Like all businesses, social businesses require funding and capital to get started and to scale up. However, unlike typical businesses, social businesses aspire to more than just financial returns. Often, their primary mission is to maximize the social and environmental benefits of their companies, sometimes at the expense of maximizing profit. Whether or not social businesses should offer financial returns to investors that are on par or at a discount to typical businesses is a topic for future posts. What is certainly true in the industry right now is that for-profit social businesses often return less to an investor than the stock market would. Additionally, social businesses are generally a riskier investment, which leads investors to expect higher rewards. Operating in developing countries with unique businesses models and distribution channels can lead to a lot of unknowns and unexpected bumps along the way. Therefore, it takes a special kind of investor to put capital into social businesses.
I firmly believe that in the long run, it will be demonstrated that companies focused on consumers at the bottom of the pyramid (BoP) can be successful and will experience rapid growth. In the meantime, investors are wary of BoP companies. Therefore, bold and unreasonable investors must prove the benefits of investing in the BoP to the typical investor. These unreasonable investors must care more about building the case for investing in the BoP than about receiving dramatic financial returns themselves.
The Acumen Fund is doing just that. They are a pioneer in the social business industry with the innovative concept of patient capital. Essentially, the Acumen Fund is a venture capital firm for social businesses; they invest money in early stage social start ups, with a goal of exiting the business after 5-7 years, or longer if necessary.
Along they way, they are accomplishing two honorable goals:
- In the immediate term, the fund is backing companies that are directly having an impact on the standard of living for those at the bottom of the pyramid. The Acumen Fund portfolio of companies is helping to alleviate poverty across the world.
- More importantly, in the long run the fund is making the case for other investors to put money into BoP focused companies. By doing so, the fund will eventually make it easier for socially minded companies to access capital, which is exactly what is needed to encourage rapid expansion of the industry.