Market Impediments to Social Venture Capital

Venture capital, unlike other capital-raising vehicles, originally was understood as a vehicle for impact in stimulating the economy. American Research and Development, the first modern venture capital (VC) firm, was founded in 1946 in the immediate aftermath of World War II. It was founded as much to stimulate technology entrepreneurship and economic development in the U.S. as to generate high financial returns. The pioneering family funds J.H. Whitney and Rockefeller Brothers had similar objectives. A few spectacular exits (sales as well as IPOs) drove attention and institutional capital towards the venture capital channel, which led to professionalization, standardization, and eventual mission drift. 

In recent years, the category has started to return to its social origins, and there are now numerous organizations dedicated to investing with impact ranging from the patient capital model to various region or sector-specific categories. The recent Impact Forum was fortunate enough to host several practitioners to address recent developments in social VC, including Jean-Philippe de Schrevel from Bamboo Finance, Julie Cheng from Insitor, Fahim Ahmed from SEAF Bangladesh, and David Steel from Leapfrog Investments. The panel was moderated by Sasa Vucinic from V Media Ventures. 
While the panelists spoke of the extraordinary promise that social VC holds for addressing solutions in emerging markets–development institutions recognized this as early as the 1970’s–they all acknowledged some difficulties that the category now faced. These challenges include conservatism and risk aversion resulting from the financial crisis, difficulties in deal sourcing, due diligence, and infrastructure constraints. They also noted that the diversity of objectives of various stakeholders often hindered investments. Ms. Cheng noted: “It is important that as the industry matures, there is recognition of the different expectations and goals that cohabit the sphere of social enterprise investment.” Mr. Steel argued that demand for investments in Social Enterprises (SEs) was likely to outstrip capacity for the foreseeable future, while Mr. Ahmed and Mr. Schrevel both addressed the acute need for greater transparency and accountability by SEs and Impact Investors alike. Despite these challenges, the panelists envisioned a promising future for social venture capital which would enable highly promising social SEs to drive impact for impoverished populations across Asia.