For profit social enterprises in The Netherlands changing trends in access to financial capital

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For Profit Social Enterprises in The Netherlands

Changing Trends in Access to Financial Capital

Carolyn O’Rourke 2016

Master’s Thesis

University of Amsterdam, Faculty of Economics and Business VU University, Faculty of Economics and Business Administration

MSc Entrepreneurship – Joint Degree

UvA 10864628 VU 2566723

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Abstract

Social Entrepreneurship is recognised as being increasingly important to the global economy. The number of social enterprises is on the rise across Europe and in the Netherlands. Many governments in Europe specifically support social enterprises recognizing the extra challenges with which they are confronted. The Dutch Government made a conscious decision not to do so. One of the main challenges faced by social entrepreneurs is raising financial capital. The aim of this thesis is to discover the financial capital mix accessible to social entrepreneurs in the Netherlands.

A survey of social enterprises gave an overview of the financial capital mix used at seed, growth and mature stage. Albeit a small response rate some clear trends were observed. At seed stage crowdfunding and angel investors play a large role for current startup social ventures. These methods of finance are not visible at seed stage for mature companies. Own money and that of family and friends are used by companies of all ages at seed stage. At growth stage own money, bank loans and subsides are visible for companies who have reached this stage of growth. At mature stage companies are strongly dependent on own money and family and friends.

A strong positive correlation is shown between growth in revenue and angel investor and venture capital funding at seed stage. A strong positive correlation is found between growth in FTE and bank loans and subsidies at mature stage. However a strong negative correlation is found between the same financing methods and revenue growth at this stage. The limitation of the sample size means that it is now known if these relationships are statistically significant.

The transition to Angel Investors and Crowdfunding in the mix of financial capital at seed stage may be a result of the financial crisis. Low confidence levels in the banking system caused people to invest their money elsewhere. Social Impact Funds can offer transparency to clients but only if social impact is measured. The Dutch Government might consider incorporating Social Entrepreneurship in the education system to ensure entrepreneurs with a social mission have the required business knowledge. Looking forward, social impact funds can play a big role in funding scalable social enterprises. Whether the changes observed in this thesis are indicative of long term financial growth and sustainability for social ventures will require further research. A larger sample size would be necessary and more in-depth financial and employment data required in order to monitor change and identify if certain sources of funding have a significant impact on the survival and growth of a social ventures.

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Acknowledgements

I would like to sincerely thank my supervisor Dr Joeri Sol, UvA, for his academic input and his professional and personable approach throughout the writing of this thesis.

Thanks to the social entrepreneurs who responded to my survey and extra appreciation to those who participated in the follow up interview.

Tjeerd Krumpelman Head of Sustainability Advisory at ABN Amro for his interest in my topic and for his time in participating in an in-depth interview.

Bjorn Wilson and Kitty Berteling from the libraries of UvA and AMSIB respectively.

People who were negatively affected by my decision to invest time and energy into the process!

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Introduction

Social enterprises are seen as central to the global economic system (EC, OECD, 2015). Within Europe there is growing recognition of the role played by social ventures in tackling societal problems. The number of social enterprises, albeit small when compared to commercial enterprises at approximately 1% (EC, 2014) is a sector which within the EU is growing rapidly. Social innovation is the driving force behind many sustainable consumer products and services. Some countries within the EU recognise and support Work Integration Social Entrepreneurship (WISE) schemes and or have specific social entrepreneurship Certification Schemes or recognised social enterprise 'Marks’. Many countries have also developed specific legal forms or statutes recognizing social entrepreneurship (EC, 2014).

The Netherlands does not have a specific legal structure or policy framework for social enterprises. In fact it is one of the few countries which has made a deliberate choice not to develop schemes specifically for social enterprises (EC, 2014). In 2000, the Dutch Government stopped subsidizing social enterprises and many disappeared (Duning et al., 2014). The Dutch government believes that subsidizing might lead to a large number of companies declaring a social element to their business in order to profit from this type of structure (Interview with Alexander Rinnooy Kan, UvA, 2014, Duning, van der Jagt & de Sena 2014). The Dutch legal framework states that social enterprises should not profit from tax benefits and that all entrepreneurial activity should be treated equally, ‘Create generic stimulating policy for all entrepreneurs and not for specific categories’, (Interview with Paul Thewissen, Ministry of Economic Affairs, 2014, Duning et al., 2014, Pg 33). This implies that while the Dutch government supports entrepreneurship in general, social entrepreneurs are not treated differently from commercial entrepreneurs.

Despite the fact that the Dutch government does not overtly support social entrepreneurs in the Netherlands from a financial perspective, the number of social enterprises has grown substantially. In 2006 the number stood at 100 while by 2010 the number had grown to 270 (Duning et al., 2014). According to more recent figures there are now more than 300 social ventures in the Netherlands (Social Enterprise NL, August 5, 2016). It is however a country which stands out in terms of its community interest, the extent of possibilities for social

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enterprise and social innovation (EC, 2014). It is also a country which views the development of social enterprise incubators, mentoring schemes, specialist infrastructures and investment as being of primary importance (EC, 2014).

It is well recognised that social entrepreneurs face more challenges than commercial entrepreneurs. Accessing financial capital is one of these challenges. According to Willemijn Verloop (Social Enterprise NL, August 5, 2016), financing social enterprises in the Netherlands is still an issue. She suggests that the professional finance market needs to develop and banks need to offer working capital facilities to social enterprises.

Whilst some research has been carried out on more large scale social enterprises in the Netherlands (McKinsey & Company, 2011), little attention has been paid to smaller social entities and the manner in which they set up and sustain themselves financially. The aim of this thesis is to discover the way in which for profit social enterprises in the Netherlands set up and sustain themselves from a financial perspective leading to the following main question.

What is the mix of financial capital accessible to social entrepreneurs in the Netherlands at the various stages of growth?

The remainder of this paper is set up as follows. Chapter 2 will provide a review of the literature on social entrepreneurship. It will begin by examining what is meant by social entrepreneurship, followed by the main differences between social and commercial entrepreneurs and the challenges with which they are confronted. It will then examine the various methods of financial capital which are potentially available to social entrepreneurs. Chapter 3 describes the research methods used to answer the above question. Chapter 4 describes the results of the findings and chapter 5 contains the discussion, conclusions and potential for future research.

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2. Literature Review

The literature review set out in this chapter will broadly outline social entrepreneurship. It will give an overview of the differences between social and commercial entrepreneurship. It will also identify the more specific difficulties social entrepreneurs encounter when accessing financial capital. It will then identify the various methods of finance potentially available to social entrepreneurs. It will conclude with a brief outline on social impact investment funding.

2.1

What is Social Entrepreneurship?

When the wants and needs of society are not taken care of by the free hand of the market, government has historically intervened to fill the social gap (Dees & Anderson 2003). Government has been supported in this by non-profit organisations, predominantly in the sectors of health and education. Although the number of non-profit organisations has undergone unprecedented growth in recent decades (Austin, Stevenson & Wei-Skillern, 2006) societal issues pertaining to the triple bottom line remain. Social innovation is required to fill the growing gap between what governments and philanthropic organizations provide and what commercial organisations offer (McKinsey & Company, 2011 Pg. 3). This has given rise to a more dynamic form of social entrepreneurship (Austin et al 2006) with hybrid business models combining profit and not for profit social ventures. Sustainable solutions require alignment between social and economic value creation through business approaches (Dees & Anderson, 2003).

Many authors believe that all entrepreneurship is social (Seelos & Mair 2005, Dacin, Dacin & Meteor 2010). However, it is the mission and primary goal of a social enterprise which differs from other forms of entrepreneurial activity. ‘Social entrepreneurship combines the passion of a social mission with an image of business-like discipline, innovation and determination’ (Dees, 1998, Pg. 1). The primary goal of commercial ventures is to maximise economic profit. The primary goal of a social enterprise is to create social value by solving social problems from an ethical and or environmental perspective (Seelos & Mair 2005, Martin & Osberg 2007, EC & OECD 2015). Social entrepreneurs seek to find sustainable solutions by addressing underlying problems and empowering people rather than providing charity (Dees et al, 2003). Economic

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wealth plays an important but lesser role for the social entrepreneur (Dacin & al 2011, Mair & Marti 2006).

Many social enterprises originated as non-profit organisations and were funded primarily in a philanthropic manner. In an effort to find more cost effective and sustainable ways to address social problems and deliver socially important goods Dees & Anderson (2003) argue that the lines between for profit and not for profit organisations have become blurred. Organisations such as Grameen Bank and Habitat for Humanity have restructured their business models to include for-profit as well as non-profit elements (Dees & Anderson, 2003, Dacin, Dacin & Treacy, 2011). In this way the for profit element of the business can support the non-profit activities.

The term Social Entrepreneurship is a relatively new concept and although there is much debate surrounding it, there is no one accepted definition. For the purpose of this paper the following definition of social entrepreneurship is used. ‘A social enterprise is an operator in the social economy whose main objective is to have a social impact rather than make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to fill social objectives’ (EU definition cited on, Social Enterprises NL, August 5, 2016).

2.2 Social and Commercial Enterprises: A Typology

Social entrepreneurship challenges traditional assumptions of economic and business development (Dacin et al., 2010). Market failure presents different opportunities to social rather than purely commercial business enterprises. A commercial entrepreneur reacts to new ‘needs’ whereas a social entrepreneur reacts to an existing need but takes a new and more innovative approach (Austin et al., 2006). The commercial entrepreneur is concerned only with financial success whereas the social entrepreneur is concerned with the social impact the venture will have. This in turn leads to differences in mobilizing resources including access to financial capital for social enterprises being more limited (Austin et al., 2006).

Measuring success is also more challenging for a social enterprise. A commercial enterprise is concerned solely with financial returns and this is easily quantifiable. However, measuring

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social impact is often very difficult or even impossible to quantify. This in turn leads to complications with transparency and stakeholder relations (Austin et al, 2006). However, a social venture also has a desire and need to be self-sustaining and therefore being economically viable is a crucial factor (Dacin et al 2010, Dacin et al 2011). In this way a social enterprise can be aligned closely with commercial entrepreneurship rather than non-profit organisations. According to Mair & Marti (2006) social entrepreneurship can run equally well on a for profit basis rather than the traditional non-profit manner. The way in which a venture is run is dictated more by the social need it addresses and the amount of resources required (Mari & Marti 2006). Combining shareholder value with social objectives can lead to further difficulties with social ventures needing to show both financial and social worth (Yunus, Moingeon Ortigs, 2010). This is further emphasised by Dacin et al (2011) who state that combining for and not for profit can be in conflict with one another. There is a need to involve socially oriented shareholders and to explicitly state the expected social profit (Yunus et al 2010). This underpins the importance of the financial and economic outcome as well as the social outcome (Dacin, Dacin & Treacy, 2011). A social enterprise is located between profit maximisation and non-profit, as investors, in theory get their money back whereas philanthropists do not (Yunus et al., 2010).

Social and commercial organisations are not dichotomous. They are enterprises which range from purely social to purely economic and everything in between (Austin et al., 2006). Dees & Anderson (2003) question whether wealth creation can be aligned with serving a social purpose. For profit social ventures measure success not only in terms of social impact but also in terms of economic profit. According to Dees (1998), impact related to the social mission is of primary importance and not wealth creation. The complexity of the challenge of this combination is substantial as market pressures and investors’ expectations can have a negative impact on social value creation as well as compromise on financial performance (Dees & Anderson 2003, Yunus, Moingeon & Ortega 2010, Zahra, Gedajlovic, Neubaum & Shulman 2009).

For profit social enterprises are motivated to use resources more efficiently and become more innovative as they need to respond to the market and be accountable to their stakeholders in a way that organisations funded in a philanthropic manner do not (Dees & Anderson, 2003). The

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authors argue that this ‘boundary blurring’ can lead to greater financial strength and increase access to financial capital.

Social enterprises have developed from non-profit philanthropic traditions to hybrid models where both profit and non-profit elements co-exist. More recently for profit social ventures can be seen to compete with commercial enterprises. They are however confronted with extra challenges from a resource mobilization perspective. Raising financial capital is one of those challenges.

2.3 Financing Social Ventures

Access to financial capital for triple bottom line companies is twofold (Choi, Gray & Carroll, 2008). On the one hand social enterprises often do not want external investors as they fear it will impact on their social mission and on the other hand investors fear that social enterprises will not profit maximise. Choi et al (2008) find that in most cases businesses do cut costs and do profit maximise albeit prioritising their social mission. Social entrepreneurs are willing to grow at a slower pace rather than compromise on their mission.

Social enterprises rely on people who are exceptionally skilled at mustering and mobilizing resources (Seelos & Mair, 2005). In order to access public funds and or capital markets, social ventures need to be viable economic entities (EC, OECD, 2015). Measuring impact is influential when looking for public funding or traditional financing methods (EC, OECD, 2015). When trying to obtain finance it is important to involve socially orientated shareholders and state explicitly the intended social profit Yunus et al (2010). Investors in for profit social ventures in theory do get their money back but part of the return is the social impact achieved and not simply the financial pay off. This is known as the social return on investment or SROI (Dacin et al., 2011)(EC., 2014).

Achleitner, Speiss-Knafl, Heinecke, Schoning & Noble (2011) state that social enterprises have the same financing options as the commercial enterprises. The authors claim that social investment can allow the venture to scale up but there is some danger that the original social mission can play a lesser role. Both parties need to agree to metrics and a mutually compatible plan to lead to the greatest success (Achleitner et al., 2011). Some of the main criteria which can

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lead to a good investment fit are the geographical focus, the sector focus, the investment stage focus and the social value set which the investor is interested in (Achleitner et al., 2011).

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2.4 Types of Financial Capital

Many social entrepreneurs use their own money or that of family and friends when starting up their business. This type of financial capital is highly attainable at early startup stage (Lehner et al., 2013). Bank loans are attainable at all stages of the process and normally involves a stringent due diligence (Achleitner et al., 2011). Grants and subsidies made available by government bodies can be difficult to obtain as there are strict rules and competition is generally high (Achleitner, 2011). During times of austerity this type of funding becomes scarce.

Business Angels are private investors who provide risk capital to new and growing businesses in which they have no family connection (Mason & Harrison, 1995) cited in (Maxwell, Jeffrey & Levesque (2011). Business Angels are more likely to invest at seed stage and choose small projects which appeal to their intrinsic values (Lehner, 2013). According to Maxwell et al., (2011) involvement of a Business Angel at the early stage of investment increases the chance of attracting Venture Capitalists who tend to invest at a later stage. Venture Capitalists are however not easily accessible to the social entrepreneur (Lehner, 2013). They have a preference for large projects, require a lot of reporting and want a clear exit strategy.

Crowdfunding is a relatively new method of financing. It is well known within the world of charities, is popular with entrepreneurs generally and social entrepreneurs in particular. Crowdfunding allows for relatively easy access to people, ‘the crowd’ (Lehner, O.M., 2012) who often contribute small amounts of money to an organisation for a small or sometimes zero financial return. There can be non-pecuniary returns in the form of association with a particular organisation. Crowdfunding works via the internet and avoids standard financial intermediaries (Mollick, 2014). Successful crowdfunding projects seem to be based on successful personal networks and the quality of the project, as well as geographical location (Mollick, 2014). According to Schwienbacher & Larralde (2010), crowdfunding is a strong contender for providing seed capital (cited in Mollick, 2014). Crowdfunding may have the advantage of bringing the popularity and therefore demand of a product or service to light which in turn can lead to securing more traditional financing methods (Mollick, 2014). Conversely it can allow projects to ‘fail quickly’ (Mollick, 2014, Pg. 3) preventing further investment of resources.

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At its core, investing in social entrepreneurship via crowdfunding platforms appeals to people’s values and opinions (Lehner, 2013). It ignores the traditional method of analysing business plans (Lehner, 2013) and instead examines the ideas and core values of the firm. According to Lehner (2013) crowdfunding works extremely well with the capability of raising vast amounts of money. However, as the number of platforms and competition for funds from the crowd increases, resources become scarcer (Lehner, 2013). One of the advantages and in contrast to Achleitner et al. (2011) is that geographical location bears less relevance to the crowdfunding method.

In 2012 the crowdfunding platform OnePlanetCrowd was established for social enterprises in the Netherlands. OnePlanetCrowd boasts a double return for investors in both social and financial format. The platform has led to 17,000 investors investing over €7m in seed and growth capital (OnePlanetCrowd 12.09.2016). Entrepreneurs need to meet certain criteria before being accepted onto the platform such as the clear and significant impact the venture will have on people and planet. The entrepreneur first needs to launch the venture via his own social media circles and only when 20% of the target amount is reached can the venture go public.

Achleitner et al. (2011) suggest that traditional forms of finance are available to the social entrepreneur. However, Lehner (2013) and Calic & Mosakowski (2016) argue that in practice, access to this type of finance is limited for the social entrepreneur. The main reasons for this are the dichotomous aims of the social venture (Dacin et al, 2010, Lehner 2013), and legal and organizational structures in social ventures which are difficult to accept for traditional investors and lenders (Lehner, 2013).

The following table summarises types of financial capital, the potential accessibility for the social entrepreneur and the stage of growth in which it is more likely to be accessible. This lays the basis for the investigation of this thesis into the accessibility of financial capital to social entrepreneurs in the Netherlands.

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Table 1

Equity Claims

Type Description Accessible for SE Stage

Entrepreneur/Family/Friends Investing his/her own money into the social venture, or money borrowed from family / friends

+++ Early Start Up

Social Target Group Form of crowdfunding by tapping the beneficiaries. Successful when the entrepreneurial innovation is understood and the leverage is perceived high enough. Suitable when many people are involved with small contributions from each individual. Complex form of governance.

+++ Innovating, sometimes after initial proof (of concept). High impact on corporate governance Business Angels Wealthy individuals willing to invest in

small social projects that fit to their intrinsic values and agenda

++ Early stages, difficult to tap and scarce Venture Capitalists Specialized investors, placing their fund

investors’ money into larger projects for a longer period of time, however with a clear exit strategy. Fiduciary duties, lots of reporting necessary. + Growth. More specialised VC firms for SE emerge, not suitable for early start-ups Debt Claims

Banks Loans. Special banks for social ventures exist. Often project finance with little mutual understanding between (social aim) seeker and provider. Problems in terminology and cultural distance.

++ All stages, depending on the

entrepreneurs’ preferences for control and risk-taking. Increasing importance due to specialized banks. Government, agencies Subsidies, grants and credit to improve

rating. Perhaps forms of public private partnerships. Also service-based public funding. Highly competed for,

problematic in times of government austerity.

++ High

importance for socially desirable projects that can be run sustainably with a managerial attitude, but would not be attractive for traditional investors and entrepreneurs Equity and Debt investor types, SE accessibility and stages, Source: Adapted from Larralde cited in Lehner (2013)

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2.5 Social Impact Investment

‘A growing number of investors have the desire to “do good while doing well” (Brest & Born 2013, Pg. 22). These are impact investors and they seek out investment opportunities which are also creating a positive social impact. Ormiston et al. (2015) investigate the approach of leading investors to social enterprises. One of the most significant outcomes is that investors approach social enterprises in the same way they approach any other enterprise. There needs to be a high financial return on investment. As outlined in much of the literature the social return on investment needs to be measureable. According to Ormiston et al. (2015) investors take either a ‘financial-first’ approach or an ‘impact-first’ approach. Financial first investors include banks and pension funds while impact first investors are in the form of foundations and family offices (Ormiston et al., 2015). The article stresses the importance of due diligence as in mainstream investment backing up Achleitner et al. (2011). Interestingly the authors outline the competitive advantage of having social enterprises as part of the ‘bundle’ as more clients look for this to be included when making an investment.

“Our largest client surveys their beneficiaries every quarter on what they think about responsible investing and whether we should do more. There are an over-whelming proportion of beneficiaries that respond positively. The beneficiaries themselves are a driving force in ultimately driving PGGM to invest in impact investments for our clients “(Tim van der Weide, PGGM, cited in Ormiston et al. 2015).

According to Achleitner et al. (2011) the business concept needs to show that the product or service will have a social impact in the desired sector. The market needs to be large enough to allow for scaling up while the business model needs to be concrete about the financial return. From an investment perspective, measuring the social impact is of high importance and the characteristics of the entrepreneur are also an important factor.

In the Netherlands ABN Amro made a conscious decision to invest in social and sustainable enterprises by launching its Social Impact Fund in 2013. The bank is active in young and innovative markets for social enterprises and also actively contributes to its development. The bank has made €10m available to social ventures during the upcoming years for individual investments of between €250,000 and €1,5m. To qualify for the funding companies need to be

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innovative and scalable and the social impact needs to be specific and identifiable. The social as well as the financial outcome need to be quantifiable (Social Enterprise NL August 5, 2016).

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3. Methodology

This chapter outlines the methods used in answering what mix of financial capital is available to social entrepreneurs in the Netherlands at the various stages of growth. In identifying this mix, both the availability and accessibility of financial capital is analysed. Social entrepreneurship is a nascent area of research and theoretical constructs are in their early stages. As such, a combination of both quantitative and qualitative methods are used. Edmondson & McManus (2007) argue that neither quantitative nor qualitative research is superior and that the methodological fit is dependent on the research questions being addressed. This is further underpinned by Davidsson (2005), who states that the relative youth of the domain of entrepreneurship requires qualitative as well as quantitative research methods. The remainder of this chapter outlines the research design, the data collection methods, the interviews undertaken and the method of analysis.

3.1 Research Design

This research combines both qualitative and quantitative methods and is both exploratory and descriptive in nature. It is concerned with discovering the types of financial capital used by social enterprises at three identified stages of growth and as such is descriptive (Blumberg, Cooper & Schindler, 2011). Using a quantitative measurement allows for objectivity and detection of patterns (Davidsson, 2005). Hence a quantitative method is applied in order to discover the financial capital used at the three distinguished stages of set up and growth. A follow up qualitative semi-structured interview will be held with three social entrepreneurs in order to gain insight (Blumberg et al., 2011) into the availability and accessibility of financial capital from their perspective. Semi-structured interviews are important to obtain the retrospective and real-time accounts of people experiencing the phenomenon of theoretical interest (Gioia, Corley & Hamilton, 2012 P 19). The survey (Appendix 1A) is used as a basis for the interviews thereby ensuring all interviewees are asked the same line of questions (Blumberg et al., 2011).

This research aims to uncover the availability and accessibility of financial capital to social entrepreneurs. Initial secondary research regarding availability of funding is carried out by studying the website of both ABN Amro who have a social impact investment fund and

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OneCrowdPlanet which is a dedicated crowdfunding platform for social enterprises in the Netherlands. A qualitative structured in-depth interview is held with the Head of Sustainability Advisory at ABN Amro to allow the interviewee to fully describe and explain (Blumberg et al., 2011) the availability of funding and the criteria which the bank requires before investing in a social enterprise. Validated research questions were sourced for this interview (Appendix 2).

3.2 Data Collection Method

Social enterprises in the Netherlands do not come under a separate classification in the Dutch Chamber of Commerce (KvK, July 2016). Existing registered social enterprises are identified via the Social Enterprise NL website. Social Enterprise NL is a national network for social entrepreneurs in the Netherlands. It represents, connects and supports the growing community of social enterprises, is committed to improving the business environment and instigates action (August 5, 2016 Social Enterprise NL). Social Enterprises NL divides more than three hundred social enterprises into 16 separate business sectors. Food & Catering, Fashion, Retail, Technology & Telecom and the Sharing Economy were chosen for this research as all four impact sectors as identified by Social Enterprise NL, labour participation, poverty alleviation, environment and social welfare & cohesion can be found across these sectors.

Taking cross-over (duplication) of business sector into account, one hundred and thirty one organisations were identified. The communication approach to distribute the survey was email. Email addresses were retrieved for one hundred and one organisations via Social Enterprise NL, academic databases Nexis Lexis and Orbis and individual company websites. Three email addresses proved to be invalid and four email addresses could not be delivered. This lead to the successful delivery of the survey to 94 organisations.

3.3 Survey Design

Targeted structured questions were used to investigate the specific study (Blumberg et al., 2011). The questionnaire(s) from a Panel Study of Entrepreneurial Dynamics (2010) carried out by the University of Michigan 2005–2010 provided a solid base for the questionnaire. Other specific questions pertaining to this thesis were devised by the author in line with theory as discussed in the previous chapter. Question content was determined using the following instruments 1.

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Should this question be asked? 2. Is the question of proper scope and coverage? 3. Can the participant adequately answer this question as asked? 4. Will the participant willingly answer this question as asked? (Blumberg et al., 2011, Pg. 357-358). Administrative questions were kept to a minimum, taking the respondents’ time into consideration. Companies were identifiable by their email addresses and the emails were directed to the founder/director of the social enterprise. The questionnaire provided a path to ensure that only relevant questions were presented to each respondent.

In order to motivate the participants, a clear and concise email was written outlining the purpose of the study, see Appendix 1B. The participants were offered to participate in a follow up interview and should they so wish, receive a copy of the results. The respondents were also assured of complete confidentiality (Blumberg et al., 2011).

A mixed response strategy was used in the questionnaire. A multiple choice strategy was used to determine the age of the company and to create the pathway for each respondent. A checklist response was chosen to determine the financing mix, both successfully and unsuccessfully obtained by the social enterprise at the different stages of growth. A dichotomous response strategy was used to determine the preferred future size of the company and to determine if the company measures the social impact it creates. Open ended questions were used to measure the growth of the company over time with reference to number of full time employees and percentage revenue growth of the company (Blumberg et al., 2011).

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4. Analysis of Results

This chapter will analyse the results of the survey circulated to the social entrepreneurs. The primary purpose of the survey was to get an overview of the financing mix social entrepreneur’s use during the three stages of set up and growth in The Netherlands.

The response rate for the questionnaire was 15%. From the responses received two were considered to be invalid as only two of the survey questions were answered. The analysis is therefore based on the remaining responses. As this thesis sets out to discover the financing mix used by social entrepreneurs at the different stages of set up and growth, seed, growth and mature stage, each stage will be discussed separately below. It also differentiates between companies at seed stage < 3 years in existence, growth stage 3-5 years in existence and mature stage > 5 years in existence.

Table 2

Analysis of Successful Financing: Seed Stage

Financing Type OM FF Team BL Subsidy AI VC CF Other Age Company

<3 years n = 5 0.6 0.6 0.0 0.2 0.2 0.4 0.0 0.6 0.2

3-5 years n = 2 1.0 0.5 0.0 0.0 0.5 0.5 0.0 0.0 0.5

> 5 years n = 4 1.0 0.5 0.0 0.25 0.0 0.0 0.0 0.0 0.5

OM Own Money, FF Family/Friends, BL Bank Loan, AI Angel Investor, VC Venture Capitalist, CF Crowdfunding

Table 2 above shows the financing mix which social entrepreneurs at the three distinguished stages of growth were able to access at seed stage. Companies at seed, growth and mature stage all used own money to start-up. However, older companies all used their own money whereas in more recent times this trend has diminished. Families and friends are also represented at all stages with at least half of entrepreneurs accessing funds from this source. Bank loans were obtained by one quarter of companies older than five years and one fifth of current start-ups. Grants are evident for start-ups and companies at the growth stage but not for older companies. Angel Investors are a source of funding for ventures less than five years old at seed stage but older companies did not benefit from this method of finance. Venture Capitalists are not represented at this stage. Crowdfunding is well represented with current startups but is not visible for companies at growth and mature stage.

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Table 3

Analysis of Successful Financing: Growth Stage

Financing Type OM FF Team BL Subsidy AI VC CF Other Age Company

3-5 years n = 2 0.5 0.0 0.0 0.5 0.5 0.0 0.0 0.0 0.5

> 5 years n = 4 0.75 0.25 0.0 0.5 0.25 0.0 0.25 0.0 0.0

OM Own Money, FF Family/Friend, BL Bank Loan, AI Angel Investor, VC Venture Capitalist, CF Crowdfunding

Table 3 above shows the financing mix which social entrepreneurs in the Netherlands were able to access at growth stage. At this stage, between half and three quarters of the social entrepreneurs are still investing their own money into the organisation. This is less than at seed stage but is still significant. Family and friends have a much smaller representation with only one quarter of ventures receiving money in companies more than five years old. There is an increase in the number of social enterprises receiving bank loans at this stage of growth. Grants are represented to a similar degree at seed stage as well as at growth stage. Angel Investors are not visible while Venture Capitalists are visible for the more established companies. Crowdfunding is not evident at this stage of growth.

Table 4

Analysis of Successful Financing: Mature Stage

Financing Type OM FF Team BL Subsidy AI VC CF Other Age of Company

> 5 years n = 4 0.75 .25 0.0 0.5 0.0 0.0 0.25 0.0 0.0

OM Own Money, FF Family/Friend, BL Bank Loan, AI Angel Investor, VC Venture Capitalist, CF Crowdfunding

Table 4 above shows the financing mix which social entrepreneurs in the Netherlands were able to access at mature stage and as such is only applicable to companies more than five years old. The only difference in funding for established social entrepreneurs is that no grant was received at this stage of growth. All other sources remained the same as at growth stage.

Another finding from the survey is that 50% of social enterprises measure impact while 42% of social entrepreneurs would like to grow their enterprise as large as possible, even if that means handing over some control.

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4.1 Results from Interviews of Social Entrepreneurs

One social enterprise which had originally accepted the invitation to participate in a follow up interview was not able to do so. Therefore, two follow up interviews were held with social entrepreneurs, one company was at growth stage and one at mature stage.

The company at growth stage (SE1) had encountered little difficulty with accessing funds both at start up and at growth stage. Own money and an Angel Investor were accessible at start up stage and a bank loan was used during the growth stage. The bank loan was easily obtained and offered the best interest rate at the time. SE1: ‘It was easier than Crowdfunding and we didn’t want to give away any of the company’. There has been no change in the number of FTEs employed which remains at two people and the percentage growth rate in revenue was 338%. The entrepreneur wants to keep the company at a size which can be managed by himself and some key employees. The company may hire two more employees during the coming year as they grow their brand and increase exports but money is generally reinvested into automization. Expected revenue growth for the coming year is 70%. The impact is measured by the number of jobs created through microloans for potential entrepreneurs in developing countries.

The company at mature stage (SE2) has experienced difficulty with accessing external financial capital. The organisation was and is very much dependent on own money financing. Venture Capitalist funding was successfully obtained during growth and mature stage but there were also unsuccessful attempts to obtain this type of finance. Several attempts have been made to access government subsidies but the company did not meet the required conditions. The organisation is still pursuing this route and currently one such application is pending. The organisation has received social impact investment funds. The money received was in return for approximately one third of the shares in the company. This impact funding has been in place since seed stage. The impact funding is however dependent on the company becoming profitable. Now in its sixth year of business, the company has not yet made a profit. The number of FTE has grown by 200% and revenue grew by 10% last year. In this instance the company had also answered that they would like to keep the company at a size which they can manage themselves. During the interview it became clear that the company is currently at a crossroads and sharing the risk would

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be useful at this time. Unlike the first company, this company has struggled at every stage in trying to access external financial capital.

4.2 Results from Interview ABN Amro

ABN Amro want to be positively recognised on sustainability and transparency and are in the process of developing the market for social impact investing. The bank does not have a sector focus but does have a geographical focus on social ventures within the Netherlands. They also do not have a ruling for the growth stage of the company but companies are more likely to approach the bank when they are at growth or mature stage. Tjeerd Krumpelman, Head of Sustainability Advisory believes that although ABN Amro are in the early stages of their impact investment strategy, that together with their clients the bank can have a huge impact. Although the market is still in its infancy the bank targets specific clients that are really interested in impact investment and offers it to them.

The main challenges for the bank in developing the impact investment strategy are impact measurement, due diligence and assessing the investibility of companies. To date the bank has made approximately eight large investments in return for equity of the social ventures. Although the bank does not interfere with the day to day running of the ventures, having a vested interest in their achievement and with a lot of in-house experts they do offer coaching and advice. ‘Their success is our success’.

When questioned about the process the bank goes through to arrive at investment decisions with regard to impact investments, Mr Krumpelman replied, ‘It’s no different for a social enterprise than from another investment opportunity’. ‘The analysis is exactly the same, the threshold could be a bit lower, so the threshold or expected returns could be a little lower, we could settle for a little less return, if we are sure the reward is also on the impact side’. In terms of performance ‘To date, the bank is really satisfied with the performance of the impact fund as a whole’.

Looking ahead ABN Amro believes that the future is full of possibilities for the social impact fund. Mr Krumpelman hopes ‘that impact will become a regular criteria like risk and return, so risk, return and impact’. However, before that can happen there needs to be agreement on measurement, ‘There is not one global language yet with regard to impact’.

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4.3 Limitations

…. if restricted data availability makes your mission impossible, perhaps you should pick another mission?’(Daviddson, P., 2005 Pg. 141).

The number of social enterprises, at just over 300 in the Netherlands, leads in itself to a restricted population. With a larger data set it would have been possible to run a regression to estimate the relationship between the type of financial capital used by social enterprises and their level of growth, using the percentage change in FTE and/or revenue as the dependent variables. The methods of finance or independent variables could have been divided into five separate categories or dummy variables D1 {OM, FF, Team}, D2 {BL}, D3 {Subsidy, Grant}, D4 {AI,

VC}, D5 {CF} and independently tested. As this was not possible a correlation was run in excel

to examine the relationship if any, between the growth measures and the financing methods used by the respondents. This was done for seed stage and mature stage as the number of respondents at growth stage was too small.

Correlation Table 5A outlines the results between FTE and methods of finance during seed stage. There is no correlation between own money, bank loans or grants/subsidies. A positive correlation is found between the growth rate in FTE and Crowdfunding, Angel Investors and Venture Capitalists.

Table 5A

Correlation Results Seed Stage FTE

Growth FTE OM(FF)(Team) BL Subsidy AI / VC CF

Growth FTE 1 OM(FF)(Team) 0 1 Bank Loan 0 0,25 1 Grant/Subsidy 0 -1 -0,25 1 AI/VC 0,372677996 0,40824829 -0,40824829 -0,40824829 1 Crowdfunding 0,372677996 0,612372436 0,40824829 -0,612372436 -0,166666667 1

With respect to revenues, Table 5B below shows a low positive correlation with own money and crowdfunding. A negative relationship was found between bank loans and grants/subsidies. There is a very strong positive correlation between revenues and Angel Investors & Venture Capitalists at seed stage.

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Table 5B

Correlation Results Seed Stage Growth in Revenue

Growth Rev OM(FF)(Team) Bank Loan Subsidy AI / VC CF

Growth Rev 1 OM(FF)(Team) 0,174150214 1 Bank Loan -0,319412952 0,25 1 Grant / Subsidy -0,174150214 -1 -0,25 1 AI / VC 0,981348838 0,40824829 -0,40824829 -0,40824829 1 Crowdfunding 0,174150214 0,612372436 0,40824829 -0,612372436 -0,166666667 1

Table 6A represents a strong positive correlation at mature stage between growth in FTE and bank loans and grants/subsidies. A negative relationship is found between growth in FTE and Angel Investors and Venture Capitalist investment. Own money and crowdfunding show a perfectly positive and perfectly negative correlation respectively and are not presented in this table.

Table 6A

Correlation Results Mature Stage Growth in FTE

Growth FTE Bank Loan Grant / Subsidy AI/VC

Growth FTE 1

Bank Loan 0,608884234 1

Grant/Subsidy 0,608884234 0,166666667 1

AI/VC -0,237353557 -0,40824829 -0,40824829 1

Table 6B shows revenue growth has a negative relationship with financing from bank loans and grants/subsidies. A weak positive relationship is found between revenue growth and Angel Investors and Venture Capital.

Table 6B

Correlation Results Mature Stage Growth in Revenue

Growth Rev Bank Loan Grant / Subsidy AI / VC

Growth Rev 1

Bank Loan -0,396202908 1

Grant/Subsidy -0,396202908 0,166666667 1

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In conclusion there is a positive correlation at seed stage between growth in FTE and Crowdfunding and Angel Investors and Venture Capitalists and there is a very high positive correlation at this stage of growth between revenues and investment by Angel Investors and Venture Capitalist. Mature companies have a positive correlation with growth in FTE and bank loans and subsidies but these methods of finance correlate negatively to growth in revenues. This does not indicate that growth or lack of it is caused by a particular method of finance but certain relationships can be identified.

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5. Discussion, Conclusion and Future Implications

This thesis set out to discover the financing mix available to social entrepreneurs in the Netherlands. One of the main findings of this thesis is that access to financial capital for social enterprises in the Netherlands is in transition. All companies used their own money and that of family and friends during the startup phase. This is in line with much of the literature which states that this type of capital proves to be very accessible for social entrepreneurs at early start-up stage (Lehner, 2013). However, according to the findings, the current seed companies have been less dependent on this method of financial capital. It is also clear that at growth and mature stage, own money is still a valuable source of financial capital.

Bank loans are evident at each of the growth stages but more strongly for older companies at growth and mature stage. This can be explained by the fact that companies are at a more established phase and can provide more concrete evidence to banks that they are a proven viable and investible entity (Dacin et al.. 2010, 2011, EC OECD 2015).

Grants and subsidies are evident at seed and growth stage of the survey respondents with companies. They are not evident at mature stage. One possible explanation for this is that the economy was suffering from the financial crisis of 2008. As suggested by Lehner (2013), there is a lot of competition for this type of finance during difficult economic times. In more recent years grants are available to half of the respondents suggesting that money is flowing more freely in the economy.

Crowdfunding and Angel Investors do not feature at seed stage in older companies. Crowdfunding is a new form of financing and as such it is possible that it was not considered at time of start-up by mature companies. It does however feature strongly in companies which are less than three years old. OnePlanetCrowd, the crowdfunding platform specifically geared towards funding social enterprises in the Netherlands was launched in 2012. This might have played a strong role in young startups having access to the ‘crowd’. This may also play a role in explaining why family and friends have played a lesser role at this stage as in order to go public on a crowdfunding platform the startups need to have obtained a certain percentage of the target through their own social media circles. A possibility here is that family and friends investment funds are now masked under Crowdfunding. Angel Investors are evident at seed stage for both

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startups and growth companies which is also in line with theory (Maxwell et al. 2011). Most interesting is that half of the companies are financed to some extent by Angel Investors. Described by Lehner (2013) as ‘wealthy individuals willing to invest in small social projects that fit to their intrinsic values and agenda’, it would be interesting to discover why they emerge at this point and time. One possibility stems again from the financial crisis when trust in the banking system was at an all-time low and other investments were sought out.

According to Lehner (2013) it is very difficult for social entrepreneurs to access venture capitalist funding. However he does suggest that more venture capitalists are starting to emerge who want to be associated with social enterprises. Venture capitalists are more likely to invest at later stages of development (Maxwell et al. 2011) and this is also evident from the data where venture capitalists can be seen at growth and mature stage of older companies.

At the outset of this thesis it was stated that the Dutch government does not provide specific financial support to social entrepreneurs in the form of tax breaks or subsidies. In trying to mobilize financial capital, social entrepreneurs face more challenges than commercial entrepreneurs. They need to convince potential stakeholders of their social mission. They need to appeal to the ‘crowd’s’ intrinsic set of values. They need to quantify the social impact they have if they are to be successful in obtaining social impact investment. To maintain this funding they need to become profitable. Considering the persistent growth of social enterprises in the Netherlands the Dutch government does not need to reconsider this policy. Having this policy in place prevents entrepreneurs whose main mission is not to solve social problems from taking advantage of fiscal or other incentives. However, as many social entrepreneurs do struggle with balancing social and economic value creation, incorporating social entrepreneurship in the education system might lead to a smoother path for future social entrepreneurs. Having the business knowledge to construct innovative business models which can lead to sustainable and profitable ventures is crucial. As the Dutch government does support entrepreneurial ecosystems, developing specific social ecosystems could provide knowledge and support useful to social enterprises.

Banks such as ABN Amro will support ventures which are scaleable, can quantify their social return on investment and become profitable. The bank realises that many clients would welcome

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elements of sustainability as part of their investment bundle (Ormiston, 2015). Currently 50% of the social entrepreneurs who responded measure their social impact. Social impact measurement needs to be transparent and properly reported if there is to be institutional investment. If banks are to invest in social enterprises the venture needs to be scalable. Many social entrepreneurs do not want to scale up if it means losing control and perhaps jeopardizing their mission. There needs to be an understanding from both sides if banks and social entrepreneurs are to work in harmony. Banks need their investments to exhibit an economic as well as a social return. ABN Amro has stated that if the social impact is measureable the financial return can be lower. ABN Amro views investing in social enterprises as a substantial element of their future growth strategy. Social entrepreneurs need to recognize the importance of measuring their social impact. One of the main limitations of this thesis is the limited amount of data. Further research using a larger data set might find statistically significant relationships between growth measurements and types of finance used. As the sector grows it would be useful if social entrepreneurship is specifically categorised at the Dutch Chamber of Commerce. In this way data on all social enterprises could be gathered centrally allowing for more thorough research to be carried out in a quantitative way. Having said this, qualitative research is also important so that a comprehensive understanding of the difficulties social entrepreneurs encounter when trying to raise financial capital can be achieved. Another limitation of this thesis is that in getting an overview of the types of financial capital accessible to social entrepreneurs, detailed information is not gathered on the individual methods. In-depth information about the specific mix of finances used and the potential effect of this on the success of the venture in terms of its financial viability would be useful information for upcoming social entrepreneurs.

Finally, even though social entrepreneurs do not receive and perhaps should not receive special treatment from the Dutch government, it is in the interest of society at large that social entrepreneurs continue to solve social problems by creating social and economic value.

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Appendix 1A

Social Enterprise Financing in The Netherlands

Q1 What is the current legal form of your business?  Sole Proprietor (1)

 Limited Partnership (2)  Limited Liability (3)  Foundation (4)  Other (5)

Q2 For how many years has your business been in existence?  < 3 Years (1)

 3-5 Years (2)  > 5 Years (3)

Q3 Which of the following methods of finance have you successfully obtained at seed stage, 0-3 years? Please click all options which are applicable.

 Own Money (1)  Family / Friends (2)

 Other members of the start up team (3)  Bank Loan (4)

 Government Subsidy / Grant (5)  Venture Capital (6)

 Angel Investor (7)  Crowdfunding (8)  Other (9)

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Answer If For how many years has your business been in existence? < 3 Years Is Not Selected

Q4 Which of the following methods of finance have you successfully obtained during the growth phase, 3-5 years? Please click all options which are applicable.

 Other members of the start up team (3)  Bank Loan (4)

 Government Subsidy / Grant (5)  Venture Capital (6)

 Angel Investor (7)  Crowdfunding (8)  Other (9)

Answer If For how many years has your business been in existence? 0-3 Years Is Not Selected Answer if For how many years has your business been in existence? 3-5 Years is Not Selected

Q5 Which of the following methods of finance have you successfully obtained during the mature phase > 5 years? Please click all options which are applicable.

 Other members of the start up team (3)  Government Subsidy / Grant (4)

 Bank Loan (5)  Venture Capital (6)  Angel Investor (7)  Crowdfunding (8)  Other (9)

Q6 Which of the following methods of finance have you tried to obtain but were unsuccessful at seed stage, 0-3 years? Please click all options which are applicable.

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Answer If For how many years has your business been in existence? 0-3 Years Is Not Selected

Q7 Which of the following methods of finance have you tried to obtain but were unsuccessful at growth stage, 3-5 years? Please click all options which are applicable.

Answer If For how many years has your business been in existence? 0-3 Years Is Not Selected Answer if For how many years has your business been in existence? 3-5 Years is Not Selected

Q8 Which of the following methods of finance have you tried to obtain but were unsuccessful at mature stage, > 5 years? Please click all options which are applicable.

Q9 How many FTE's are currently employed in your business?

Q10 How many FTE's did you employ at the end of Year 1?

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Q12 Which of the following statements best describe your preference for the future size of your business?

 I want the business to be as large as possible, even if I give up some control. (1)  I want a size which I can manage by myself or with some key employees. (2)

Q13 As a social enterprise, do you measure the social impact which your business has?  Yes (1)

 No (2)

Q14 Would you like to receive the results of this survey?  Yes (1)

 No (2)

Q15 Would you like to participate in an in-depth interview as a follow up to this questionnaire?  Yes (1)

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Appendix 1B

Dear Founder / Director

I am currently carrying out research into social enterprises in The Netherlands as part of my masters thesis at the University of Amsterdam.

The main objective of this research is to gain insight into the types of funding social entrepreneurs in the Netherlands can obtain during the various stages of growth; seed stage 0-3 years, growth stage 3-5 years, mature stage > 5 years.

Accessing financial capital can be difficult for any entrepreneur but social entrepreneurs are very often confronted with extra challenges in this respect.

By completing this questionnaire you will help to give a general overview of the way in which social entrepreneurs access financial capital. The questionnaire, which will take a maximum of 10 minutes will be followed up by in-depth interviews to gain a deeper understanding of the obstacles (if any) faced by social entrepreneurs in accessing financial capital at the various stages of growth. The ultimate goal of the research is to understand the availability and accessibility of financial capital to social entrepreneurs in The Netherlands.

Please click on the link below to participate in the survey. All information will be treated completely confidentially.

Thanking you for your co-operation. Kind regards

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Appendix 2

Impact Investing in the Netherlands

This interview was held with Tjeerd Krumpelman, Head of Sustainability Advisory, Reporting & Stakeholder management at ABN Amro at Gustav Mahlerlaan 10, 1082PP Amsterdam on Thursday the 29th_{of September at} 15.00 hours. The interview last 30 minutes.

PURPOSE

The focus of the interview was on the investment process undertaken by ABN AMRO in successfully or

unsuccessfully building the case for investment. If there are any questions which the interviewee would prefer not to answer, he is free to do this.

Strategy

1. How does ABN AMRO define impact investing?

2. How would you summarise your impact investing strategy (including geographical and sector focus)? 3. What is the purpose and objective (financial, social and environmental) of your impact investing strategy? 4. What triggered the move towards and pursuit of an impact investing strategy and how has your approach evolved

from conceptualisation to your activities today?

5. How does your impact investing strategy fit within your organisations larger investment strategy? 6. What were the largest challenges faced in developing your impact investing strategy?

Investments

7. What impact investments have you made to date?

How do you identify/originate impact investment opportunities?

8. What is the average timeline from origination to investment? How “hands-on” are you with the investee company leading up to investment?

9. Do you consider impact investments as a separate asset class or as an opportunity within existing asset classes? 10. How have your impact investments performed vis-à-vis your purpose and objectives?

Structure, process and decision making

What is the due diligence and investment process you undertake to arrive at investment decisions in regard to impact investments? How, if at all, does this vary to the analysis you conduct on all other investments?(answered already) 11. What, if any, advisers do you use throughout the due diligence and investment process?

And also with measuring themselves?

12. How do you analyse the risk and reward of each impact investment?

13. How is the portfolio management (including monitoring of financial and social returns) of your impact investments undertaken on an ongoing basis?

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14. What excites you most about the future opportunities impact investing offers your organisation? 15. CO’R What concerns you as to future ability to realise your impact investing strategy?

16. CO’R What would you recommend as first steps for others considering impact investing?

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Appendix 3

Table 7

Summary of Gathered Data

Company SE1 SE2 SE3 SE4 SE5 SE6 SE7 SE8 SE9 SE10 SE11 SE12 Growth Measures Growth Revenue % 900 200 10 112 0 25 338 0 8 10 20 0 Growth FTE % 300 100 0 100 0 200 0 0 14900 200 0 0 Funding Mix OM(FF)(Team) 1 0 1 1 1 1 1 1 1 1 1 1 Bank Loan 0 0 0 1 0 0 1 1 1 0 0 0 Grant/Subsidy 0 1 0 0 0 1 0 0 1 0 0 1 AI/VC 1 0 0 0 1 0 1 0 0 1 0 0 Crowdfunding 1 0 1 1 0 0 0 0 0 0 0 0 Size / Impact ALAP 1 0 0 1 0 1 0 0 1 0 1 0 Impact 0 1 0 1 0 1 1 0 1 1 0 0

For profit social enterprises in The Netherlands changing trends in access to financial capital