Abstract
Social entrepreneurship literature is silent on what governs social enterprises’ (SE) financing decisions in contexts where there are no clear legal distinctions between social and commercial enterprises. Using a qualitative multiple case study approach, this research explores how social entrepreneurs decide their financial strategies and evaluate investors in such contexts where such blurred boundaries exist. The case study of nine Indian SEs operating in emerging sectors of health, education, and agriculture reveals social entrepreneurs’ perspectives on SE financing and practical dilemmas faced when moving beyond donation is considered. Our findings present that the organizational factors governing their financing strategy and due diligence criteria used for investor evaluation reflect the social entrepreneur’s value-based lens of self-conceptualizing their own vision of ‘What is a Social Enterprise’ in their financial decisions. Though this does not adhere to popular capital structure theories used in commercial finance, it conforms with Hambrick and Mason’s Upper Echelons Theory, which states that organizations reflect their top executive’s values and belief in their decisions. We observe in our study that self-discretion and value expression is a contextual necessity for social entrepreneurs operating in emerging sectors where there are no clear legal distinctions in organizational forms or theoretical directives on financing decisions.
Keywords
Introduction
With its potential to address complex and longstanding unaddressed social problems, ‘Social Enterprise’ (SE) has been receiving increased attention from academia, practitioners, and policymakers across the globe in recent times (Akter et al., 2020; Kannampuzha & Hockerts, 2019; Zahra & Wright, 2016). Studies have emphasized the positive role that SEs can play in poverty reduction (Bloom, 2009; Ghauri et al., 2014), women empowerment (Datta & Gailey, 2012; Haugh & Talwar, 2016), health and wellbeing (Gordon et al., 2018; Poveda et al., 2019), inclusive growth (Azmat et al., 2015), as well as institutional and social change (Nicholls, 2008; Stephan et al., 2015). With this growing interest, there has been an explosion of publications on the topic related to SEs (Rey-Martí et al., 2016), but most studies have explored its dimensions at an individual level, leaving dimensions at the organizational and institutional level less explored (Saebi et al., 2019). Notably, at the organizational level, a pertinent aspect that remains under-researched is the determinants that govern a SE’s financing decision (Achleitner et al., 2014; Lyon & Owen, 2019). Among the studies that look at this under-explored domain, the majority document it from the social impact investor’s perspective describing the financing tools that are offered as choices for a SE (Berndt & Wirth, 2018; Calderini et al., 2018; Tekula & Andersen, 2019). However, little is known about what goes into the evaluation of these choices in practice resulting in financial decisions that align with the goals of a SE. Social entrepreneurs know that without finance their impactful ideas will not take off or scale, however, they also know that every funding tool may not be right for their ideas that have a unique purpose.
SEs have an unprecedented transformation path to pursue in markets with systemic challenges, and their financial choices are peculiar to the sectors in which they operate. This peculiarity of SEs is even more prominent in emerging markets like India, where a large population segment still lacks equitable access to health, education and livelihood opportunities (United Nations Development Programme, 2016). Institutions addressing these development gaps were hitherto dominated by non-profit charities in India until the advent of SEs in India (British Council, 2016). One of the reasons behind the trend of for-profit SE models being experimented in these hitherto non-profit development sectors is the need to seize the opportunity to look beyond donations and access more finance.
The Indian Social Enterprise Landscape Report (Ganesh et al., 2019) states that India’s SEs tend to cluster around high-impact development sectors such as agriculture, health, education, clean energy, financial inclusion, water and sanitation. Given the fact that more than 50% of the Indian population is dependent on agriculture that is costly and underproductive, and health and education are still major dividers when it comes to social equity, the sectoral priorities coincide with the needs of the low-income communities in the country (Raghvan, 2014).
The estimated market opportunity and potential for SEs in India are expected to grow to US$ eight billion (€ seven billion) by 2025 as they are operating in unexplored markets (British Council, 2016). Sensing this potential sustainable and scalable SEs models in India have attracted impact investment of US$5.2 billion (€4.6 billion) in a short duration of 2010–2016. The investor interest resulted in unique financial challenges for SEs in India. Social entrepreneurs found that investors often had fewer means to comprehend the entrepreneur’s impact aspirations but were more focused on the potential monetary returns in the scalability of novel social venture models (Gaurang & Jain, 2014). This was challenging and often got complicated once their for-profit operations scale up as there were no legal measures to prevent investor pressure and mission drift in the growth stage of SEs.
SEs in India are not distinguished from commercial organizations as there are no legal directives on the distinction (Ganesh et al., 2019). So, when it comes to financing decisions, this complicates the evaluation of choices that a SE has to make from the investors who have heterogeneity of investment motivations and returns expectations. While there are some studies exploring financing issues in socially oriented organizations (Carroll & Stater, 2009; Tevel et al., 2015) and social mission and funding (Smith et al., 2012), not much is known about how SEs evaluate an investor and formulate their financing strategy, especially in emerging markets like India. Against this backdrop, this article takes early steps in addressing this literature gap in the field of social entrepreneurship by exploring the financing decision of SEs in India in three sectors—education, health, and agriculture. It is guided by two objectives:
To understand how social entrepreneurs in India decide on their enterprise’s financing strategy. To understand how social entrepreneurs in India evaluate investors.
A qualitative multiple case study design is used for this purpose as the nature of inquiry is exploratory and best addresses our research question (‘how’ financing decisions are made). As its early proponent Yin (2003) states, using a case study methodology provides the ‘emic’ perspective from the participants and to use this meant first-hand access to the perspectives, views and rationale for financing decisions. Our sample comprises for-profit SEs operating in the areas of health, education and agriculture. For-profit SEs were chosen purposively to capture evidence from multiple sectors, multiple contexts, and stages. Primary data was collected using an in-depth interview method. Social entrepreneurs or founder/co-founders of the SE were interviewed, and data were analysed by coding the patterns that emerged from the transcripts.
The cross-case analyses showed that entrepreneurs evaluate their financial options using a value-based lens and evaluate financial sources through multiple factors that reflect their self-conceptualized vision of ‘What is a SE’ in their financial decisions. It emerged that financing strategy is shaped by organization-specific characteristics like its form, commitment to the mission and stage of life. Non-monetary factors were also found to act as due diligence criteria to arrive at a mission-aligned financial decision. We explain these findings using the interpretative lens of a management theory called Upper Echelon Theory (UET) and depict how the social entrepreneur’s perspectives influence financing decisions in SEs.
The ensuing sections of this article start with an overview of the scant literature in the field of SE financing. To contextualize our work, we briefly review the literature related to the definition of SEs and their financing and then give a background of the emergence of social ventures in India. This is followed by a description of the methodology used to answer our research question of understanding how SEs in India decide their financing. We then present our findings and discussion related to how SEs choose and evaluate their financing sources.
Theoretical Background and Literature Review
Defining a Social Enterprise
There is no consensus on one definition for SEs. The concept of SE means different things to different people. Moreover, with the growing interest in the field, diversity in the type of organizations classified as SEs has also increased (Smith & Stevens, 2010). The lack of homogeneity is evident as organizations with variations in legal structure, profit distribution policies, different linkages between mission and business activities are termed as SEs (Alvord et al., 2004; Lehtola & Ståhle, 2014; Seelos & Mair, 2005). Choi and Majumdar (2014) term SE as essentially a contested concept and suggest that it is a cluster of related constructs.
Nevertheless, there is a growing consensus among scholars that the pursuit of dual goals with social and financial returns is the distinctive feature of SEs, with a social problem as its central driver for venture creation (Austin et al., 2006; Saebi et al., 2019; Wu et al., 2020). In other words, blended value creation (Nicholls, 2008), or pursuit of dual mission of social purpose and financial sustainability (Dees & Elias, 1998; Tykkyläinen & Ritala, 2020), differentiates SEs from organizations operating in public, private or non-profit formats.
As far as the present study is concerned, a SE is a for-profit organization created with an explicit aim to address a social problem (Dees & Elias, 1998; Nicholls, 2008).
Social Enterprise in India
Past studies have suggested that national and cultural context influences the emergence of SEs (Hoogendoorn, 2016; Stephan et al., 2015), and many scholars have explored the role of socio-historical antecedents and the impact of the macro institutional factor on the emergence of SEs in different parts of the world (Hazenberg et al., 2016; Kerlin, 2010). In this light, the underlying socio-economic conditions in India, like inequitable access to education, health and economic opportunities, provide a fertile ground for a thriving SE ecosystem. Although the modern form of SEs is a recent phenomenon, there is historical evidence of voluntary organizations’ existence to address social needs through charity, trust, cooperatives, and other forms (Shukla, 2020). Such ventures operated with heavy reliance on donation and philanthropy capital. With the liberalization of the Indian economy in the 1990s, and subsequently reduced role of government, growing competition for limited donor funds and success of microfinance institutions (MFIs) in the early 1990s as a social innovation demonstrating that poor can pay the new forms of ventures, ‘SEs’ came to the fore. Indian SEs can be seen taking a range of organizational formats like for-profits and hybrid cross-subsidy models with an inclination towards financial self-sustainability and social purpose (Shajahan & Marakkath, 2015). While India does not have a separate legal structure for SEs yet, SEs adopting a non-profits structure have multiple options: ranging from trusts to societies, private limited non-profit companies or Section 8 companies (Jammulamadaka & Chakraborty, 2018). In contrast, for-profits SEs have no option apart from being registered as Private limited companies and treated at par with other commercial organizations for regulatory and taxation purposes.
Financing Decision in Social Enterprises
The decisions related to the source of finance are important topics of study on commercial organizations. A plethora of studies has explored the questions related to cost of capital and capital structure where firms have options to raise capital in the form of instruments ranging from retained earnings, equity to pure debt (Graham & Leary, 2011). Further, scholars have explored financing issues such as debt management (Tuckman & Chang, 1993), motives of surplus accumulations (Chang & Tuckman, 1990), financing structure (Carroll & Stater, 2009; Jegers & Verschueren, 2006) of non-profit organizations.
However, for-profit SEs operate differently from non-profits and commercial organizations (Austin et al., 2006; Santos, 2012). Even though with a growing call for sustainability, and the emergence of socially responsible investing (Tripathi & Kaur, 2021), several commercial enterprises have started to articulate social and environmental goals besides economic goals (Eccles et al., 2014) due to operational differences in their financing choices are different from for-profit SEs (Siqueira et al., 2018). In contrast with commercial ventures, for-profit SEs have access to financing instruments of multiple sectors—ranging from investors with no financial return expectations to investors with a market rate of financial return of expectations (Bugg-Levine et al., 2012). Theoretically, they have options to choose from a gamut of financing instruments ranging from equity, debt, mezzanine capital, grant and donations, to forgivable loans (Bugg-Levine et al., 2012; Spiess-Knafl & Achleitner, 2012). However, similar to other forms of enterprising, choice of the instrument have implications for the survival and growth of SEs (Schwienbacher, 2013); for example, while a grant does not require any annual payment and repayment, it is usually restricted for a predefined project as a result offers low entrepreneurial flexibility. On the other hand, a debt instrument requires annual interest payment and repayment and can offer high entrepreneurial flexibility.
The option of raising funds from multiple sectors, and thereby resulting in heterogeneous return expectations with varying degrees of financial and social returns, make the financing decisions in the for-profit SEs unique (Achleitner et al., 2014). The corporate capital structure theories that explain financing choices of commercial organizations do not seem to be readily applicable in for-profit SEs, and the gaps that this creates are not bridged by social investors (Lyon & Owen, 2019). In their longitudinal study, Siqueira et al. (2018) found differences with respect to the capital structure of for-profit SEs and commercial enterprises. Mayer and Scheck (2018) observed that SEs while choosing an investor, consider the non-financial aspect as well. The contrasts between SEs’ financing models in the United States and Europe have been studied by Akbulaev et al. (2019). In the United States (US), SEs have led to legal support for two types of hybrid organizations where commercial and social principles overlap: the low-profit limited liability company or L³C or, and the benefit corporation or B-Corp (Jensen, 2014). In the United Kingdom (UK), it has led to specific SE legislation called Community Interest Companies (Companies [Audit, Investigations and Community Enterprise] Act 2004,
An examination of the literature reveals that research on the financing and financing structure of SEs is relatively scarce and non-existent in India’s case. Existing investigations on the financing of SEs have mainly focused different on facets of impact investing like its emergence (Höchstädter & Scheck, 2015), investing decisions (Spiess-Knafl & Aschari-Lincoln, 2015), barriers (Glänzel & Scheuerle, 2016), its significance for SEs (Castellas et al., 2018). Lyons and Kickul (2013), in their seminal work on ‘The Social Enterprise Financing Landscape: The Lay of the Land and New Research on the Horizon’, call for more research on the financing side of the trail-blazing field of social entrepreneurship. As literature showed the absence of commercial financing theories that apply to the SE financing context, we also considered the potential of general management theories as an explanatory lens for strategic financial decisions. In that context, we reviewed the UET as literature mentions its application in explaining enterprise financing decisions.
The Upper Echelon Theory and Financing of Social Enterprise
Hambrick and Mason (1984) ‘UET’ states that an organization reflects its top executives’ experiences, values, and personalities. This is because executives’ background characteristics play a role in their interpretation of situations they encounter and their decisions. Thus, an executive’s background characteristics have implications for organizational outcomes, strategic choices, and performance levels. Further, to explain the extent of the effect of top executives on organizational outcomes, Hambrick and Finkelstein (1987) advanced the concept of executive discretion or latitude of action as the function of three sets of forces:
(1) the degree to which the environment allows variety and change; (2) the degree to which the organization is amenable to an array of possible actions and empowers the executive to formulate and execute those actions; and (3) the degree to which the executive personally is able to envision or create multiple courses of action. (p. 379)
Using UET, numerous studies have explored and confirmed the link between different attributes of top executives and organizational outcomes (Chin & Semadeni, 2017; Chin et al., 2013; Rijsenbilt & Commandeur, 2013; Semadeni et al., 2021) underlining the importance of understanding the strategist’s perceptions to decipher the strategy of a firm.
Although this theoretical lens of top executive discretion has been tested to understand the financing decisions in commercial organizations and scholars have found an association between top executives’ personal characteristics (e.g., age, experience) and their appetite for financial leverage (Matemilola et al., 2018; Ting et al., 2015) there has been no such explorations made in SE finance. In this backdrop, our review showed that our research interest to understand how social entrepreneurs decide financing strategies and evaluate financial investors for their enterprises had no extant theoretical conceptualization in literature. This was an interesting gap to note as literature did consider SEs to be theoretically distinct from commercial enterprises and celebrate its capability of moving beyond donations in their financing structure but had no explanation on its financing side from the entrepreneur’s perspective. With no theoretical guidance on what governs the financing decisions of these enterprises in contexts where there are no clear legal demarcations between commercial and SEs, literature seemed silent on a pertinent dimension of social entrepreneurship in emerging sectors. Our research exploration aims to bridge this gap in the literature by developing an understanding of the constraints, dilemmas and perspectives of social entrepreneurs that govern the financial decisions of Indian SEs operating in emerging sectors such as health, education, and agriculture with no clear legal distinctions or theoretical directives on financing. We use the Upper Echelon as our theoretical lens to discuss the entrepreneurial perspectives as it factors in how environments with variabilities allow executive perspectives to be determinants of organizational decisions.
Methodology
Following previous empirical studies in the domain of social entrepreneurship (Cooney, 2006; Dahles et al., 2020; Mair & Marti, 2009), and due to the exploratory nature of our research, we chose a case study design. The case study approach is considered primarily useful when the focus is on the exploration of a phenomenon within its context (Yin, 2003). Since this study is focused on ‘how’ a social enterprise decides on financing, and a social enterprise is a contextual phenomenon (Mair & Martí, 2006), the case study approach appeared as an appropriate design to conduct the present study. Further, a multiple case study approach was considered as appropriate to investigate the relevant questions as the researcher wanted to study financing issues in various social enterprises working in different sectors, different parts of the country and at different stages. A multiple case study approach is prescribed to reduce researcher bias (Eisenhardt, 1989) and help develop a broader understanding by revealing differences and similarities among cases.
Selection of Cases and Data Collection
A SE was determined as a case or the unit of the analysis for the study. SEs operating in the areas of health, education and agriculture and registered as for-profit organizations formed the sample population for the study. The logic behind selecting these sectors came from the fact that a high percentage of the Indian population depends on agriculture for their livelihood, does not have access to basic health services and quality education. Moreover, a study reported that 56% of total SEs in India were operating in these three sectors (Allen et al., 2012). SEs were chosen purposively to facilitate capturing of evidence from multiple sectors, multiple contexts, and life cycle stages. In total, nine SEs, three from each sector, were chosen for the study. The logic behind multiple cases within each category is the fact that it allows findings to be replicated within categories (Eisenhardt, 1989). A brief profile of the nine case studies is provided in Table 1. All the SEs’ names have been denoted with alphanumeric notations as the entrepreneurs who were interviewed were guaranteed confidentiality and assured protection of the identity of their enterprises. Multiple data sources were used, including the primary data source consisting of open-ended interviews with the social entrepreneurs or founders of SEs, and secondary data sources consisting of websites, annual reports, and other documents such as information brochures and investment reports.
Profile of Cases
Primary data was collected using an in-depth interview method. Social entrepreneurs or founders/co-founders of the SE were interviewed using an interview guide. Social entrepreneurs were chosen as the founder’s perspective on a strategic decision like financing of an enterprise was of interest to explore in a context where there are no function-specific directives on SE financing. A brief profile of the social entrepreneurs selected for the interview is presented in Table 2.
Interview Details
The interview method was chosen as it enables the participants to express their views and discuss the financing decisions freely. Data regarding SE was collected using an interview schedule. The length of the interview varied from 30 minutes to 120 minutes.
Data Analysis
Theory building in qualitative research is an inductive process (Eisenhardt & Graebner, 2007). Hence, following Miles and Huberman (1994), data was reduced through multiple readings of transcripts of interviews and summaries writing. The next step was manual coding of the transcripts of the recorded interviews and the documents using various coding techniques. Strauss and Corbin (1998) suggest that open coding is helpful in generating categories. The analysis of interview data was done with a thrust to discover ways in which financial decisions were undertaken in SEs. It was followed by a detailed case write up for each case, using information collected through interviews, and secondary data such as website information, documents, audio-visual data, to understand financing specific information and unique features of that case. These write-ups helped the researcher to identify key points from each case and helped in cross-case comparison. The cross-case analysis was carried to identify concepts and patterns not idiosyncratic to one specific case, but which can be found across different cases.
Findings
From our exploratory study, it emerges that though moving beyond donations by adopting a for-profit SE structure is possible for sectors that non-profit models in India hitherto dominated, the financing decision of SEs in this domain remains complex. Analyses of cases further reveal that financing is not just about selecting between all the available financing options that the social investment world had to offer to a for-profit social venture. The SEs explored in our study, though they were structurally homogeneous as for-profits social ventures, depicted complexity in their financing choices characterized by variations in their organization form, commitment to the mission and the life stage their organizations were in. Moreover, attributes and vision that the social entrepreneurs had for their organization acted as factors influencing the financing decisions of social ventures, especially due to the lack of directives for the process of social and economic value creation in emerging markets. In such a scenario, a social entrepreneur’s self-conceptualization of ‘What is a SE?’ was seen to influence their venture financing decisions. It further emerged that while deciding on an investor, SEs valued non-monetary contributions that an investor can bring to their venture (such as mentoring support, connections to networks and access to human resources in the ecosystem) and evaluated the non-monetary compliances that they are expected to adhere to in the deal (such as reporting requirement and board positions) all adding as due diligence criteria governing a social financing decision.
The empirical evidence we collected with respect to financing strategy and evaluation of investors is clubbed and synthesized along with three major themes: Organizational Characteristics, Social Entrepreneur’s Discretion, and Due-Diligence Criteria. Table 3 provides a synoptic view of the evidence, and the following sections an in-depth presentation of each of the themes.
Synoptic View of Findings
Organizational Characteristics
Organizational Form and Commitment to the Social Mission
Analyses of the cases show that although the source of finance (e.g., debt, equity, forgivable loans) was widened beyond donations for SEs with their for-profit structure, there were decision constraints when it came to making a funding decision. This was because it was particularly challenging for SEs to balance economic and social goals when working in hitherto non-profit sectors and suddenly having to deal with investors with varied social and financial return expectations was difficult. The pursuit of dual goals of social and financial sustainability was a tightrope walking and taking any source of funding that was available would put their social mission in jeopardy. So, the commitment to and clarity on the social mission seems to have an overarching influence on how SEs go about their financing. The founder of HSE6 mentioned:
One thing I realized after setting up a for-profit company [SE], it becomes tough for us to take the grant. Companies cannot accept grants at a structural level. Second, from the philosophical level to me, it is also hard to take grants for economic value creation.
In formulating their overall financing strategy, SEs carefully considered each financial instrument in terms of how it furthers or hampers their social and economic vision. The founder of the ESE1 explained:
If you are getting into Social Venture Capital (SVC) and all, then there are difficulties for the SE. It is because most of the SVCs have very fixed financial return expectations and in the process of managing that, your social mission might be left behind. That is one of the reasons why we decided to not go to SVCs. SVCs usually do not have a 10-year horizon because their business model is different, which require, most of the time, to exit in five years.
It emerged from our interviews that social entrepreneurs had a desire for a financing method that respects their mission, operational pace and gives them the entrepreneurial flexibility to pursue it without losing control. Though the financial instrument that offers the most entrepreneurial flexibility is debt in the commercial world, this was not the same for social entrepreneurs. Among the SEs we interviewed, debt was approached with caution due to its potential to lead to bankruptcy and threaten their explicit aim for social value creation. Cases revealed that SEs were cognizant of the implications of the financing choice not just on their current performance but also on their development plans. So, they were looking for capital that was aligned with their social mission, and if they did not find any, they continued with their own funds.
Life Stage of Social Enterprise
Cases analyses underline that financing choice was also influenced by the life cycle and stage the organization was in. When the participant SEs were starting, seed capital mostly consisted of founders’ savings, borrowing from family or friends. However, once their venture model proved to be workable, new financing sources were accessible to fund their expansion and operations. Explaining this life cycle influence on financing, the founder of HSE4 said:
Look, when I was starting in 2011, I knew we had a good idea, but we did not know how to write a venture plan […] or convince an investor, I put in our own money, and I also convinced my mom to invest some money. Later, we also received a few lakhs as prize money for winning a business competition.
The founder of ASE7 added, ‘It is not easy for a new organization to attract resources from those who have resources.… You have to struggle, establish yourself, show something, and then resources start flowing’.
It also emerged that while at the start-up stage, SEs were open to raising funds from multiple sources, but as they moved up in their life stage, focus increasingly shifted to raise funds from a limited number of sources and alignment of the mission. The founder of ESE2 mentioned:
[…]at one point in time, a funder offered some funding, but we had to say no. Because we were already committed to four VCs funders and we did not want to put many people on board. We have understood the value of having a lesser number of people, though earlier it used to be an excitement whenever any investors came.
The founder of HSE4 added, ‘[…] we have realized the lesser number is better so that your and investors thoughts and the philosophies are aligned, and communications lines are better’. This inclination of SEs towards having concentrated financing over a diversified financing structure may be explained by their aversion to conflicts arising out of diverse return expectations.
Nature of Business and Clients or Beneficiaries
The financing choices of the SEs also exhibited the influence of the nature of SEs. The cases operating with target populations belonging to comparatively higher income categories were confident in raising finance from even those sources that involved a relatively higher financial return expectation. The founder of one of the cases, HSE5, said:
[…] if you have a mainstream product and you are able to address a social problem prevalent among the bottom of the pyramid population on a considerable margin, you can increase your access to capital and can afford to pay high financial returns as well.
However, it emerged from the cases that SEs engaged in the provision of product-specific to people belonging to relatively lower-income groups preferred raising funds from the sources that involved low financial return expectations.
Due Diligence Criteria
Non-financial Support
The cases revealed that SEs not only considered financial support investors brought to the firms but also on the extent to which they could help them in their ambitions through non-monetary support. SEs looked for the possible by-products, particularly at the possibility of investors bringing access to other investors or even access to human resources. The founder of ASE8 said, ‘[…] who can give us inputs on strategy, market, fundraising, and in other areas where we lack skill’.
Through the social network of investors, SEs aimed for opening the door of other funding sources and other valued resources such as partnerships, government support, legitimacy, community support or volunteerism as the founder of another case ASE9 explained, ‘someone who can help us in mitigating our future risk. Basically, people who believe in our idea, people who will help us connect with international organizations-both in the private and public sector.’
Reporting Requirement and Level of Involvement
SEs were sceptical of those investors requiring complex and detailed reporting and rigid plans. The analyses of cases show that SEs did not want funds from the investors who sought a more significant supervisory role and demanded complex reports about their performance. It also emerged that SEs also assessed the extent to which a funding source contributes to their autonomy or reduces their control. Though SEs appreciate the investors’ support, they did not want them to become dominant voices in decision making.
We need a funder who can trust our team and us and understand the venture concept. We do not want Someone as our investor forces his decision. They need to have faith in us. The problem is, I will tell you—we are working in a very grey area, and we want to have enough flexibility to make things work. (Founder, ESE1)
Investor Track Record and Public Image
Social entrepreneurs interviewed for the study believed that getting funding from a reputed and well-known investor would give validity to their organization. They also believed that affiliating with a reputed investor would not just improve the image of the organization among outsiders but also among insiders (employees and other stakeholders).
There are some big names in the space, and if one has raised money from prominent investors, then there would be other investors who might feel that it is very safe to invest in that organization. That is what happens at one level with the investors. Moreover, at the enterprise level, employees will feel that now a big investor has invested in and so in the coming days, there will be sure growth in the organization, which will make them stay. (Founder, ESE2)
Social Entrepreneur’s Discretion and Value-based lens
The general expectation in the SEs’ ecosystem is that social ventures would attempt to access all available social financing opportunities to sustain and attain their mission and select the ones that match their operations. When we explore this from the experience of participating social entrepreneurs, we find that they have many reasons to evaluate a financial opportunity not just as a funding source but with respect to how it will impact their self-conceptualized vision of ‘What is a Social Enterprise’. Table 4 provides details of what constitutes their self-conceptualized vision of a SE and what their financial sources are. As seen in Table 4, we can see that the conceptualization has to do with their views on how they believe to deliver on their social mission and their choice and pace of financing were aligned to that thought.
Social Entrepreneur’s Idea of What Constitute a Social Enterprise
The cross-case analyses revealed that social entrepreneurs did not see finance or financing as just a fundraising initiative but as a mission enhancing initiative where they feel their values and conceptualization of SE need to be respected.
Many investors view a SE as a commercial entity as neither by structure nor by statutory requirements; SEs in India appear any different. As a result, social entrepreneurs find it hard to balance their social and economic vision, and this struggle plays a significant role in the choice of investor and financing instruments. SEs are mindful that their choice of financing instruments has implications for the operation and development of the SEs. This is in line with commercial entrepreneurship.
Moreover, since there is no clarity concerning what constitutes a SE, and identity lines are blurred, and there is no one guideline for all SEs for balancing social and economic returns, social entrepreneurs’ idea of their venture is reflected in their firms’ financing choices. As one of the founders said:
Before starting a SE, I wanted to be sure of three points-first, it should deliver a good social impact; second, it has to be self-sustainable or profitable and third, it should have all the elements to scale up. (Founder, HSE6)
It comes forth from our cases that a value expression has to do with a social entrepreneur’s attributes such as background, experiential knowledge, aversion to losing control, the propensity to take a risk, and networks they were associated with. All these attributes played a role in decisions related to financing. The founder of the one of participating SE had an experience of working in the microfinance sector in the phase when many of the Indian MFIs moved from non-profit structures to for-profit structures and raised funding from the investors with a market rate of financial return expectation. He believed that by doing that, MFIs drifted from their social mission. Thus, when he founded his SE, he put his own money and avoided taking funds from any such source, which emphasized financial performance. On the other hand, another founder who had worked in national and multinational corporate firms and had prior experience of starting and running a commercial venture in a developed country was optimistic about raising funds from investors with diversified return expectations. He explained:
One should be open to a mix of different types of capital like we discussed the grant, equity, and debt. Each has its own place. So, you would not surely experiment with debt, you would experiment more with equity, and at the same time, debt is a good instrument for growth and replication, especially if your business model and pricing are very well defined. Grant has its own place and is non-diluted in nature. The only thing which you must keep in mind while taking grants is that they are extremely focused on the impact matrix, and often you might not have the flexibility you need to experiment when you are taking grant capital. (Founder, HSE5)
The cases further reveal that the financing choices were also influenced by the uncertainty about the impact on governance and personal liability for a social entrepreneur. The risk-averse social entrepreneurs like the founders of SEs ESE1, ASE 8, and ASE7 decline offers of a few investors due to uncertainty about their future impact of such investment. For example, ASE8 was launched in 2007, but it has not raised any external funding. On being asked about it, the founder said, ‘See, we want to validate our model. As of now, we do not have much of a choice; we are still experimenting, so we do not want to create any financial pressure’. In contrast to ASE8, the founder of HSE6 had raised a mix of debt, grant, and equity. HSE5 had raised capital in the form of equity, grant and wanted to raise debt capital. The founder of case HSE6 mentioned:
We have taken equity and grant and will go for debt in future. We used equity to pilot our model, got grant support for buying expensive types of machinery for the hospital. We would like to raise debt for expansion. We want to use a mix of all three; it gives us flexibility.
Further, it emerged that SEs do not have easy access to debt even at later stages. Even when they can access it, some prefer not to raise it due to the possibility of bankruptcy associated with debt. One of the founders mentioned:
We put our own money, and we did not take any debt initially. It is a very risky model to take debt. However, based on the need, we take debt also, but currently, our major things are only equity. (Founder, ESE 1)
Overall, the findings that emerged from the study show that the social entrepreneur’s perspectives on their enterprise financial decisions vary as they reflect their own notions and values in their decisions than adhere to any standard guidelines. We discuss these findings by contrasting the variations seen from commercial enterprise financing and by using a theoretical lens to explain the rationale for self-discretion in SE financing decisions. Goodson observes that ‘theories are stories’ (2010, p. 11), and the theoretical framework helps researchers tell the stories of phenomena under study. We discuss our findings and tell the story of financing decisions of Indian SEs using the UET, which states that an organization reflects its top executives’ experiences, values, and personalities (Hambrick & Mason, 1984). As explained in our literature review, UET is appropriate for understanding strategic decisions in an organization using its founder’s characteristics that get revealed in environments with uncertainties and variations. Since our findings reveal the financing decisions of SEs to be influenced by their social entrepreneurs’ personal values and belief than any external standards, we use the UET lens for our discussion.
Discussion and Implications
Our study revealed that organization-specific characteristics such as organizational form, the nature of the business, life stage of the enterprise, social entrepreneur’s discretion and values all played critical roles in financing decisions of SEs. Further, it emerged that SE evaluates a prospective investor not just based on financial support but also based on non-financial support, reporting mechanism, and investment profile and reputation. In order to put the findings into context and make sense of themes that emerged from the case analyses, we interpret it in the light of UET. This because the varied themes that emerged from case analyses depicted that the SE financing decisions have the value expression of their social entrepreneurs reflected in them. The evaluation criteria of an investor seem to have linkages with social entrepreneurs’ own conceptualization of ’What a SE is’ without being mistaken as a commercial enterprise. Moreover, in the Indian context, lack of legal distinction between for-profit SEs and commercial enterprises, and absence of theoretical explanations or empirical observations in social entrepreneurship literature on how SE financing are to be structured other than the mention that it is different from commercial enterprises, social entrepreneurs are left to make financial decisions with no standardized guidelines. In such an environment that calls for self-discretion in decisions, the effects of social entrepreneurs’ background characteristics, values, and personality on their ventures’ strategic choices and outcomes become a contextual necessity. This aligns with the UET, which states that an organization’s strategic decisions reflect the background characteristics and value expressions of their top executives and contextual needs in the environment manifest them in operations (Hambrick & Mason, 1984).
While this is also in line with research studies that have identified similar factors being considered by commercial entrepreneurs like the role of personal compatibility (Valliere & Peterson, 2007), and investors’ ethical reputation (Drover et al., 2014), the due diligence criteria in case of SE financing seem to emerge from social entrepreneur’s characteristics and background.
Overall our findings show that though popular commercial capital structure theories like M&M Theory (Modigliani & Miller, 1958, 1963) or pecking order theory (Myers & Majluf, 1984) seem to be inapplicable for formulating an optimal capital structure in SEs (Spiess-Knafl & Jansen, 2013), the UET seems to provide an insight into SE financing.
In Figure 1, we present the findings from our study and portray the application of this theory in the SE financing context. In our findings, an absence of separate regulations (Referred in Figure 1 at ‘macro-level’) and the constraint this presents to the entrepreneurs during its evolution as a distinct organizational entity (Referred in Figure 1 at ‘meso level’) offers a fertile environment for social entrepreneur’s discretion to enact financing decisions through their own value-based lens (Referred in Figure 1 at ‘micro-level’).
This theoretical lens from management literature has significant implications for understanding SE financing. It not just captures the varied factors at micro, meso and macro-level that impacts a SE’s financial choices but also provides insights to investors and regulators as to why financial options are valued differently by SEs. Further, this provides an insight into gaps in the proliferating social financing tools of the impact investment world that are attempting to touch down on the social entrepreneurs’ needs in emerging markets.
Limitations, Conclusion and Future Research
This qualitative study is focused on SEs in India. It concludes that SEs’ financing decisions, though do not share patterns observed in commercial financing decisions, conform with Hambrick and Mason’s Upper Echelons Theory, which states that organizations reflect their top executive’s values and belief in their decisions. In a SE context, we present this as a social entrepreneur’s discretion in using a value-based lens in their financing decisions. The study acknowledges several limitations. One of the main limitations is related to its external validity, that is, its generalization for the domain of social entrepreneurship. This can be addressed by future research by studying cases in different countries to see how different contexts can validate the findings from this research, the organizational and due diligence factors we identified as value expressions, and UET’s applicability to explain SE financing decisions. Also, due to its qualitative methodology and its exploratory nature, the relationship among different constructs identified in this study could not be tested. However, a large sample of empirical studies can be carried out to test the link between social entrepreneurs’ attributes, discretion and strategies where potential trade-offs in financial sustainability and social value goals can manifest.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.