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Apr 24, 2014

What Does It Mean to Invest in Social Impact?

The recent buyout by Facebook of Oculus Rift has spawned a great deal of ill will and confusion by many.  The reason is that Oculus Rift was an early beneficiary of crowdfunding.  Individuals contributed $10 or $200 to the “cause” of developing a new technology.  This campaign sought $450,000 but actually got almost $5 million.  Facebook bought out the company for $2 billion.  Owners and other investors got the windfall, but the crowdfunders got nothing — so they are upset.  Were they robbed?  Was Oculus Rift greedy?  Or did the crowdfunders think Oculus Rift was a social enterprise and therefore committed to a large social benefit with less ambitious financial goals?

Oculus Rift was a great, innovative idea, but it was never intended to be a social enterprise.  So which entrepreneurs should crowdfunders support if they have in the back of their minds that pure financial gain is not the “exit” they want the entrepreneurs they support to be looking for?

First, they need to understand the context for the business.  Social enterprise has an unfamiliar context.  A podcast refresher or a video refresher  or an old-fashioned article can help.

Second, crowdfunding as it exists today provides the funder with NO RETURN except for a trivial recognition like a refrigerator magnet.  Thus, for a socially-minded individual, crowdfunding makes sense for the mission-based activities of nonprofits, which are not capable of earning a profit and returning the crowdfunders money.  On the social enterprise side, where there is the potential for a profitable enterprise, the crowdfunder should be mindful that start-ups, whether social enterprises or not, usually fail  — so that no investor gets his or her money back.

The rub comes from the social enterprises which become financially successful, and better data collection is making it easier to know about those successes. The Global Impact Investing Network (GIIN), a great information resource on global activity, reported in 2013 that 89 percent of institutional impact investors were meeting or exceeding their financial expectations.  Luther Ragin in Institutional Investor cites a U.S. Bond fund committed to low-income housing beating the Barclays Aggregate Bond Index and a venture fund committed to economic and environmental development outperforming Cambridge’s venture capital index.  In an earlier blog, I reported on the very encouraging results of the impact portfolio of the KC Felicitas Foundation.

For these situations, crowdfunders will always feel wronged because they are the only investors with no claim on the company.  There are better ways for those individuals to support social causes.  They can invest in a social impact fund that accepts small donations, such as the Calvert Foundation Community Investment Note  or the Invest Local Ohio notes of ECDI.

Nevertheless, the area of impact investing must still rely on accredited investors (who meet minimum criteria for income and/or personal wealth) and institutional investors who will make their own investment decisions or participate through investment funds (such as the soon-to-be-formed CINCO Fund).

But this started to change last year and variations on stock exchanges for social enterprises are emerging outside the United States.  A blog post by Nicole Motter lists several emerging efforts.  In the UK, the Social Stock Exchange currently provides information on 12 companies that meet its criteria for social or environmental impact.  It is not yet an exchange, but it hopes to be someday. In Canada, the Social Venture Connexion is another matching program that matches pre-screened social enterprises with accredited investors.

The Impact Exchange in Singapore is the only public stock exchange currently in existence but it has not yet added any issuers.  This is expected to change sometime this year.

Thus, new opportunities to be true investors in social enterprises are in the works.  But crowdfunders need to modify their expectations for now.  If they truly want to be part of something socially beneficial, they should crowdfund the mission activities of nonprofits or carefully identify true social enterprises.  Otherwise, they should accept that someone else will be the financial beneficiary of their largesse.  Still not sure where your largesse should go?  Learn more by reading Linking Mission to Money!