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Mar 9, 2016

Building a Culture of Local Social Investment

Central Ohio has a strong culture of investment in start-up companies:  Ohio TechAngels Funds, Ohio Third Frontier, NCT Ventures, and Rev1 Ventures are examples.  It also has a strong culture of philanthropy as indicated by the record value of grants provided through the many funds of The Columbus Foundation and the Columbus Jewish Foundation.

The motives for the former are financial return and the prospect of receiving back the investment so it can be recycled into further investments.  The motive for the latter is social impact since a grant is the equivalent of an investment that is written off as a total loss.  With such different motives, it is not surprising that they are viewed as different and unrelated activities.

Kickstarter and its offshoots have spawned the concept of investment with social impact.  Kickstarter is closer to a grant than an investment because its motive remains only social impact since a financial return or opportunity to recycle one’s investment into further investments is not possible.

Reese Neader and newly elected Mayor Ginther are launching Kiva Columbus, a new approach to start-up investment.  Being a zero interest loan program, Kiva will not provide a financial return but it will produce social impact and the opportunity to recycle one’s investment into further investments.

Social impact investing is the only approach that addresses all three motives: creating social impact, receiving a financial return, and the opportunity to recycle into further investments.  Despite these attributes, social impact investing has failed to develop meaningfully in Central Ohio.

The major issue, and a frequent topic in national media, is how large must the financial return be to attract start-up investors to social investments?  Must the return be market-rate?  If so, the prospects for significant local social investment are dim because market rate returns usually require national and global scale.

What is the potential for the creation of social impact to change the risk-return demands of investors?  Foundations for many years were required to consider only market rate returns for companies aiming to be sustainably profitable.  That changed in 2015 when the Internal Revenue Service removed this concern and opined that fiduciaries can invest at below market returns if the social impact is consistent with the foundation’s mission.  Since both The Columbus Foundation and the Columbus Jewish Foundation have local impact in their missions, below-market local social impact investments should qualify.

For other investors, does social impact change the risk-return equation by enough to attract them to the low return-high risk opportunities of investing in local social enterprises?  In the social enterprise directory on www.cincohio.com these highlighted entries address this question for a social impact investment of $300,000:
•    This investment in LA Catering would create a sustained impact of an additional 600 clients receiving Meals-on-Wheels year after year.
•    This investment in Double Comfort Restaurant would create a sustained impact of an additional 75,000 meals being provided each year through Central Ohio food pantries.
•    This investment in Pearl Interactive Network would create 40 additional jobs for disabled veterans paying an additional $1.6 million in payroll every year thereafter.

A grant of $300,000 would achieve the same social impact, but an investment would also provide the investor with a financial return and the chance to invest later in more social impact.  What must our community do to advance this discussion enough to create a local culture of social impact investment? Study the social impact profiles in our social enterprise directory and start a discussion with your peers on what it would take to make an investment rather than a grant to those social enterprises.  Ask them what financial return would they require if they were to invest?  Ask what information they need to build their comfort level with social impact investing?  Do they want to attend presentations by local social enterprises so they can better understand them as businesses?  Let me know how I can help you.

The Center for Social Enterprise Development is presenting SE Catalyst to work with 5 nonprofits to get them ready to present to investors in October 2016.  The Center is also presenting SEA Change to work with up to 15 local social entrepreneurs to get at least 8 ready to present to investors in August 2016.  The programs will end with “Demo Days” which will allow more direct exposure to social investment opportunities.  If you want a regular exposure to social enterprise activity in our community, be sure to follow, like, and share our Facebook posts.

Allen Proctor, President & CEO

Center for Social Enterprise Development