Financial Sources Open Up to Social Enterprise Investing

Laurie Allen
Joe DeLoss, founder of Hot Chicken Takeover

Two of the most recognized names in Columbus' social enterprise scene began their odysseys with their own credit cards and a firm belief in their missions. If they were to start their organizations today, however, they might follow different paths.

“There has never been more money available for impact investing,” says Tony Wells, president and CEO of The Wells Foundation, which has funded and operated social enterprises in central Ohio for more than a decade. JP Morgan Chase forecasts the sector will be 10 times its size in two years, Wells notes.

Like Wells, who funded his first ventures with credit card debt and a second mortgage, Hot Chicken Takeover's Joe DeLoss used his personal credit to launch what is now a successful, expanding business that hires and supports the hard-to-employ. “I couldn't have walked into a conventional bank and asked for a loan,” says DeLoss, who estimates he approached nearly 100 people during his first round of funding requests. “I had an 80 percent turndown rate, which is common. This requires a degree of tenacity and a thick skin. I took a beating.”

Today's upstart social entrepreneurs, however, can tap into new sources of capital. “There is a growing interest in enterprise investing,” says John Glazer, technical director of the Social Enterprise Ecosystem at the Ohio University Voinovich School of Leadership and Public Affairs. The school recently published a report on the status of social enterprise in central Ohio.

One up-and-coming channels is called “venture philanthropy”—in which historically grant-based institutions are moving into social enterprise investing. “There has been a receptiveness of nonprofits to use traditionally for-profit tools to grow and stabilize, versus begging for money, having one more golf outing or one more wine tasting,” Glazer says.

In addition, philanthropic organizations now see funding through a new lens, he says. “Why not invest in things that advance your mission? It's a generational thing. People today are less interested in getting their name on the wing of a building than they are in making a difference.”

The Columbus Foundation has been involved in social enterprise investing for about a decade, with investments ranging from about $500,000 to $3.4 million, says Carter Hatch, associate director of corporate philanthropy and impact investing. Now, she says, “We are looking to be more proactive about finding investment opportunities. … Grant-making can go only so far.” Hatch says the foundation also plans to extend impact investment opportunities to its traditional donors and is working on a vehicle to make that happen.

Ironically, the Columbus Foundation is experiencing an environment faced by many other potential investors: more money to deploy than there are applicants. “While we get hundreds and hundreds of grant applications, I can count on one hand the number of impact investment requests we've received,” says Emily Savors, foundation director of grant management.

The relative newness of the social impact-investing sector is a key factor in the disconnect. Investors and entrepreneurs are trying to align with one another's visions and expectations, and that road can be bumpy, experts say.

“Bringing these two together is a new space companies haven't been in,” says Pablo Vegas, executive vice president and chief customer  officer for NiSource, a seven-state utility company that has been actively involved in social enterprise investing. “The struggle [for investors] is ‘How do I think about these dollars? How do I balance the mission versus the bottom line?' ”

A social impact investment means a double bottom line, with two distinct set of returns: one financial, the other social—measured by how the business alleviates problems such as chronic unemployment, food insecurity or access to healthcare.

Conventional investors don't have that social impact built into their investment strategies. At the same time, “Impact investing is such an exciting space that it's attracting traditional lenders” who not only charge higher interest rates but may not be willing to compromise on financial return, Wells says.

Glazer says the new playing field requires adjustments by all parties. “In impact investing, you're not expecting to see these huge, out-of-whack returns. You also are going to take more modest risks.”

Those in the field say investors and entrepreneurs are finding creative ways to address the situation, such as delayed or staggered re-payment schedules and tying payment terms directly to revenue generation.

The “invest-ability” of social enterprises is in some ways hampered by their very nature: They serve small markets, often don't have a competitive advantage such as proprietary technology and don't have built into their business plan how to provide a return to their investors, Glazer says. Investors see good causes but no proven business model.

DeLoss agrees that many social enterprises “haven't fully embraced the components” of conventional business, such as cash flow, marketing, capital needs and investment risk versus return. Social entrepreneurs, he cautions, must channel their passions through a business filter.

In some cases, “It's been a matter of not presenting fundable cases to the business community, but presenting a really novel nonprofit idea. You have to demonstrate sustainability.”

Wells says a key consideration always is whether an enterprise's business model is sustainable through the good and services it provides. The foundation realizes that won't happen overnight, and is flexible on repayment terms. However, he points out, “We say up front, do not enter into this thinking we don't want the money back.”

DeLoss says, “We perceive our impact strategy as a privilege we earn by running an effective enterprise in the same way we earn the customers' commitment to buy chicken.” Even though he found partners who shared his passion and understood the nature of his business, “there was still a level of scrutiny.”

Many promising ideas never get to fruition, Wells says, because entrepreneurs lack the confidence or business acumen—or both—to see it through.

He believes the solution lies in educating entrepreneurs on how to request funding and how to effectively transfer their vision to a successful business reality. Local entrepreneurs laud the workshops offered by the Wells Foundation as a valuable training ground.

DeLoss says such education and mentorship are critical. “You can teach the skills of business easier than you can teach compassion.”

Laurie Allen is a freelance writer.

Who's Investing?

The following are among the organizations that have made investments in social enterprises in central Ohio:

• The Wells Foundation

• The Columbus Foundation

• The Business of Good Foundation

• Finance Fund

• Illinois Finance Fund

• Social Ventures Fund

• Economic Community Development Institute