New global ‘Financing Social Innovation’ report has 8 lessons for Canada

Germany is struggling to build a social innovation ecosystem that allows innovators and entrepreneurs to flourish – and a new report by the country’s Social Entrepreneurship Network, the University of Heidelberg, and the Centre for Social Investment offers a few tips for any country, including Canada, to consider.

In a report spanning 10 countries and 23 experts on social innovation, “Financing Social Innovation” puts the spotlight on countries around the world, from Finland to Canada, to learn how their social innovation institutions support the sector. Allyson Hewitt, vice-president of impact at MaRS, says Germany’s government – like Canada’s – is struggling to understand why social innovation policies beyond their borders is important. Hewitt explains Germany’s position as: “It doesn’t really matter what happens in other countries. We’re different.”

Yet some of the 10 countries highlighted in “Financing Social Innovation” are critical for Canada to understand how to build a robust social innovation movement at home. The report praised the Canadian government’s promise of a substantial investment – $750 million in the Social Finance Fund – and its desire to attract private capital. However, Canada’s social innovation programs are described as strongly market-based and relatively immature compared to other countries.

At the report’s global launch, Hewitt was asked to consider some of the recommendations made in “Financing Social Innovation” that Canada might benefit from. Her response? “Let’s spend some time with Portugal,” she said. The country’s government-directed, top-down approach to social innovation financing – rather than trying to cultivate private and grassroots community funders and then stepping back – make it fertile ground for social innovation organizations to secure funding, scale up, and thrive.

The report’s authors argue examining multiple economies, rather than just considering Germany’s circumstances, will help it – and by extension, any country – build a stable financial system for social innovators. “Financing Social Innovation” concludes that any social innovation strategy, in any country, needs to think about the entire development cycle of a social innovation from seed to solution. Using non-monetary support, particularly around skill building, is all crucial.

Future of Good examined “Financing Social Innovation” and its various recommendations for governments keen on building a social innovation financing structure within their own borders. Here’s what we found that’s useful for Canada’s ecosystem:

 
Pooling accelerator grants

• The issue: Plenty of social innovation awards, programs, and pitch competitions exist – but they often award small amounts of money for anywhere from a couple of months to two years at most. Social innovators may spend a lot of time applying for one-off project grants.
• The solution: “Private funders, for example big corporations or private foundations should consider pooling resources, which can be used to provide long-term support to organizations rather than short-term support to projects.” 
• The leaders: The Power Up Scotland programme worked with the Scottish government, as well as the London-based Big Issue Invest fund and the University of Edinburgh, to provide low-interest loans to new social enterprises. Aberdeen Standard Investments also provided free skills training for these startups. 

Tax incentives or premiums for social impact

• The issue: Funders shy away from opportunities that don’t seem new enough, aren’t financially stable enough to become profitable, or are hard-pressed to explain their successes. Social innovation can tick all three of these boxes, making it difficult for leaders to secure capital for social ventures.
• The solution: “The state could encourage private engagement by offering preferential tax treatment of such investments. Such tax cuts should be linked to impact criteria to help differentiate impactful from less impactful investment types.” 
• The leaders: Portugal Social Innovation, launched by the Portuguese government, invests public funds in a 70/30 split with private social enterprises. On top of these efforts, the Portuguese government also grants a 30 percent tax cut for impact-orienting co-investing.

Governments taking on risk for social innovators

• The issue: Social innovators and conventional investors often have very different perceptions of risk. For the former, risk can include the potential of a social innovation not producing a desired result, while investors often think of risk purely in terms of financial instability.
• The solution: “The state could issue guarantees to mitigate these problems. This may happen in the literal sense, that is the state takes first loss in case of defaults, or by way of co-investment, for example, via state-owned investment banks.” 
• The leaders: In Scotland, the national government became the provider of first loss guarantees and credibility to private funders involved through the Power Up Scotland program.

Using the “pay-by-results” principle

• The issue: Radical innovation is seen as difficult in the social services sector of many countries where cost-efficiency and taxpayer accountability are paramount.
• The solution: “Instead of financing [a theoretical social outcome], the state repays private investment plus a premium in case pre-defined impact criteria are achieved, so that the private capital bears the risk of the innovation.”
• The leaders: In Finland, the national government is willing to pay premiums on pre-defined impact criteria agreed to by social innovators such as Sitra. The program works on welfare reform alongside social service providers, commercial fund managers, and other unlikely collaborators – and investors typically seek near-market rates of return.  

Creating community investment tools (besides crowdfunding)

• The issue: Aside from online crowdfunding, there aren’t many ways for citizens to invest in social innovators beyond the earliest stages of a project.
• The solution: “Locally oriented community bonds, for example to support social innovators in a local urban neighbourhood or rural region, would provide a vehicle for place-based innovation. Municipalities could seek to structure such investment opportunities and potentially co-invest.”
• The leaders: Canada’s Centre for Social Innovation has issued a number of community bonds, mainly for real estate. 

Integrating social innovations into public procurement

• The issue: Some social innovations simply will not emerge as commercially viable services. They’ll need long-term government funding.
• The solution: “The state could engage in two ways…market building by the public sector for the mid- to long-term, for instance through implementing an innovation as part of the standard system of social provision, can help social innovators establish a sustainable and market-oriented income model. Second, social procurement is a more universal mechanism the state could apply, which would establish impact and social and ecological criteria as core criteria in public buying decisions.”
• The leaders: The Canadian government is in the process of setting up a “fund of funds” to channel social innovation investments into a variety of areas related to the United Nations’ Sustainable Development Goals. These could include procurement purposes.

Include social innovators in established funding programs

• The issue: Plenty of funding streams exist for startups, but most in Germany explicitly don’t allow social innovation organizations who don’t seek commercial markets to apply.
• The solution: “A first and relatively simple measure that policy makers should consider is including non-market social innovators as eligible for established funding programs. Second and more importantly, the public sector should consider reforming assessment criteria used to make funding decisions to better reflect the complex properties and requirements of social innovators.”
• The leaders: Le French Impact, a France-based government initiative, not only works with social innovators and other organizations to boost the sector, but also brings in politicians to consider legal or institutional changes.

Launch vouchers for social innovator upskilling

• The issue: The social innovation sector – including leaders, investors, and intermediaries – all need skill-building help. Financing is important to solving many of the issues faced by social innovators around the world, but it won’t be enough on its own.
• The solution: “Vouchers for dedicated upskilling, as often used to support commercial innovators, would be an effective instrument…the skill-building process for social innovators would benefit from using the expertise of potential match-making organizations (for example, impact hubs, accelerators, or social entrepreneurship networks but also more mainstream economic development units or innovation centres), which can establish links between social innovators (or investors) and the providers of training.”
• The leaders: Swedish innovation agency Vinnova provides dedicated training and help with capacity-building for social innovation organizations.  

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