We’re publishing brand new social investment research that reveals a significant funding gap in the social sector. Here, Commercial Lead Duncan Fogg shares the highlights. Big thanks to our project partners CAF Venturesome and Unltd, as well as our principal funder Esmée Fairbairn Foundation.
Why patient, risk-bearing capital?
The most game-changing and impactful innovations in the world – almost without exception – started out as highly speculative, unproven “good ideas”. These good ideas typically become a reality when the innovators behind them are able to find funding to develop them, from investors who are both willing and able to wait a long time for these ideas to come to fruition. These investors must also be prepared to share risk with innovators, accepting that many of these ideas will fail and they may lose money. We define this particular type of funding as patient, risk-bearing capital – the driving force behind much recent human advancement, and a transformative tool to realise ambitious social impact.
Impact driven ventures often require capital that is patient, flexible and aligned to impact ambitions.
David Bartram, Director of Ventures at Unltd
For social purpose organisations (SPOs) working on a new social innovation or looking to scale existing operations, the right type of funding can be transformative. Patient, risk-bearing capital can enable world-changing ideas to be tested, validated, and supported right through to delivering social impact at scale.
Currently, as the social sector faces increased pressure as a result of Covid-19, SPOs are responding to significant operational – and therefore funding – challenges. We observe funders working hard to support their investees by implementing flexible support, such as extended capital, interest repayment holidays, and additional emergency funding. We welcome this response and believe it only reinforces the importance of taking an adaptive, long-term view to funding the social sector, which will need time to reflect and rebuild in the wake of the pandemic. The need for patient, risk-bearing capital surfaced by this research comes into even sharper focus as we consider its potential role in supporting the social sector’s recovery and reinvention.
A case for new research
Despite the logical fit for SPOs and social innovation, there has been very little demand for patient, risk-bearing capital in the social sector to date. The data suggests that few SPOs want it and, as a result, investors have focused on other forms of funding – mainly short-term debt to provide working capital or acquire assets. But Shift’s experience of building social impact ventures doesn’t tally with the data. We’ve spent five years seeking patient, risk-bearing capital in order to test venture ideas in market, drive customer traction, and build robust evidence of impact.
All this poses the question: do SPOs really have no need for patient, risk-bearing capital? Or is something happening to stop them seeking it out?
Shift joined forces with CAF Venturesome, UnLtd and Esmée Fairbairn Foundation – three progressive funders similarly interested in exploring these issues – to put these questions to the social sector. Together we formulated the research hypothesis:
In the social sector, the need for patient, risk-bearing capital is much greater than current demand. This is driven by demand-side barriers including awareness, understanding, and access to this type of funding.
We designed a research methodology – involving desk research, segmentation and a survey – to surface the types of funding SPOs actually need, rather than ask for, and to begin identifying barriers to existing funding demand. The resulting key findings confirm our hypothesis.
Research findings and implications
Our headline findings are:
Almost one in five (18%) SPOs need patient, risk-bearing capital to realise their social impact goals.
This need is three times greater than current demand, indicating significant barriers to this type of funding in the social sector.
Barriers include low awareness and understanding of patient, risk-bearing capital, which should be tackled in order to more effectively fund innovation for social impact
These findings show there is a substantial opportunity to increase demand for patient, risk-bearing capital among SPOs, so they get funding that is better suited to enabling their social innovation and impact goals.
Building on the momentum of these findings, we recommend further research and experimentation to identify remaining funding gaps, consider the right ecosystems of support, develop specific funding products, and meet SPOs’ diverse needs with an injection of transformative investment that will stimulate the market both in terms of demand and supply.
This research is an important next step both to further our knowledge and influence funders to offer the best kind of transformational funding for social impact.
Ben Smith, Head of Social Investment at Esmée Fairbairn Foundation
Transformational ideas for social impact don’t start and stop with SPOs. At its best, funding can be just as innovative, disruptive, and impactful. It can be both the spark that ignites innovation and the fuel that continues to drive it forward. Social investment has come a long way in the last 20 years, but it is still finding its feet and evolving to better meet the specific needs of the social sector. We believe there has never been a better time to reflect and explore this further.