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The Gritty Reality of Social Investment: an investor's view

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We know that all too often there is a mismatch between the hype of social investment and the gritty reality. Part of this is a mismatch of expectations – between the social investor with the money, and the social enterprise looking to raise finance.  And in my experience, this mismatch is particularly striking around the issue of governance. 

 

We all know that people are really important to the success of the social organisation (as well as to the success of the social investment), but understanding what “good governance” looks like, and assessing “is this person good enough” is tricky to say the least – and we don’t always get it right.

So, as a social investor, what have we learned so far?

Meet the board

A social enterprise will often expect us to be very interested in the directors’ CVs, and will proudly present a document detailing everyone’s fantastic achievements and qualifications.  However, a wonderful CV on paper is not enough – or even necessary.  We want to understand whether the board get on – with each other, with the CEO – how often they meet, can they explain what their organisation does.  And whether they fully understand the social investment being proposed. 

Where we’ve got this wrong: the Chair of a very-failed social investment denying any knowledge of the loan taken on….  If they apparently didn’t know about the loan, perhaps it wasn’t that surprising that they didn’t repay it!

Understand how the board were chosen

To be honest, social enterprises rarely expect us to ask about this – however we know that great boards do not emerge fully formed, in a waft of purple smoke, from some mysterious alien spacecraft.  The more prosaic reality is that great boards are deliberately put together to ensure that there is a balance of skills, experiences and motivations.  So when considering whether to make a social investment, we want to know how the board were chosen.  Has there been a skills audit (either formally, or informally recognising the skills gap and proactively trying to fill them)? Is the board solely made up of donors or investors, and if so, what impact does that have in decision making?  Are the board too close to each other, or to the CEO, to have constructive input?

Where we’ve got this wrong: reasonably far into the due diligence process, asking the CEO to tell us all about the Chair (“he’s excellent”), how they got on (“very well”) and to introduce us.  In a later call with the Chair it emerged that they were siblings….  We didn’t make the social investment.

But above all, trust your gut

If you don’t trust someone – no matter how brilliant they appear to be – then you shouldn’t invest in them.  This is particularly the case for unsecured social investments to potentially highly-personal social causes.  But it can be tricky to back away diplomatically! 

Where we’ve got this wrong: ignoring our gut! And making social investments to individuals who, for example, later alienated their entire board, took on additional finance without anyone realising, and generally turned out to be a “bad egg”.

This absolutely works the other way round – if you, as a social entrepreneur, don’t like a potential investor, then don’t work with them! No matter how cheap, flexible or big the social investment appears to be, if you don’t have a good relationship – it’s not worth it.  After all, there are plenty of other fish in the social investment sea.

Last updated | 
4 April 2016

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