WiserEarth Editors

You are an investor and you are interested in investing in Social Businesses: the existing investment models do not really work.

The main issue with Social Investment is the issue of measurement: what makes a good deal? what makes a bad deal?

If you go the classic route (through a VC fund or as an Angel), best practices will adivse you to do an equity deal: you may loose your money, this is an acceptable risk, but you keep the upside in case the business turns out to be a good one. But what comes with equity is the issue of exit:

• What kind of exit can you expect for a social business?
• When can it be expected to happen?
• And assuming it happens, what is a good return? Should you be happy with getting your money back? or with a 3x? what should you aim for?
• How do you measure impact versus return? If you are going to be happy with a lesser return, should you require a measurement of the impact of the social business against pre-defined goals?

The Entrepreneur Commons resolves this issue by using debt instead of equity for the investments.

• Debt resolves the issue of exit: the loan is for a pre-defined number of years and everybody knows exactly what to expect
• The debt return rate can be benchmarked against the market to set a reasonable goal of return as it relates to the risk taken (and independent of the social impact)
• The measurement of success becomes the ability to pay the loan back: if the business was successful enough that it was able to generate revenue, establish sustainability and pay off the debt, and if all this was done while producing something that helps the community at large then everybody wins.