Why social investment is more than a fad

I’m no fan of buzzwords or phrases but sometimes there is something substantive behind them. Over the past few years ‘social investment’ (also known as ‘impact investment’ in some quarters, particularly the US) has been growing as an idea and, while I was a bit of a cynic early on, I’m coming round to the idea that it is more than just flavour of the month.

I got the chance to see Sir Ron Cohen give a couple of talks in London earlier this year. You might have seen him on Newsnight or similar over the past few months as he’s become more high profile as Chairman of Big Society Capital. His back-story is that he played a very significant role in the development of the venture capital and private equity industries in the UK and elsewhere, setting up Apax Partners in the 1970s. There’s a long list of interesting companies he’s either invested in early on or turned around using a more private equity like approach.

He tells the story of social investment slightly more formally in this SSIR article but about twelve years ago (apparently after a phone call from the Treasury of Gordon Brown’s era) he started thinking about how the approach he’d developed in financing businesses and delivering a return to investors could be applied to tackling social issues. The scale of the challenge was what interested him. He saw social problems getting bigger but charities and the public sector less able to innovate because all their time was spent servicing existing needs.

He set about proving that social investment could have an impact so co-founded Bridges and the Social Investment Business and played a role in the creation of social impact bonds that are now spreading to other countries. Sir Ronnie talks about social investment having a range of returns and for Big Society Capital he talks about an average return of 5–6%. Some people think that’s very ambitious in the current economic climate, but in the venture investment world that’s pretty low. VC funds that go fundraising would be predicting a 15–20% IRR.

Investors often talk about a ‘pipeline’ of investment. I’ve been watching this field develop over the last few years in the UK and one of the things I realised is that there’s a kink in the pipe right by the tap. As Seedcamp has done a fantastic job in solving that in for European tech startups over the past 5 years, the social investment world has to now focus on creating opportunities for the brightest and the best to start new ventures. BGV is our attempt to do that and I think it’s good that a few other people seem to be doing that too.

I think social investment will continue to grow and start to be an appealing source of finance for founders where they can see a match between their aims and those of their investors. It’s already becoming a bigger part of the investment world in Silicon Valley with many of the big names (such as Mitch Kapor) setting up ‘impact funds’. I’m sure there will be plenty of mistakes along the way but I’m pretty hopeful that the growth of social investment will be a good thing.

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