Executive summary of our master's thesis: Facilitating a business relationship between social entrepreneurs and business angels
Still smoking hot from our intense typing! The Good Tribe's Xmas gift to all social entrepreneurs, social and commercial business angels, impact and social investors out there, trying to facilitate well working business relationship - a taste of our full master's thesis... Here's the executive summary!
Happy reading! Michael & Evelina
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We are in the midst of turbulent times, and changing economic and social paradigms. While working on this master’s thesis throughout 2011, we witnessed major breakdowns, revolutions, and changes.
This year began with the Arab Spring, saw the overwhelming earth quake and tsunami catastrophe in Japan that led to a renewal of the discussion of nuclear energy, revisited the economic and financial crisis of 2008 in form of the so-called debt crisis, and gave rise to the critical movement of Occupy Wall Street. Well-known and deeply rooted economic and social paradigms are under scrutiny, theorems and assumptions are questioned by a growing number of people, and every day we read in the news about depleting resources, environmental pollution, climate change, and an ever increasing social gap separating a minority of haves from a growing majority of have-nots.
Social entrepreneurs and business angels - drivers of change and innovation This increasing number of people, organizations, and institutions from all three major institutional sectors that make up a society, civil society, the state, and businesses, work to resolve the challenges ahead by introducing new ideas and methods. They challenge our common wisdom and reveal promising new perspectives. This study focuses on two of the many actors, which are identified as important drivers of change and innovation: social entrepreneurs and business angels.
Social entrepreneurs - extremely heterogeneous group Social entrepreneurs conduct a wide range of activities, ranging from activism to social business, and social enterprise to corporate social responsibility. Social entrepreneurs can be described as both a product and a driver of social innovation. They have an important role to play in the current change of economic paradigms since they challenge and disrupt institutions and structures on all levels through offering solutions to social and environmental problems, which other actors cannot or choose not to deal with. Social entrepreneurs comprise a heterogeneous group concerning context they operate in, interests, objectives, paths in life, and educational levels. There are several business model social entrepreneurs can pursue: non-profits with earned income, hybrids, for-profits with a social mission, and traditional non-profits; and form of financing: revenues, loans from commercial and social banks, soft loans, grants and scholarships, donations, venture capital, venture philanthropy, and angel capital and social angel capital.
Business angels invest early stage Business angels provide high risk capital expecting rather high rates of return. They typically invest in early stages of a company’s life cycle enabling it to fund the development of business concepts, products and services and bring them to market. Business angels can be difficult to approach as they seek privacy and tend to keep a low profile. Business angels are strongly motivated by growing and developing a venture through contributing own experience, network, and time. They derive satisfaction from being involved, setting trends, and participating in the entrepreneurial process. This may be largely owed to the fact that most business angels have been entrepreneurs themselves. Business angels find potential deals usually through personal referrals from informal contacts, such as peer investors or business partners. They screen deals and if found worth the effort, apply intense scrutiny during due diligence, x-raying the entrepreneur and their idea. Only 5% to 12% of projects will lead to closing a deal, but these prove to return financial success in 60% of the cases by employing an exit typically through a trade sale, seldom through going public. Such rates of success make business angels more successful than e.g. formal venture capitalists.
Social entrepreneurship more comprehensive than entrepreneurship This study identifies factors decisive for facilitating a working and lasting business relationship between social entrepreneurs and business angels. We find that above all other factors trust is paramount. Investing into social ventures, especially in very early stages of the venture’s development cycle means investing into people and their ideas. Though business angels want to see hard facts in a business plan they pay most attention to the person of the social entrepreneur. Their requirements are immense: not only needs the social entrepreneur show excellence in creating social and/or environmental impact, and incorporate so called social qualities like solidarity, cooperation, or selflessness they also need to exhibit a broad set of entrepreneurial qualities, for instance drive, passion, perseverance, a sense of realism, displaying competitiveness and an eye for business. This lets us conclude that social entrepreneurship is more comprehensive then entrepreneurship, adding social and/or environmental impact. This new breed of entrepreneurs is envisioned to command a broad spectrum of capabilities that enable them to balance economic, social, and environmental demands and constraints in order to achieve the best possible result for all stakeholders. Thus we label it “entrepreneurship plus”.
Essential reaching agreement on social and environmental impact and profit Adding to the theory of entrepreneurship plus, during the process in which the business angel chooses investees there are many factors specific to social entrepreneurship which can reduce the chances of investment. The social entrepreneur and business angel must reach agreement and similar definitions regarding social and environmental impact, the value of social entrepreneurship, as well as on a level of return on investment and method to measure social and environmental impact. It can be particularly troublesome to reach an agreement on the level of return on investment, since it often is central to the business angel’s perception of the legitimacy of a venture, and of different importance to the social entrepreneur depending on their type of social venture.
Social entrepreneurship - nascent domain in a pre-paradigmatic state In general there are not many cases known of business angels investing in social entrepreneurs’ ventures. We relate this to a discursive gap between the discourses of business angels and social entrepreneurs. It seems as if the word social tears the discourses apart. The domain of social entrepreneurship is currently in constant flux, and has no clear boundaries, and hence the knowledge about it is limited. Although the phenomenon of social entrepreneurs is not new as it can be tracked back at least 30 years to e.g. the work of Muhammad Yunus and Bill Drayton, who founded the Grameen Bank and Ashoka, respectively, the domain is still to be deemed nascent, and in a pre-paradigmatic state.
Research design This study follows a qualitative design, exploring the potential business relationship of social entrepreneurs and business angels by analyzing semi-structured interviews conducted with four social entrepreneurs and four business angels active in Austria and Sweden. The participants were selected to represent a sample as heterogeneous as possible in order to attain an image of reality that covers a diverse set of perspectives. We apply social constructivism to interpret the participant’s statements, assuming that our perception of reality is made up of many individual narratives.