Funding needs of social enterprises
The report published in 2019 by SpainNAB (the National Advisory Board for Impact Investment, of which the Esade Center for Social Impact is the academic partner), entitled “Towards an Impact Economy”, included a concrete appeal to gain a deeper understanding of the funding needs of social enterprises in Spain.
It was for this reason that we decided to join forces with Open Value Foundation to promote this study in order to help strengthen the impact investment and social entrepreneurship ecosystem in Spain.
The ‘two souls’ of social entrepreneurship
The first conclusion is that there is a great diversity of social enterprises – we talk of the ‘two souls’ of social entrepreneurship in Spain. These different ways of promoting and managing social enterprises are geared to the resource mobilisation needs of each business model, the motivations of the founding team, the image they want to put across to the various stakeholder groups and the type of challenge or sector in which they want to generate impact.
The first strategy is adopted by those companies that tend to opt a non-profit legal form: they act more locally, they have a greater dependency on the public sector, and they focus intrinsically on impact. The second strategy is usually adopted by profit-oriented companies: their products are more technology-driven, they endeavour to grow on a global scale, and they seek funding in the form of capital.
Although both strategies can harbour sustainable business models, companies in the latter group tend to have greater potential for scalability and profitability. In any event, it should be stressed that some projects match neither of these two groups exactly, and often pursue hybrid structures.
Specific funding needs
The second conclusion is that social enterprises have specific funding needs that cannot always be met with the present supply. This difficulty derives from two factors: lack of funding sources for the early stages of development and lack of specific funding for social impact projects.
It is important to find ways to cover these two needs, probably with hybrid funding structures in which public or private capital can act as a catalyst for other impact investors. Furthermore, it is important to understand the specific needs of each of the two types of social enterprise identified, as they must be taken into account when it comes to designing the new funding tools for this sector.
Impact funding of social enterprises at the startup stage can adopt the venture philanthropy format (funding that can be sunk costs or in the form of debt or lower-return or longer-term investment, complemented with non-financial support) or impact investment (usually with higher expected financial returns, close or equal to market rates, but in Spain still under-developed). For later stages, it is important to complement the present ethical banking and impact fund instruments in order to cover the needs of the different types of social enterprise.
Building a solid ecosystem
The third conclusion focuses on the need to build a solid ecosystem around social enterprises. Firstly, public administrations can contribute to the sustainability of social enterprises by including social impact clauses in tenders for procuring goods and services, and also by fostering social impact contracts (SICs).
Secondly, non-financial support for social enterprises at the startup stage is very important for their growth and consolidation, so ways should be sought for the various types of intermediaries to be able to offer this support in a sustainable fashion. Lastly, funders can help to make the measurement of impact more sophisticated among social enterprises, by requiring increasingly advanced measurement levels, while at the same time offering them their financial and non-financial support.
