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Why governments should target social issues in their venturing

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Governments around the world invest billions in start-ups and high growth firms in pursuit of job creation and innovation.  We recently attended the Global Government Venturing Summit, whose attendees alone represented more than $10 billion in government-funded capital for venturing.  They each try to fill market gaps and keep financing flowing to small enterprises with high growth prospects.  And the state’s role is only growing: Marcos Battisti who manages the European arm of Intel Capital (one of the largest corporate venturing funds in the world), estimated that governments’ funding of new venture capital funds has risen from 15% in 1999 to over 50% today in the EU.

And yet despite taxpayer involvement and governments’ national interests, no one talked about the social issues that each of these countries faces.  Discussion centred around traditional economic development approaches, often of investing financial capital through mainstream venture capital managers. 

Are governments missing the potential innovation and growth that can come out of tackling social issues?

Orienting government venturing toward social venturing goes beyond the benefits of generalist early stage funding to create positive externalities for governments:

  • Create jobs.  Social investing creates new employment (Growing the Social Investment Market, page 49).  Although few direct comparisons between SMEs and social ventures exist, however a 2012 survey by the UK government found no significant differences in size distribution in terms of number of employees (Social Enterprise: Market Trends, page 16).
  • Create jobs for hard to reach groups. Governments should take note of the employment contribution of social enterprises – over half seek to employ those disadvantaged from the labour market, rising to almost two-thirds in the most deprived areas (The People’s Business 2013, page 66).
  • Create local development with a high economic multiplier.  Social enterprise supply chains tend to be local and regional which adds to the economic multiplier of expenditure in the regional economy (Growing the Social Investment Market, page 49).
  • Create development in deprived areas.  Social enterprises are more present and active in the most deprive areas than conventional small businesses (Social Enterprise: Market Trends, page 26).  In this case, social venturing could provide a useful counterpoint to flagship economic hubs that often attract government capital.

But social venturing can also create a different quality of innovation in a national economy.

First, social investors and ventures strive to scale up business models that meet a clear social need. By placing social challenges as the central problem to be solved, they often apply a distinctive lens to social innovation rather than searching purely for the highest-profit product.  Developed countries face a litany of challenges over the next 20 years (as highlighted by a recent OECD report) – and social venturing can help to re-orient the economy toward strategic areas that sustain long term growth like education and healthcare.

Second, social ventures can create more direct innovations applicable to local and national governments.  Social impact bonds provide numerous examples of how a structure driven by social outcomes can generate innovation in areas where the traditional capital markets would not provide a clear incentive.

Many governments might rightly say that they ultimately end up supporting social ventures through their existing programs.  However, that ignores the value of intent at both the investor and enterprise level.  At the investor level, creating dedicated capital for social venturing signals its importance to the market and the availability of funding to organisations.  At the enterprise level, investing to achieve social outcomes through a business model ensures that outcomes are explicitly measured and actively managed.

For instance, Mariana Mazzucato highlights the importance of mission-oriented financing in her book, “The Entrepreneurial State.”  She points out that major breakthroughs in technological innovation have often taken place because governments made significant strategic investments at the very early stages (with considerable losses).  She contrasts this with the commercial venture capital market which tends to adapt existing technology to make it commercially viable.  She argues for a much more active state that takes bold, mission-oriented bets at the earlier stages like the US attempt to “put a man on the moon.”  In a 2006 study:

“In each case successful development of new technology complexes was not just a result of finding and creating the right conditions for innovation.  Equally important was envisioning the opportunity space, engaging in the riskiest and most uncertain early research, and overseeing the commercialisation process” (Ruttan 2006)

As the debate over the role of the state in the broader innovation landscape continues, governments should harness social venturing.  It may even be much easier to argue for government intervention in the social venturing market than the mainstream capital markets given that traditional financial markets will fail to value the additional social benefits that extend well beyond core financial returns.

Admittedly, it is difficult to scale social ventures.  They are complex to run.  They often require greater alignment between the investor and the entrepreneur.  The market is less developed than traditional venture capital. 

Big Society Capital was set up as a mission-oriented organisation with national interests and the resources to do social venturing.  Since 2012 we have invested in growth funds like NESTA and Impact Ventures UK who are pioneering investment to scale innovative high-growth organisations – and we are working on several other investments that will support early stage social ventures.  What’s more, the wider introduction of mission-driven companies through the B Corp movement demonstrates that many different organisations, including companies limited by shares, can also have a strong social intent.

An investment that creates jobs, generates new types of innovation, and addresses social issues of our society?  Sounds like something governments everywhere could get behind.

Last updated | 
18 February 2015

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