The Ecosystem: support grows for social impact start-ups

Start-ups with a social mission have a harder time getting off the ground than peers focused solely on financial returns, yet their innovations can have just as much impact. Reflecting this, new initiatives being set up to help with the first steps to becoming viable enterprises.

Last month saw the launch of the Social Impact Republic, an alliance of German start-up centres supporting social enterprises. Meanwhile, in the UK, London Social Ventures is about to announce the first cohort in what it hopes will become a pipeline of social start-ups emerging from London’s universities.

In both cases, it is the social intent of the venture that is important. “The Social Impact Republic focuses on start-ups solving some kind of social challenge, but that’s intended to be quite broad. We don’t have specific sectors in mind,” said Michael Stockerl, who is leading the project from UnternehmerTUM, a start-up centre working closely with the Technical University of Munich. “The important thing is that solving the challenge is more important than making a profit, although we plan to support both for-profit and non-profit start-ups.”

Challenges that qualifying start-ups might address include inclusivity in the workplace, the pressures of caring for elderly relatives, or literacy among the children of migrants.

London Social Ventures expects its start-ups to be for-profit, but with a clear social or environmental purpose. “They are here to develop a surplus and become sustainable, but social purpose and impact must be a strong operational lever to what they do. It’s not something that they do on the side,” said Amir Rizwan, the initiative’s director.

For example, start-ups could work with disadvantaged groups or help deliver a public service, such as health or social care. It might also mean that they have a social intent in the way their profits are distributed or how decisions are made within the company.

Extending deep tech support

The Social Impact Republic is part of a national strategy for social innovations and social enterprises published a year ago by the German federal government, and has funding from the Federal Ministry of Education and Research.

“By establishing the Social Impact Republic, we are accelerating the development of the ecosystem for social innovations in Germany and helping to trigger a new wave of start-ups,” said Mario Brandenburg, parliamentary state secretary for education and research. “With our funding, we want to establish a national network to support start-up teams in promoting innovations with impact.”

The founders of the Social Impact Republic are UnternehmerTUM from Munich, Founders Foundation from Bielefeld, Phineo from Berlin, the appliedAI Institute for Europe in Heilbronn, and the Digitales Innovationszentrum Rostock. Further centres with complementary expertise are expected to join in the future, initially from Germany but potentially from elsewhere in Europe.

The starting point is to give social ventures the same kind of support that the centres give to deep-tech start-ups. In some cases, particularly where start-ups plan to apply deep tech to social challenges, this is not much of a stretch. But there are also issues specific to social ventures that need to be addressed.

One problem is recruitment. “The top talents go to work of Google and Facebook, and don’t think of starting a career with a social company,” Stockerl said. “We want to help with that.”

There is also a tendency for social ventures to start with modest ambitions. “Most work in an analogue way,” Stockerl said. “They have local impact but don’t know how to bring this to a national or international level. So we want to help them build scalable products.”

There may also have problems finding partners for demonstration projects. “Often they need access to the public sector and to social work organisations, and these can be very hard to contact. As we already have this network, we can bring them to the right people and help them find pilot partners,” said Stockerl.

Finally, there is the problem of funding. Social ventures with for-profit models have the edge here since there are some venture funds that actively seek out start-ups with social goals. “But non-profit organisations depend on state money or foundations, and that can mean a long process to get money to fund their activities,” Stockerl said.

The Social Impact Republic aims to mobilise its network of investors, philanthropists and foundations, so that the ventures it supports have the best chance at finding the money that is out there. It will also help to develop alternative business models that may prove more attractive to investors and other funders.

Ultimately it would like to develop a dedicated fund, modelled on UnternehmerTUM’s Funding for Innovators programme, which provides early-stage tech start-ups with pre-seed money, in particular to develop prototypes. “We want to have something similar for the social start-ups, money that they can get at the beginning of their lives and start working with,” Stockerl said.

The Social Impact Republic programme will have three tracks. The Create track will support teams interested in founding a social start-up, from the idea to building a prototype, including fund raising. A pilot cohort of four start-ups has already been selected. This includes Family Mind, which is developing an AI-driven system to help over-stretched parents manage and share household and other daily tasks. Then there is Inclusion Match, a start-up that will help companies meet their legal obligation to hire more people with disabilities.

Next is the Accelerate track, which will help existing social start-ups scale-up their products or services to achieve greater social impact. “We are talking to around 60 established organisations that we would like support,” Stockerl said. “They are all looking for funding or access to pilot partners, and we would like to help with that.”

The Transform track hopes to persuade high-tech start-ups to apply their knowhow to social challenges. “We’re already talking to social welfare organisations, foundations and non-profits about the challenges they have,” Stockerl said. “When we have a pipeline of challenges, we will match them with deep-tech solutions and help apply them.”

The target will be more established high-tech start-ups that have investment money and  an initial product-market fit and are now looking for new opportunities. The challenge is to help them see the returns possible from social applications. “The public sector can be a valuable market, but most tech start-ups don’t understand it and don’t expect it to be profitable. They think the easy money is elsewhere,” said Stockerl.

The overall goal of the Social Impact Republic is to create 10 social impact unicorns by 2030. While this could mean unicorns in the usual sense of a company with a market capitalisation of over €1 billion, there are other definitions that might apply.

One is to become a company with a €1 billion social return on investment, either saving society €1 billion or generating €1 billion more for society. Another is that the company affects more than one million people in a positive way.

“There are a lot of social challenges where you can easily find this many people,” Stockerl said. One example is helping children facing literacy challenges to read and write well. “In Germany alone we currently have 1.2 million kids who would benefit from that kind of support, so that would be a possible impact unicorn for us.”

Social impact pipeline

London Social Ventures is building a pipeline of social impact start-ups from London universities, along with a support network of non-university partners, such as companies, to help with legal issues, business models and mentoring.

The argument is that a pipeline of social ventures is necessary to attract and hold the attention of investors, both for individual deals and more structural support. “The long-term ambition is to create a permanent fund or similar structure in London, but in order to do that you need have an evidence base and understand how a pipeline might work,” said Rizwan.

The project brings together 11 partner institutions: Queen Mary University of London, University College London, London Metropolitan University, London Business School, King’s College London, University of London, Goldsmiths University of London, University of the Arts London, London School of Economics, University of East London and City University.  together with a number of investors and other partners from across London.

The initiative is responding to rising demand from London’s academic community. “We already have students who want to set up their own social ventures, and academics and researchers looking at models that will help them spin-out their ideas, when commercial models don’t necessarily fit,” Rizwan said.

The pilot year, which is initially being funded by Research England, will have a number of elements. The first is a venture-building programme, intended to address a gap in the current support for start-ups in the capital. “While there is help out there, it can often be fragmented, or not pitched correctly for the audience we are trying to work with at universities,” Rizwan said.

The first cohort of 10 social ventures will be announced this month, covering sectors such as health, environment and the arts.

Further support during the pilot year will look at how to connect social ventures with the public sector, particularly in health and social care. Public procurement is often complex, unwieldy and slow. An established business can absorb this, but a new social venture finds it more difficult.

“We want to help social ventures get to the point where they can take on their first customer from the public sector,” said Rizwan. “You can set up all the social ventures you want, but if they don’t have a customer within the first six months they will find it hard to become sustainable in the future.”

There will also be work to develop the ecosystem of support for social ventures in London, in particular through collaboration with companies. “Corporates have a valuable role to play supporting social ventures through mentoring, giving them space and access to resources, and also introducing them to their supply chains,” Rizwan says.

Corporate partners include Barclays Eagle Labs and law firm Mischon de Reya. London Social Ventures is aiming to grow the number of corporate partners it works with over the next 12 months.

Rizwan is convinced that investment money is available for social ventures, as long as expectations about potential returns are managed. This is not an area for venture capital funds that expect a 10 or 12-fold return on their investments, but a smaller return on investment is not unreasonable. “You need to be clear around this, especially when looking to bring new investors on board,” Rizwan said.

He also sees the potential for projects such as London Social Ventures to develop blended finance models. “Social ventures will always need non-financial support, for guidance and mentoring, and activities that make ventures investible in the future, but that needs to be funded through grants rather than a loan or an investment. So, there should be a way to create a hybrid approach, which meets the sector’s unique needs.”

Elsewhere in the Ecosystem…

• German start-up Voltfang has raised over €8 million to continue development of its renewable energy storage system built from reconditioned and surplus lithium-ion batteries, principally from the automotive industry. The funding, which includes €800,000 in grant funding alongside equity investment, will be used to advance the company’s energy management system and broaden its product offer in commercial, industrial and grid-scale applications.
   
• The Estonian government has released more funds for defence technology companies, doubling the budget of its Defence Industry Fund to €100 million. The fund, managed by SmartCap, will invest in companies developing defence and dual-use technologies, and support other funds that focus on high-added value sectors and deep tech. The first investments should be announced early in 2025.
   
• Taiwania Capital’s CEE Fund has made its first investment in a Croatian start-up, leading a €10 million series B round for All Eyes On Screens. Until now the $200 million venture capital fund set up by Taiwan’s National Development Fund has favoured companies from Lithuania, Slovakia, and the Czech Republic. Founded in 2012 as AdScanner, the All Eyes On Screen has developed an artificial intelligence-driven system for planning and monitoring advertising on TV and streaming services.