Expert Insight: Inclusive investing yields better repayments
Early evidence collected by Sumerian Foundation from their UK investment portfolio suggests that social enterprises led by black, Asian and ethnically diverse founders – especially those who are women – have a better track record in starting to make repayments. It also challenges misconceptions about the viability and reliability of enterprises led by underrepresented founders, says Sumerian Partners founder Isabelle Irani.
In our recent impact report: Inclusive social investment: unlocking opportunities, an impressive trend has emerged: social enterprises led by black, Asian and ethnically diverse founders, especially women, are showing commendable success in meeting their repayment obligations. Specifically, 80% of our investees that are paying back on time are led by black, Asian and ethnically diverse people and have significantly outperformed others in initiating repayments.
This trend not only challenges conventional narratives about repayments but also highlights the unique strengths and resilience of these founders in the social enterprise sector. While it is still early evidence, the repayment performance of these social enterprises underscores the effectiveness of inclusive investment and challenges many prevailing misconceptions about the viability and reliability of enterprises led by underrepresented founders.
Repayment success: diverse founders equals a great opportunity
Social enterprises – organisations that prioritise social impact alongside financial sustainability – have gained significant traction globally. They aim to address social issues, from poverty and inequality to environmental sustainability, through innovative business models. Traditionally, access to funding and financial support for these enterprises has been a critical challenge, often compounded by systemic biases and barriers faced by founders from diverse backgrounds.
We believe our repayment success is attributable to overcoming the'trust deficit' and awareness among social enterprises led by black, Asian, and ethnically diverse founders. The recent Dechomai 2024 report also confirmed through separate independent research that “ethnic minority social entrepreneurs may have lower trust in support institutions, which could influence their preference for grant funding over other forms of support”.
Navigating this trust deficit is critical to success but also comes at a cost as it takes time. We believe our repayment success is also attributable to our “partnership-based” investing approach, which involves three important steps:
- Building relationships: Trust is established more quickly if a social enterprise is referred by someone they already have a relationship with, or a shared lived experience. Outreach partners such as accelerators, incubators and community based organisations play a critical role in developing the social enterprise sector, and developing partnerships with these organisations is vital.
- Providing pre-investment support: Provision of relationship based pre-investment support is the key to overcoming the trust deficit. Pre-investment support encompasses anything required to help a social enterprise seeking investment to achieve viable growth and mitigate risk, and typically includes support with developing a business strategy, building a financial and cash flow forecast, strengthening governance, organisational development, and advice on the pros and cons of different investment options. This support is crucial, as it helps bridge the gap that can exist between investors and founders who may not have had the same opportunities in traditional investment environments. Our experience reveals that addressing this trust deficit is not merely about providing information or outsourcing skills support. It requires an intentional and relational approach, treating the investment process as a partnership rather than a transaction. By forming close partnerships, we can better understand and align interests, thereby reducing power imbalances and fostering a more inclusive investment environment.
- Focusing on resilience: Investment needs to move from a transaction to a partnership-based approach in order to reduce power imbalances and equalise risk. Wider recognition needs to be given to assessing, pro-actively supporting and valuing the resilience of social enterprises who continue to deliver impact, despite difficult circumstances. By resilience, we focus three key areas that we believe are critical for organisational success: management/governance, financial and organisational strength.
Trust is established more quickly if a social enterprise is referred by someone they already have a relationship with, or a shared lived experience
Challenges and opportunities
Despite their positive repayment trends, these enterprises face significant challenges, including limited access to the right form of capital, systemic biases, and insufficient tailored support. The success in repayments, despite these obstacles, underscores the resilience and resourcefulness of these founders.
To address these challenges and build on the current positive trends, we stress the importance of targeted support systems. Initiatives such as mentorship programmes, tailored governance, financial and operational support, and access to networks play a crucial role in their success as long as they are delivered in a partnership approach.
From an investor's perspective, it is important to note that overcoming these barriers comes at a cost. However, when these support systems are in place, they can significantly enhance the ability of social enterprises to meet their financial commitments. The Social Enterprise UK report from 2021, No going back: State of social enterprise survey, emphasises that targeted support structures are crucial for overcoming the unique barriers faced by diverse-led enterprises.
Path forward – implications for the funding landscape
Our early evidence points to a significant opportunity within inclusive investment. It challenges traditional perceptions of risk and underscores the need for a more nuanced understanding of the factors contributing to successful repayments. As more black, Asian, and ethnically diverse founders secure investment and as diversity increases within investor and advisory teams, we anticipate a reduction in the trust deficit. Embracing inclusive investment involves not only providing financial support but also investing in relationship-based pre-investment support to truly understand and address the unique challenges faced by these founders.
By acknowledging and addressing the unique strengths and challenges faced by these founders, the funding community can foster a more inclusive and effective ecosystem for social enterprises. This shift could lead to more equitable opportunities and a more diverse range of impactful solutions to social challenges. It also signifies a broader opportunity for investors to reconsider and expand their approaches to support inclusive and impactful social enterprises.
Need for continued support
The emerging evidence from our investments suggests that enterprises led by Black, Asian, and ethnically diverse founders, especially women, not only navigate challenges effectively but also demonstrate strong repayment capabilities. The financial performance of these diverse-led social enterprises serves as a powerful reminder of the strength and potential within these communities. Supporting these enterprises not only benefits the founders but also enriches the entire social enterprise ecosystem, driving forward social innovation and positive change. It highlights the resilience and capability of these enterprises but also underscores the need for continued and enhanced support.
Inclusive investment is not just a moral imperative but a strategic advantage... an opportunity to rethink traditional funding approaches and support systems
In conclusion, inclusive investment is not just a moral imperative but a strategic advantage. Embracing and nurturing diverse leadership will be crucial for fostering a more inclusive and impactful future in the social enterprise sector. By continuing to build relationships, understanding barriers, and investing in resilience, we can unlock the full potential of social enterprises and drive meaningful change across society. As this trend continues to gain recognition, it presents an opportunity to rethink traditional funding approaches and support systems, ultimately contributing to a more inclusive and impactful social enterprise sector.
Photos: (Main photo and bottom photo) Carl Konadu and Azzees Minott, co-founders of 2-3 Degrees. (Top photo) Isabelle Irani, founder of Sumerian Partners. (Middle photo) Asha Patel, founder of Innovating Minds. 2-3 Degrees and Innovating Minds are both social enterprises that have received investment from Sumerian Foundation.
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