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Shifting attitudes of the investment community

Wednesday, 20 November 2013 18:59 GMT

* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Our latest social enterprise guide, ‘Which Legal Structure is Right for my Social Enterprise? A Guide to Establishing a Social Enterprise in the United States’ was recently launched at an event in San Francisco, a city teeming with social entrepreneurs.

Morrison & Foerster hosted the launch (and also very kindly created the guide for us) which took the form of a ‘live pitch’ event. Three social enterprises - from different sectors and at different stages of their development - pitched their business models to a panel of impact investors and a lawyer, who then gave feedback on legal structures and business plans to help make sure the organisations are as investment -ready as possible.

We ran a similar event in London about 18 months ago, and as expected, similar issues and problems arise for social entrepreneurs both sides of the Atlantic. Though the stories behind the mission of social enterprises can be inspiring, and the products and models used can be innovative, the commercial realities of running a business are the same the world over: how do you ensure they are commercially sustainable, and able to grow?

One of the key issues specific to social enterprises is how to lock in the social mission – especially when investment is being sought – to make sure that it continues to the community or cause it was created to benefit.

With increasing sophistication in social entrepreneurship, ever larger levels of investment are required to help ensure that these socially focussed organisations can reach their potential. This not only requires investors to be prepared to invest in an organisation whose ultimate goal is likely to be to support beneficiaries rather than shareholders, but also social entrepreneurs to tailor their businesses to make then as appealing as possible to investors. However, once an investor has a stake in an enterprise, that investor can exert influence over the enterprise. So unless the investor shares the viewpoint of the entrepreneur, the business is at risk of being guided away from its core mission.

The expert panel were perfectly placed to offer advice and options on this topic. In some cases, the relevant advice is to set up a non-profit arm that, for example, can own the intellectual property relating to the business and licence to back to the commercial arm. This means that the intellectual property is protected from investor influence. Another option may be to incorporate as an L3C or Flexible Purpose Corporation that allows beneficiaries or stakeholders to be enshrined within the bylaws of the business. With only the slightest hint of self-promotion (!) our guide ought to be a massive boon to entrepreneurs trying to work out what will be the best fit for them.

After listening to several impact investing funds representatives at the event, one thing that became very clear to me was that attitudes in the investment community are changing, and that there is real appetite for investing in socially-focussed businesses. An incredibly simple but enlightened piece of advice for the entrepreneurs was simply to speak to your investor: make sure that the investor is comfortable with the business structure you are using and the ways you choose to lock in social mission. It is this that is most likely to avoid governance problems arising further down the road.

A genuinely stunning statistic I heard during my trip was that globally 95% of venture capital goes to all male teams. Only 5% goes to management teams that are mixed gender or all-female. A growing number of groups and funds are working to ameliorate this enormous, and quite frankly surprising, discrepancy.

I hope that as investor attitudes continue to shift, we are likely to see investment portfolios containing businesses with increasingly diverse missions being led by increasingly diverse teams. And I for one am rather excited by that prospect.

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