Recently ClearlySo was asked to raise capital for a business we know well.  It has been going for over a decade, is well-established in its marketplace, and sells products people like at affordable prices which generate a satisfactory gross margin.  The firm has over £1 million in sales, operates at breakeven and achieves considerable social impact; but the road to get there has been long and difficult.  The lessons have come painfully, yet the CEO has matured greatly, he has built a strong Board with an effective Chairman, and with a bit more capital they could thrive.  Sadly, investor’s initial reactions are somewhat unenthusiastic—I won’t say too due to client confidentiality.

At the same time other newer companies we help easily grab investors’ attention—though they lack many of the key ingredients to success.  A charismatic founder might be in place, but there is no battle-tested team or Board.  A breath-taking PowerPoint presentation has been assembled, but the route to market is unclear, and the business plan, though replete with colourful graphics is bereft of anything which resembles hard evidence.  There is sometimes no product or even a prototype—just the best of intentions and glorious aspirations.

The social enterprise sector must allow for innovation—for where else can the experimentation take place in solving social problems, but things are way out of balance.  In my judgement investors and governments are obsessively fascinated with cool early stage ideas.  We can dream together with the entrepreneur about what might be but forget that things almost never work out as well as planned.

This is all charming in a way, like the romantic notions of a new love, but it has damaging consequences.  Entrepreneurs and their teams have slaved away, experience is gained, customers won, networks established—but as targets are inevitably missed, and reality bumps romantic illusions aside, investor fatigue sets in, funding is challenging to secure and the enterprise collapses.  From a social impact standpoint it is a disaster.  A ten year old business has done the hardest thing—survived—but it never achieves scale, as the dollars move on to the next new thing.  From the financial perspective the unsuccessful investment sours investors on this and potentially other deals.

I think we need to focus more on teams and enterprises that have withstood the test of time and remember that most new businesses fail.  The best indicator of future longevity is years of survival—especially crisis filled years like these.  Maybe we also need:

• A fund which only invests in firms after year 3 or 5?
• Mentoring programmes which have a similar focus?
• A ban on start-up investment in the social enterprise sector (that is not a serious proposal, just checking if you are still reading)
• Government to shift investment to social enterprises which surpass a certain size or longevity threshold?

I also think we have to stop being so impressed with what sounds cool.  It’s great for cocktail parties but will not help us get the sector to scale.

First published in The Social Edge in May 2012