area, that it
can work. That we have scientific proof. Yeah, I think that would work out well.”
Having this proof of concept could not only persuade other investors to invest, but also attract
more entrepreneurial people into the social field. The following quote explains: “I think the
industry would benefit from like some more success stories to get more entrepeneurs into this
field and show that it is possible and that it is not some fluffy NGO kind of sector. But that it
is a proper industry.” (P4, appendix B.4.)
Another finding that is being advocated by the participants is the need for more
professionalization in the sector as a whole.
“There is just a general need for professionalization in the sector you know. A lot of people
were inventing the wheel. I think it is time for quite some things to find at least standard
terms or definitions.” (P4, appendix B.4.)
This also applies to the impact measurement and management subfield, as the following
quote subscribes:
“Move towards a more standard field of impact measurement techniques and outputs. So for
example if you look at the impact management project, that is a project initiated by some
bigger funds. Trying to make the terminology used more standard. And I think in general that
the industry is moving there, but there is still a long road ahead.” (P3, appendix B.3.)
The participants also mention that the social entrepreneurs who are in need of
financing should find the right entries, since the capital is there. One social entrepreneur
shares his experience and thoughts: “I believe that responsibility lies - in social
entrepreneurship in the movement of social entrepreneurs - with wealthy families. So they
can make a difference, and that's what I went looking for.” (P5, appendix B.5.)
4.4 Role of governments and regulatory institutions
According to our panel of experts, taxing policies are the way the governments and
regulatory institutions can play a role in creating an enabling environment. One way is by
giving tax deductions to social investors. A policy the English government has executed for
regular startups for a few years now. I think that is one of your questions. How would the
government be able to facilitate social entrepreneurship? Well one is to look at what they are
doing in England. To give tax deduction for investors, maybe other countries as well.
An issue with these tax benefits for investing in impact, is illustrated by one of our
participants:“P3 I like the idea of tax benefits for investing in impact, but hard to determine
what is actually social.”
Besides the fact that it is hard to verify what precisely constitutes social enterprising,
the participants feel that the incentive to invest in social enterprises should not be due to tax
benefits. Participant 2 (appendix B.2) explains: “I just don't believe that the amount of money
is the problem. That should not be... people should not decide to do it because of some tax
advantages.” The opposite would be taxing pollution, which would give incentive to all sorts
of businesses to work more environmentally friendly: “The financial system does not take
those things into account. And I think the government definitely has a role their to regulate
pollution and also to tax pollution. If that would be the case, then a lot more business cases
that are not viable at the moment would actually become viable. And that would definitely
impact our investment opportunities.” (P3, appendix B.3)
So conclusive, this policy initiative will give financial incentive for businesses to
operate less polluting and new social business ideas become economically more viable.
5. Discussion and Conclusion
Although various studies have examined certain elements of social impact investing,
such as Impact measurement and management and the limits of non-profits,(Arvidson &
Lyon, 2014; Bugg-Levine & Emerson, 2011; Glänzel & Scheuerle, 2016; Hebb, 2013;
Jackson, 2013; Johnsen, 2003; Lyons Thomas & Kickul Jill, 2013; Mair & Noboa, 2006;
Miller, Grimes, McMullen, & Vogus, 2012; Moore, Westley, & Nicholls, 2012) few have
given an comprehensive overview of the industry in the context of Western Europe. The few
written accounts that do go into the challenges in social enterprising financing are assessment
reports from organizations such as GIIN (2009) and the Rockefeller foundation (2012). Based
on 9 in-depth interviews with actors of the social impact industry, this study presents an
overview and analysis of expert opinions of the social enterprising landscape in order to
answer our main question:
Why are there so few impact first- or social impact investments in Western Europe
compared to commercial investments?
5.1 Discussion
In this section I first compare my findings on social impact investing with those of
recent articles. I suggest that the “time element” finding is related to the theory of a liability
of newness; and compare the suggested external factors by Stinchcombe to positively affect
new venture formation and survival with the suggestions from our participants to overcome
the impediments in the social impact industry. And finally, I summarize my main
implications for theory and practice.
5.1.1 Study’s findings vs recent articles
The finding that social entrepreneurs often lack business expertise supports the work
of Glänzel & Scheuerle (2016), who noticed that most of the social entrepreneurs in their
sample did not have a business background. Social entrepreneurs often lack the skills to
develop professional business plans, which increases the difficulties to build SE business
models. One possible solution to this problem would be training and educating the social
entrepreneurs. However, being an educator on your own deal can trouble the negotiations you
have. Glänzel & Scheuerle (2016) confirmed this point by finding that “long learning and
development processes are not very attractive to finance: SVCFs prefer
investment-readiness—also on behalf of their capital providers” (p. 1652)
In particular, the finding “a lack of investment opportunities” is consistent with the
paper of Lyons & Kickul (2013). They described the fact that early stage social enterprises
that need capital to move beyond the startup phase, as the funding gap and as one of the
seven reasons why social entrepreneurs still have difficulties to monetize the hybrid value
they create. The investors, fund and wealth managers, in the sample group, confirmed this as
they state that the startups cannot meet the criteria they need in order to finalize their due
diligence; there are not enough investable scale-up social impact enterprises. The assessment
report of Rockefeller Foundation (2012) also made similar conclusions as they found that
“there are there are still too few investment-ready projects and enterprises to enable the
optimum placement of this new capital” (chapter 3, page 15)
An argument can be made that “commercial” start-ups also experience these
complications with early stage financing. Deffains-Crapsky & Sudolska (2014) paper does
indeed state that the early stage enterprises cannot pursue conventional financial
intermediaries because they have little or no collateral. However an argument can be made
that commercial enterprises are less binary focused than their social counterparts. Their focus
on financial returns is thus more in line with the traditional and accepted investment policies.
The “time element” finding can be interpreted in multiple ways. The newness of the
concept social impact investing creates the need for a certain learning period, as the
participants indicated. It will take some more time for people to transition into the field, get
used to the rules of the game and learn their roles. This finding is consistent with that of
Clark, Emerson & Thornley (2012) who state that the concept of impact investing is very
clear on the one hand, but at the other hand is hard to tackle since it is still evolving and the
available information on the topic is scarce.
Participants stated that more standards in social impact investing would benefit the
industry. This finding is in agreement with Glänzel & Scheuerle (2016), who note that impact
measuring is relevant as indicator for performance and for legitimizing investments, but that
there is a lack of tools to grasp outcomes. Perhaps this is why the better part of the
participants measure impact intuitively or use KPI’s/Metrics, which are output figures and
not records of actual impact outcomes. In the assessment report of the Rockefeller
5.1.2 Liability of newness of the social impact investing industry
This time element finding also fits a relatively old theory composed by Stinchcombe
in 1965 called a liability of newness. The American sociologist posed it as an explanation for
the large number of deaths of young organizations. The theory constitutes that high failure
rates of new businesses can be explained by a lack of “learning experience”. A key element
these new organisations lack, according to Stinchcombe, is trust. Trust is not only important
for building relationships with other organisations and more general social environment
(governmental regulators), it also matters with regards to building of organizational
capabilities within the firm (Gianpaolo et al., 2012). The data hints that this liability of
newness can also be applicable to new organisational structures and social environments,
such as the social entrepreneurship and social impact investing landscape.
However, what would then be a solution to overcome this liability of newness? Firstly
of course: time. As time passes, trust will develop and eventually the organizational
capabilities will improve. (Stinchcombe, 1965) Fortunately, Stinchcombe also suggested a
few more practically relevant external factors, which may positively affect new venture
formation and survival, which perhaps could also be applied to the social impact investing
industry. These are the following (a) general literacy and specialized advanced schooling, (b)
urbanization, (c) a money economy, (d) political revolution (e) density of social life,
including an already rich organizational life.
(a): “It enables more alternatives to be posed to more people. It facilitates learning
new roles with no nearby role model. It encourages impersonal contact with customer. It
allows money and resources to be distributed more easily to strangers and over distance. It
provides records of transactions so that they can be enforced later, making the future more
predictable” (p. 150-151)
Although illiteracy is not a pivotal problem in the current social business climate, the
point also includes specialized advanced schooling. This is much in line with two of the most
suggested ways to overcome the impediments by the participants, namely “investors help
social enterprises” and “professionalization in the sector is needed”. As mentioned the
participants agree that the impact investors, intermediary organizations and entrepreneurs can
help by training or educating social entrepreneurs. This specialized advanced schooling is
also consistent with what the participants advocated as more professionalization in the sector,
including using standard terminology, a more standard field of impact measurement
techniques and outputs etc.
(b): “Urban agglomeration is always made up of people who are mutually strangers,
and social devices for regularizing these relations tend to be invented in cities [. . .] This
facilitates the formation of new organizations and eases the transfer of customer from old to
new suppliers and products” (p. 151)
Urbanization as a solution to a liability of newness is outdated. The current Western
European society is already highly urbanized and the arrival of the internet and other social
devices has made the move to cities less relevant. So I believe that the point that Stinchcombe
makes, namely urbanization increases the organizational competence of populations, is not
applicable to the contemporary society.
(c): a money economy: “It liberates resources so that they can be more easily
recruited by new organizations, facilitates the formation of free markets so that customers can
transfer loyalties, depersonalizes economic social relations, simplifies calculation of the
advantage of alternative ways of doing things, and allows more precise anticipation of the
consequences of future conditions on the organization” (p. 152) Also an outdated external
factor for the Western European society.
(d): “It can drastically shift the relative advantage of vested interests and new
organizations by changing the normative basis on which interests are vested and by
redirecting the armies and police that are the means of vesting” (p. 152)
A political revolution might affect the social impact investing climate, but is perhaps a bit too
extreme and situational to consider as a solution to a liability of newness for social impact
investing. I do, however, find that the participants agree that there is a role for governments
and regulatory institutions in regulating the industry by for example taxing pollution. This
could also drastically shift the relative advantage of vested interests, since it would become
economically more viable to venture into less polluting endeavors and thus move towards
more social venturing. The strategic support of social entrepreneurship in Western Europe
has predominately been part of governmental programs and initiatives of the European
Union. There are several specific public programs, mostly by the individual governments
thus far. The UK developed a three-year program called Social Enterprise: A Strategy for
Success. The goal of the initiative is to create a supportive environment for social enterprises
including tax and administrative regulatory recommendations for social enterprises, training
efforts and research in the field (Kerlin, 2006). In 2011 the European Union also launched the
Social Business Initiative (SBI), including a short term action plan to grow the field of social
entrepreneurship in Europe. The plan is developed with 11 priority measures along three
main themes. These are: (1) Making it easier for social enterprises to obtain funding, (2)
Increasing the visibility of social entrepreneurship and (3) Making the legal environment
friendlier for social enterprises. For future research purposes it could be interesting to
investigate how these policy initiatives affect the industry.
In the latter paragraph, I have shortly described some ways the social impact investing
industry could overcome impediments to the growth of the industry. One that has not been
mentioned much in literature at all, but was subscribed by the sample group is that there is a
need for a proof of concept. Having tangible proof that investing to pursue both financial and
social goals is feasible in a variety of social/environmental themes, could create this trust
element Stinchcombe speaks of. And as the theory suggests this could aid in building
relationships between organizations and also build the organizational capabilities of the
actors in the industry. Also, other investors could be persuaded to invest and entrepreneurial
people could be enticed to enter the social domain.
5.1.3 Theoretical and practical implications
This papers main theoretical implication is that I find empirical evidence, that the
industry as a whole - including the diverse group of actors consisting of investors, fund
managers, governmental institutions and social entrepreneurs - is subject to what Arthur
Stinchcombe introduced in 1965, as a liability of newness (Gianpaolo et al., 2012). This goes
to show that this theory is not limited to new venture creation, but can be applied to emerging
industries such as the social impact investing.
Furthermore, this study is one of the few written accounts that give an comprehensive
overview of the industry in the context of Western Europe. The papers that do go into the
challenges in social enterprising financing are assessment reports from organizations such as
GIIN (2009) and the Rockefeller foundation (2012) and a paper by Glänzel & Scheuerle
(2016). The paper by Glänzel & Scheuerle (2016) investigated the social impact investing
industry in Germany and found eight problem areas for impact investing in Germany.
Although our findings are in line with most of the findings of the German study, there are
some key differences. For one, the most supported finding in this study is that there is a lack
of available investment products, and more specifically the investors miss that pool of
scale-up social impact enterprises. This is not part of the eight problem areas provided by the
German study, however, this could be explained by the difference in chosen sample group.
The participants of the study by Glänzel & Scheuerle (2016) are mostly social entrepreneurs
(14) versus only five investment intermediaries. Perhaps this domination of social
entrepreneurs skews the findings towards the view of the social entrepreneur who are less
informed about the amount of investable enterprises in the social domain. Besides this, our
study contributes to the work of Glänzel & Scheuerle (2016) by introducing some ways to
overcome impediments in social impact investing, and as formulated here ways to overcome
the liability of newness.
As a way to overcome the liability of newness construct I have reviewed a series of
external factors suggested by Stinchcombe (1965) and compared them with my findings. My
data reveals that besides a certain learning period, the industry could benefit from
governmental regulating policies, professionalization in the sector, training/education, proof
of concept, more standards in impact investing and in particular in impact measurement and
management. I, thus, contribute to theory by revisiting the liability of newness theory and
external factors that could affect the liability of newness. More research is needed to further
look into the way the liability of newness could be overcome, since the suggested factors by
Stinchcombe (1965) are for the most part outdated.
Among the practical implications are the findings regarding the reasons why there are
few impact investments and the ways the industry can overcome these challenges. Investors,
intermediaries, banks, governmental institutions and social entrepreneurs can all benefit from
the suggestions made by the field experts and utilize them in the way they approach new
deals, conduct business, make policies etc.
5.2 Limitations and suggestions for future research
Despite the study’s implications, this study was also subjected to some limitations
mainly related to the size of the field in the Netherlands and the time to research the subject.
Due to the fact that social impact investing is still a relatively small industry in the
Netherlands it has proven to be quite difficult to get a high number of participants.
Furthermore the criteria for my participants were quite high, as the entrepreneurs were
chosen on the basis of having received SI financing, and the investors were chosen on the
bases of having invested in one or more social enterprises. Also, due to the fact that most of
the participants were contacted through other participants there could have been a biased
sample. This phenomenon of yielding a study sample through referrals is called snowball
sampling. The problem with this method is that the parties could share similar traits and
characteristics to the respondents who introduced them (Biernacki & Waldorf, 1981).
Another limitation of this study is that the sample consists of social investors and
entrepreneurs working in the Netherlands, which could devaluate the external validity of the
study, since actors of the social impact investing industry in other Western European
countries are likely to have different experiences than the Dutch investors and entrepreneurs.
However, important to note is that all social investors had a demographic work area that goes
beyond the borders of the Netherlands into various countries of Western Europe.
All in all, I have to acknowledge the limitations of my study in terms of respondents
and generalizability. However, I believe that the long average duration and strong content of
the interviews led to theoretical saturation and interesting findings.
Recently there have more policy initiatives towards favoring social investment
climate in Western Europe. Specifically the U.K. has a head start when it comes to social
entrepreneurship and governments programs to stimulate the field. Besides the
aforementioned Social Enterprise initiative, the U.K. adopted the organizational form called
CIC. This is a type of company designed for social organizations that want to use their profits
and assets for the public good. These are more flexible, easy to set up and have proved to be
very popular. Research could reveal the effects these policy initiatives have on the industry’s’
actors performance in the U.K. and mature the social enterprising industry in Western
Europe.
Another element my study did not address is the role of informal networks in the
social finance world. Researching how social networks are being used for building funding
portfolios and how this process differs from conventional investments can be a fertile ground
for research.
And finally I found that most of my respondents prefer KPI’s/metrics over the more
integrated impact measurement tools. For future research purposes it could be interesting to
investigate the effect of different measurement tools on the performance of the social
businesses.
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