Research stream 3: Financing Social Innovation

PharmaFutures 3 researched whether it would be possible – and even advantageous – to structure investment vehicles that would draw for-profit capital alongside philanthropic investment to support social enterprise ventures aimed at delivering improved health outcomes. Some key findings include:

There are a range of possible financing mechanisms to tap for supporting efforts to expand access to health care for low-income patients. Philanthropic as well as mainstream investors all have a potential role to play in scaling up businesses aimed at delivering social impact. To date, however, the spectrum of social purpose investing has not included significant participation by the mainstream investment community.

Attracting mainstream investors to a field traditionally dominated by non-profits not only offers the opportunity to tap new sources of capital, but also the potential to bring skills and knowledge, particularly the ability to select and scale innovative enterprises – capabilities much needed in this growing this ‘third sector’.

One particularly promising finance model the ‘hybrid investment model’ approach: patient, philanthropic capital paired with mainstream venture or other like capital. This model uses philanthropic capital to favourably rebalance risk and reward through various forms of guarantees and increased returns (e.g. assigning disproportionate return to the for-profit partner).

The reality of bridging the for-profit and non-profit worlds is not without its challenges. Socially-purposed venture capital funds have had difficulty raising capital. For-profit and philanthropic counter-parties have different motivations, which will complicate investment management. It is also true that the few existing healthcare projects which have taken off (e.g. Acumen’s investment in Life Spring Hospitals and the Gates Foundation drug development projects) have drawn philanthropic capitalists and not mainstream investors.

Yet, despite the challenges the first opportunities are emerging. With the emergence of micro-credit all sorts of new investment vehicles have been developed including a fund for funds in which mainstream investors participate with equity alongside philanthropic capital which is provided as debt. Investment for Health in Africa provides another example of a hybrid investment vehicle which is investing in health care infrastructure. These examples illustrate how the opportunity to leverage the funding and talent of the for-profit investment community to help scale social enterprise solutions to societal challenges is ripe for experimentation.

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Comments

This is such a vital industry, with a strong and complex social contract. Hopefully, PharmaFutures can contribute to improved communications and a better alignment between society and shareholder needs.

Sophia Tickell, Director of PharmaFutures