Why financial innovation is the key to unlocking the impact of Rooted Ventures
It is time for the financial ecosystem to nurture and support the growing wave of rooted ventures and other problem-oriented, social ventures.
Rooted Ventures are part of a growing movement of ventures emerging that seek to find innovative, research-rooted solutions to many of the challenges societies face from poverty, to access to education and clean water. Exciting as they are and with many more emerging their potential will — as with most ventures — depend on their ability to access the right type and right amount of finance at the critical moments of their growth. Looking at the financial ecosystem today we will need to innovate and diversify if it is to support these emerging ventures and meet them where they are. There is a significant amount of untapped impact potential ready to be catalysed through social ventures, if only we could have the courage to develop and implement new ideas in the financial ecosystem, as much as escaping from the old ones.
The time for diversification has never been better. There are record levels of capital going into investments, with impact investing in particular growing in leaps and bounds in the UK, growing from £830m in 2011 to £5.1bn in 2019. This impact investment grew out of investors wanting to realise social as well as financial gains. Many of the investors (and the capital) emerged from high growth sectors, like tech and so the impact funds were structured with a similar worldview, value system and expectations of the ventures they invested in.
What is that worldview? Most funds are structured asymmetrically, balancing risk and reward across their portfolio, with an expectation that a significant number of ventures will fail but a handful might see exponential growth which delivers the returns. Impact investing while not having the same growth expectations is still structured with this expectation which has manifested itself into the ecosystem we see today. A distorted investment focus on tech or tech-enabled solutions. Tech solutions are undoubtedly a critical part of the ecosystem and can be brilliantly innovative but they are only one segment of the social ventures that we could nurture.
Tech is a broad church but can bias towards less optimal outcomes. Tech can lead to a focus on wide but shallow impact such as solutions generic enough to reach a critical market size; a focus driving growth in app users and an app-only approach to effecting change. We are seeing tech solutions trending towards products/services designed for people with the ability to use them — they presuppose digital literacy, internet connectivity and often the ability to pay for the app services — narrowing the field of users. Tech can also simplify; scalability tends towards uniformity — tech solutions aren’t always easily tailored towards local cultural, social and economic contexts — it’s the same product to as many people. Many of the most marginalised exist in contexts where a tech solution may be a poor fit for their challenges, yet their need is greatest.
Tech approaches also interact with the market differently — their focus is on seizing market share and Blitzscaling — the incentive is to become the dominant product/service in a market and protect their patch. Collaboration with competitors is very rarely encouraged because it threatens the core growth metrics the venture is optimising for.
The bias to scalability can also be more subversive, with social ventures — in desperate need of finance turning the investor into the true customer, what is possible often becomes, what is investable. Even when tech is on the roadmap, sometimes entrepreneurs are forced into it early to attract investment, grafting tech to attract financing, sometimes it would be better for the tech to wait as social entrepreneurs refine their offering before scaling it with tech.
We are limiting our collective imagination and creativity to align to a narrow definition of ‘investment ready’. The result is a far less diverse and homogeneous ecosystem, that incentivises just one approach leaving a larger part of the ecosystem of social ventures and their beneficiaries bereft of the resources to grow and tackle the myriad of problems in our society.
If the above sounds too critical it’s not, it’s a call to arms. Tech based social ventures under ‘Tech for Good’ are a powerful, innovative, inspirational and welcome force. But they are only one part of the social venture ecosystem and if we want healthier, more resilient and more equitable societies we will need finance that can enable a more diverse social venture ecosystem.
What are the attributes this requires:
- Deepen translational and pre-seed funding for research — Rooted ventures typically emerge from university research, research councils can support impactful ventures by including options for translational research funding — enough for a venture to get up and running for 1–2 years.
- Early investor engagement with rooted ventures — Some investors may be financially restricted from investing until a company can de-risk, but investors can engage with rooted ventures during their early years — guiding and supporting them on the operational milestones needed for them to be eligible for capital.
- Move away from exponential growth expectations — Many social ventures, especially rooted ventures begin as service providers as the researcher deliver their solution like a consultancy — they scale with staff and may only see steady rather than exponential growth.
- Be patient and extend time horizons when deploying capital — Many rooted ventures do become scalable but often it takes 2–3 years as they establish their business model. Sometimes this involves developing tech but the tech is more likely to enable rather than be the product itself.
- Invest the right amount at the right time — Non tech enabled social ventures tend to have lower capital costs, they are more likely to be service based with the costs primarily being in salaries. The key gap in finance is often at a pre-seed/seed level (such as £50–150k), this is called the pioneer gap.
- It is time to be innovative with financial products — Equity isn’t always the right vehicle, many social ventures will never exit and many founders prefer a company limited by guarantee which has no shares. Debt financing or revenue participation agreements are critical.
- Invest in good research not just good tech — Some problems are hard, tractable and are not suited to scale but they can effect major change in the lives of the people they seek to serve — big number impact measurements should only be one part of the story.
This won’t suit all investors and may not be possible for many who are expected to deliver high growth returns. Yet we believe the marginal social value will be much higher with greater heterogeneity in the financing available, a heterogeneity that matches that which we are seeing on the venture side. It is time to unlock the impact potential we are seeing emerge — financial ecosystems are the key.
This article was written by Chris Fellingham, Social Science and Humanities Ventures at Oxford University Innovation and Founder and Director of the Aspect Research Commercialisation (ARC) Accelerator and Chris Blues, Programme Manager for Social Ventures, Skoll Centre for Social Entrepreneurship.