Blended financing is the future
Earlier this month Mohammed Yunus became the interim Prime Minister of Bangladesh in response to a youth-driven movement demanding equity and democracy. Yunus earned the Nobel prize for his groundbreaking work on microfinance, recognizing that supporting new forms of business was key to sustainable economic development.
Canadians have a great deal to learn from this world leader, particularly when it comes to recognizing the intersection between entrepreneurship and generating wealth in equity denied communities.
Canada stands at a crossroads. Our economy, once a bastion of homegrown enterprises, is increasingly dominated by monolithic corporations and big box retail. Canada has far fewer entrepreneurs today than we had two decades ago. While small businesses make up 98 per cent of all Canadian businesses and account for 30 per cent of the country’s GDP, they are struggling to compete against these giants. These trends, backlit by the flames of the climate crisis, are increasing economic inequity and growing social division.
A glimmer of hope lies in a new emerging movement of social entrepreneurship — one driven not solely by profit, but by a desire to create positive social impact.
Often led by founders from under-represented communities, social and environmental impact entrepreneurs face multiple hurdles in transforming their visions into sustainable businesses. For these social purpose innovators, a blended approach to finance that leverages philanthropic, private and public capital could be the key to unlocking their potential and to revitalizing our economy — may solve a few complex social and environmental issues along the way.
There is a growing debate about why foundations only deploy 5 per cent of their assets for social impact. Five percent represents the minimum requirement that foundations have to make in grants, However there is a movement around the world for foundations to leverage endowments as investment capital for social impact as well as financial return. The lack of products, capacity and intermediaries needed to mobilize this capital has held back foundations from employing this opportunity.
Foundations interested in moving beyond grant-making need to take a closer look at how blended finance solutions can generate more meaningful community transformation.
Philanthropy can play a pivotal role in supporting entrepreneurs delivering social and environmental impact through leveraging the billions of dollars they hold in endowment to support and de-risk mission driven businesses. Resources that could allow businesses to experiment with alternative operational and ownership structures that distribute wealth across and within communities. The question shouldn’t be whether an organization is for-profit or non-profit, but who benefits from its success.
We don’t typically think of philanthropy as having a role in kickstarting new businesses. Yet, foundations could leverage their significant resources, especially their endowment investments, to social purpose businesses and help disrupt the pattern that 90 per cent of startups fail. For founders who come from under-represented groups including Indigenous, Black and racialized people, women founders, LGBT+, and those living with disabilities, the barriers to access early-stage funding are even greater.
Investing in mission-driven businesses is not solely about financial returns and therefore needs different considerations that traditional investing isn’t set up to do. Canadian foundations have endowments totalling over $100 billion. Even if just 1 per cent were allocated to venture investing, that would open up over $1 billion.
Blended finance incorporates a wide range of financial vehicles for new businesses, ones that can integrate social outcomes, multiple forms of value, and longer-term, patient capital. These enterprises can generate significant social benefits too, from improving public health to creating jobs in underserved areas to tackling Canada’s extreme housing crisis.
A recent study found that every dollar invested in social enterprises can generate up to $2.10 in social and economic returns.
Social finance will require an all-hands-on-deck approach to realize the full potential and to create a supportive ecosystem for mission-driven entrepreneurs. In addition to blending philanthropic, public and private investments, social finance requires support from the public sector and academia to fund fellowships, to change relevant policies, standards and regulations, and to design innovative financial instruments that align the interests of investors with social impact goals.
The future of a Canadian economy rooted in sustainability and equity depends on our ability to nurture bold, innovative ideas, like blended social finance.
Photo courtesy of DepositPhotos
