How innovative financing models can determine the success of an impact business

Impact enterprises(or popularly known as “Social Enterprises)are entrepreneurial organizations( includes both non-profit and for-profit ventures) that innovate to solve social or environmental problems. Thus in an impact business world, success is measured not in terms of the valuation of the company but the scale of impact it has created. The social value of providing poor people with affordable health care, basic education, or clean drinking water is enormous, but the cost of private funding often outweighs the monetary return.  Many social enterprises survive only through the largesse of government subsidies, charitable foundations, and a handful of high-net-worth individuals who will make donations or accept lower financial returns on their investments in social projects. As per Harvard Business Review(HBR), the cost of solving the world’s most critical problems runs into the trillions, including an estimated $2.5 trillion annual funding gap needed to achieve the Sustainable Development Goals (SDGs) in developing countries alone. Clearly, more funds will be needed if the development goals are to be met.

So is money  per se the wicked problem?

Based on a Mckinsey Report, market inefficiencies—such as unnecessary transaction costs, misaligned incentives, and lack of performance measure, often prevent the financial assistance that is available from achieving desired results. These organisations typically relying on traditional charity are always on a lookout for continuous fundraising and often lose focus towards their goal in the process. Further,governments around the world nowadays are straining to fund their commitments to solve these problems, dissuading social entrepreneurs to innovate and grow and resulting in financial unsustainability. Undeniably, the biggest obstacle to scale for the social sector is the lack of effective funding models.

This post on my blog will focus on some of the innovative financing models( not limited to this) that have been developed and even adopted by some of the organisations across the world and why our Indian sociopreneurs should take a cue from these models in order to fill this financial gap and address pressing global challenges.

Public-Private Partnership(PPP) model

Social Business is a concept defined by Prof. Yunus as a business which is financially self-sustainable, but recycles all profit into addressing developmental needs. This is exactly followed by an Indian social enterprise, an initiative by IIT alumni, PARFI(Pan-alumni Reach For India). This enterprise which uses Public-Private Partnership(PPP) model has been a game-changer for many rural less-educated youths, who had lost hopes of improving their family’s condition and turned them into self-sufficient human beings enabling them to live their life with dignity.

benefits_block_1PARFI Model.png

benefits_block_2Outcome Based Payment Mechanism- Development Impact Bonds

A relatively new model, wherein impact enterprises enter the capital market and rope in an investor, gaining access to a larger pool of capital helping them cover their costs and grow their activities. Repayment is contingent on the achievement of specified social outcomes, with a possibility that an outcome may not be achieved altogether.

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Benefits of DIB.pngOutcome Based Payment Mechanism with Limited Risk to All- Social Success Note

An innovative pay-for-success financing mechanism developed together by  Yunus Social Business and The Rockefeller Foundation; wherein a private investor agrees to provide equity to a social business which if achieves a predetermined social target, a philanthropic donor will give the private investor an “outcome payment” for the social good. The twist here is that the responsible organization pay back the investment after a pre-decided period, regardless of the outcomes. This seemingly reduces the risk taken by the private investor, while donor can save the loan amount to donate to another socially worthy enterprise.SSN-Final Infographic.png

Lessons learnt as we assess these models….

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Innovative financing for social good has just scratched the surface and has caught the eyeballs of both investors and donors likewise.And though these models may not be a silver bullet for poverty reduction, it is perhaps an encouraging way for investors to look through the social lens while trying to achieve the financial milestone.

The need to solve pain-points of society run in the blood of startups. In a social enterprise, however, apart from the yearning to solve social problems,we need an innovative financing model,strong policies and a public-private coordination to tackle the world’s greatest challenges; and we still have miles to go.