Original post by Sir Ronald Cohen and William A. Sahlman via HBR
During the past century, governments and charitable organizations have mounted massive efforts to address social problems such as poverty, lack of education, and disease. Governments around the world are straining to fund their commitments to solve these problems and are limited by old ways of doing things. Social entrepreneurs are stultified by traditional forms of financing. Donations and grants don’t allow them to innovate and grow. They have virtually no access to capital markets and little flexibility to experiment at various stages of growth. The biggest obstacle to scale for the social sector is this lack of effective funding models.
But the problem is not money, per se. Take a look at the social sector in the U.S. There are $700 billion of foundation assets, and 10 million people working for non-profits. These are huge numbers. Yet there are massive inefficiencies in capital allocation. Too often donors starve organizations and entrepreneurs by refusing to cover overhead. This makes it impossible for social organizations to scale. Interviews conducted in 2000 by the Social Investment Task Force in the United Kingdom, revealed what most nonprofit leaders already know: Almost all social sector organizations are small and perennially underfunded, with barely three months’ worth of working capital at their disposal. And that hasn’t changed in the last 12 years.
Compare that to the world of venture capital. If a business entrepreneur came to us with a plan for growing a new business without spending a penny on overhead, we would show him or her the door. Why should it be any different for a social entrepreneur?
We believe we are on the threshold of a major change not unlike the early days of the modern venture capital industry. In the mid-1960s and early 1970s, a new type of investment vehicle was created: the professionally managed venture capital partnership. This organizational innovation drew investment capital from institutional players like pension funds and endowments and allowed for appropriate time horizons. Soon venture capital became a core part of many economies and those bold moves changed everything. Entrepreneurship has never been the same
Big Business meets Startup London 2013