The other day, I was part of a presentation on seed stage investing in the midwest. One of the questions we received was on “social investing”.
Social investing is a hot new thing. My friend Linda Darragh is setting up a social venture incubator in Chicago. It’s a good idea.
If you are a regular reader of this blog, you might find it odd that I support businesses in social ventures. I do, but it depends.
The way entrepreneurs really create value is by finding pain points and solving them with a business idea. If it is a big market and their solution can scale, they can create a lot of value. They also make a lot of money. That’s not a bad thing.
If you see a problem or pain point, say “food deserts” for example. An entrepreneur might figure out a novel way to combat that problem. If the problem is big enough, and their solution is easily replicable over and over again, they will make a lot of money.
The problem with most entrepreneurs in social ventures is that they feel compelled to donate a portion of the profits to a community organization. That’s where we differ. If I am an investor, I assumed the risk. I deserve the profits. The business is already engaged in solving the problem.
The other thing that entrepreneurs need to realize is that not all ideas are going to succeed, even if the problem they are trying to address is important. There are a variety of reasons for that. Maybe the market isn’t actually big enough. Maybe the entrepreneur perceives it as a problem, but the market doesn’t. Maybe they didn’t execute well. The market dictates to the entrepreneur, not the other way around.
The other thing I fear is that entrepreneurs will try to apply business activity to solve normative economic problems. Just because one person perceives a problem doesn’t mean another will. Businesses might work for a short time through sheer force or will, or a regulatory maneuver in Washington. But businesses that attack normative problems are generally not sustainable. They are fads. As soon as values change, your out of business.
Instead, entrepreneurs ought to focus on solving positive economic problems that can cure social problems. The aforementioned food deserts is not of those. Positive economic problems are sustainable, and can be scalable.
In addition, social investors are sometimes smug. They look down on “regular businesses” that make a lot of money. However, what did Henry Ford do other than solve a social problem of faster transportation? Steve Jobs and Bill Gates made people more productive. Nothing wrong with that.