Why we have 100 dating apps and not 100 apps that solve homelessness.
Entrepreneurship is a real, undisputed driver to solve big, hairy urban problems like public transportation, homelessness, and workforce development. Urban issues are becoming more important as more Americans move to cities; 81% of the country now lives in a city.
Even though millennials are the most entrepreneurial generation in history, a small proportion of young entrepreneurs are starting enterprises to solve our community’s toughest social issues. This is because the funds available to impact entrepreneurs are a drop in the bucket compared to the funding available to more traditional entrepreneurs. Research shows urban impact entrepreneurs are 35% as likely to secure funding as their traditional peers. As a consequence, entrepreneurs are following the funding dollars in sectors that have been proven to be profitable and interesting to funders. That’s why we have 100 dating apps and not 100 apps that help solve homelessness.
Clara Brenner is co-founder and CEO of Tumml, a nonprofit urban ventures accelerator. Tumml’s mission is to empower entrepreneurs to solve urban problems. In her TEDx talk, Clara argues that for the social enterprise sector to scale, more investors will need to join the urban innovation movement by helping seed fund for-profit startups that are tackling problems that really matter.
How can investors support urban impact enterprises?
Social startups are not getting the resources to get off the ground, but Clara notes two ways impact investors can step up. Unfortunately, most tech angels and micro-venture capitalists think investing in social enterprises yields lower returns. In truth, urban innovators are generating real returns – look at Revolution Foods and Zipcar as examples. Companies like these are scaling, creating jobs, and doing so profitably.
The second way impact investors can drive change is by investing in more seed funding. Traditionally, impact investors haven’t invested in seed funding because of the higher risk of investing in untested business models. In a recent study, JP Morgan and the Global Impact Investing Network identified $46 billion dollars in impact assets under management, but only 3% are earmarked for seed funding. That 1.38 billion represents such a small part of the overall investing bucket. To put that in perspective, that’s how about as much as Uber got in its last round of funding!
Impact investing also has long vetting cycles that require long proposals with a ton of metrics that brand new startups typically don’t have. In contrast, traditional seed funders have shorter seeding cycles that allow startups to move quickly. There are fewer metrics to prove out a theory of change. For impact investing to truly become mainstream, Clara argues that this is how investors should be operating.
What’s at stake?
When impact investors fail to support new enterprises, those impact entrepreneurs also miss out on the invaluable guidance from investors who can help make sure that social priority is not lost as the company scales. Urban impact entrepreneurs often find themselves in a catch-22: investors demand results before deploying capital, yet entrepreneurs lack the funding to produce early results. However, by writing off urban impact entrepreneurs, we are missing big opportunities to innovate and solve our most pressing social issues. Once more impact investors seed successful social enterprises and help drive urban innovators to operational milestones, a larger variety of investor classes will enter the market. Impact investors need to step up; without them, urban impact entrepreneurs will not be successful.
Watch Clara Brenner’s TEDx Talk on why social start ups are set up to fail.
