Misunderstandings between investors and founders are damaging social innovation, research suggests — but a new tool aims to build stronger bridges between them
Social innovation ventures commonly collapse because of misunderstandings and miscommunications between venture leads and impact investors, new research from Durham University Business School reveals. As a result, promising projects which can address complex social and environmental challenges or contribute toward sustainable futures fail to realise their full potential.
Securing initial investment is not the problem, according to the researchers, nor is the availability of viable business ideas to back. “Impact investors are reportedly willing to back such projects with over US$1.571 trillion in assets to scale social innovation,” says Professor Pablo Muñoz who co-authored the study. “But despite growth in funding, many social ventures struggle to translate ambitious impact commitments into sustained investment relationships.”
The key challenge lies in ensuring investment relationships can endure as a venture grows.
The researchers state that both parties operate with very different evaluative logic, expectations, trajectories of growth, and perspectives on value creation and success. By speaking at odds and failing to understand each other’s needs, relationships commonly break down. What is already a fragile bridge between social innovators and impact-oriented capital is weakened further, limiting future opportunities for progress.
A tool for better alignment
To overcome this hurdle, the researchers developed the “impact investment relationship builder”, a tool designed to create better alignment between social venture leads and impact investors over time.
The tool structures the interactions between both parties across three interdependent and vital elements of the ventures growth journey; impact, accountability and revenue, and guides users through each to find common ground.
Rather than deciding a social ventures “investability” as a fixed threshold or screening outcome, the tool frames investment allocation as a generative, relational process through which expectations, evidence, and trust are progressively constructed and reassessed over time.
“Investment allocations should not be decided based on a one-off venture readiness assessment, but from a progressive relational process,” states Professor Muñoz. “Understandings of impact, accountability and revenue should co-evolve over the duration of an investment relationship to avoid the de-coupling of aims and objectives.”
To create the impact investment relationship builder, the researchers conducted interviews with a select group of experienced social impact investors, consultants, fund managers, academics, as well as a roundtable discussion with London-based B-corps.
In addition, the researchers also reviewed over 500 historical cases social impact investment relationships, conducted an in-depth examination of the investment processes for 55 social ventures, and analysed 70 video interviews with social venture founders in the US. These investigations identified the most common recurring co-ordination issues, and created greater understanding for each side’s needs, perspectives and typical practices when entering into an investment partnership.
The tool, the researchers state, proved effective in ensuring investors and venture leads could coordinate on meaning, ensure co-scalability and hybrid value-creation and better negotiate any trade-offs along the way. As a result, more social impact ventures have better prospects for continued growth and success, benefitting industry and society.
“In a disjointed, poorly coordinated entrepreneurial finance market, conventional funding models prove to be inadequate, stunting industrial progress. Our tool serves as both a roadmap for investors and a navigational tool for social entrepreneurs, enabling them to communicate effectively, and fulfil each other’s promises,” Professor Muñoz concludes.
The study The Impact Investment Relationship Builder: A New Artifact To Improve Market Coordination In Social Innovation, was completed in partnership between faculty at Durham University Business School, The University of Australia Business School, and the University of Edinburgh Business School, and is published in the Technovation journal.