By Saurabh A. Lall & Jacob Park

This paper was awarded the 2022 Responsible Research in Management Award

Virtually all new businesses struggle to make a profit and attract the necessary startup and growth capital. These struggles are intensified for social enterprises. Consider the case of Husk Power Systems (HPS), whose business model is to offer off-grid energy services to rural households in South Asia and East Africa. They not only had to test new renewable energy technologies in rural areas with limited road infrastructure, but also had to develop proprietary payment systems, set up health and safety standards, and develop training programs. However, financial grants from the Shell Foundation helped HPS to become more financially sustainable and made the company attractive to impact investors. Strategic use of this type of financing allowed HPS to invest in critical business areas without diverging from its social mission of providing poor rural households with electricity.

Although there are several examples like HPS that successfully make the financial and organizational transition from a startup to an established enterprise, there is relatively little quantitative research on the role of grant funding in accelerating entrepreneurial development, especially for social enterprises. This is unfortunate because social enterprises are a growing economic and business force in the global economy, with one third of startups having social good as part of their core mission and, in the case of the United Kingdom, with the startup rate for social enterprises three times that of mainstream small and medium-sized enterprises. Grants are the second largest source of social entrepreneurship finance (Bosma et al., 2016), but there has been little research on how philanthropic grant financing can help social ventures grow.

Using a dataset of over 3,400 social enterprises tracked over a 1-year period by the Global Accelerator Learning Initiative, our research paper offers insights into how grants and other forms of social financing help support and accelerate the economic, social, and environmental impacts of social ventures.

Firstly, we find that social enterprises that received grants were able to hire more employees but did not necessarily grow in revenues. This suggests that philanthropic grants can help social enterprises invest in human capital instead of having to pursue short-term financial goals, as Husk Power did with the Shell Foundation grants. Grants can provide social enterprises with guardrails against mission drift (Ebrahim et al., 2014) ensuring they have sufficient mission-oriented working capital to balance their social and financial missions.

Secondly, we examined whether receiving a grant might make a social enterprise more attractive to other investors. For instance, the Shell Foundation not only provided grants, but also introduced the Husk Power founders to potential investors and served as a recommender – providing a strong signal of potential quality (Dichter et al., 2013). We found a positive relationship between receiving a grant and receiving a loan, i.e., social enterprises that received grants at early stages of development were more likely to receive a loan in subsequent years, suggesting grants make social enterprises appear to be more credible borrowers.

Thirdly, we found that grant funding did not have any significant impact on the ability of a social venture to obtain equity finance (typically from venture capital or angel investors). It is possible that receiving grants provides social enterprises the ability to either borrow against the value of the grant or give lenders a signal of legitimacy. However, it is also possible that equity financers perceive social ventures that receive grant financing as too focused on societal impacts, thus less likely to deliver the outsized financial returns expected in traditional venture capital investing.

Compared to traditional entrepreneurship, social entrepreneurship faces a more complicated challenge of striking that critical balance between the need to be profitable and staying true to one’s social mission. Especially at nascent stages, social ventures need to test new technologies, develop market infrastructure, and hire experienced staff. Grants do not represent a one-size-fits-all solution for social enterprise growth but can play an important role in helping social enterprises, such as HPS, to achieve social and environmental impact at greater scale. We suggest that teams managing social ventures should actively seek targeted and catalytic philanthropic funding. Additionally, philanthropic donors should proactively work with other funders to build a more robust ecosystem of social venture finance in their fields.

REFERENCES

1. Bosma, N., Schott, T., Terjensen, S., & Kew, P. 2016. Global Entrepreneurship Monitor 2015 to 2016: Special Report on Social Entrepreneurship. Global Entrepreneurship Research Association.
2. Lall, S. A., & Park, J. 2022. How social ventures grow: Understanding the role of philanthropic grants in scaling social entrepreneurship. Business & Society, 61(1): 3-44.
3. Ebrahim, A., Battilana, J., & Mair, J. 2014. The governance of social enterprises: Mission drift and accountability challenges in hybrid organizations. Research in Organizational Behavior. 34: 81-100.
4. Dichter, S., Katz, R., Koh, H., & Karamchandani, A. 2013. Closing the pioneer gap. Stanford Social Innovation Review. 11(1): 36-43.