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The unavoidable misunderstanding between social entrepreneurs and social investors

"Social impact investing" is the new magic word among many investors and social entrepreneurs. It seems like an ideal combination of social concerns and profit-oriented investment. But many social investments fail, must fail, because investors do not understand the characteristics of a social entrepreneur. Felix Oldenburg, Ashoka's Europe and Germany director, speaks of a "psychological power differential between social entrepreneurs and social investors". In an interview to Next Billion, he clearly shows the core problem: “Many impact investors come from traditional finance, so perhaps they assume that social entrepreneurs, like business entrepreneurs, want to capture as much value as possible within their organization. The opposite is true: Great social entrepreneurs want to create as much value as possible in the whole system, even if that means leaving revenue opportunities on the table."

A social entrepreneur is mostly active in areas where there is not yet a fully developed market. Therefore, a large part of his task consists, as a start, in entering and opening up this market. He does this primarily out of the drive of an accessible social impact – and comes therefore quickly into conflict with a "social investor" who looks primarily to the return of the invested capital. Felix Oldenburg: "Great social entrepreneurs look for the fastest way to change the system with the cheapest form of funding available - not for the safest way to produce surpluses to pay back expensive loans or mezzanine capital. Impact investing, in the worst case, will limit the very potential of an idea, by preventing strategies that could unleash social impact across the word. By forcing a socially impactful organization to focus on earned income, you will cage them."

This description is in accordance with the research from "sun-connect" that also the due diligence process follows a traditional role allocation. On the one side, the investor, who receives applica-tions for his capital and establishes more or less restrictive conditions for the investment. On the other side, the applicant who must meet the conditions that often extend far into business decisions. Capital also weighs in social impact investing more than ideas. Popular publications, such as the "Social Investment Manual" of the Schwab Foundation, address therefore for the most part specifically to the social entrepreneur and show him how he has to approach a social investor, what documents he must prepare and what questions he must answer. But where is an appropriate guideline for social investors? These, after all, also apply with their capital for an investment - and they often do not understand at all, how a social entrepreneur thinks and acts.

What to do? For Felix Oldenburg, a fundamental change in the thinking of social investors is required: "We must fund the impact, not the organization!" We should moreover add that we also need new evaluation criteria that measure in addition to the financial impact also the social impact. In order that the social entrepreneurs and social investors not only discuss about financial plans because this narrowing must inevitably lead to mutual deception.

Statements of Felix Oldenburg: http://www.nextbillion.net/blogpost.aspx?blogid=2326
"Social Investment Manual" of the Schwab Foundation: http://www.schwabfound.org