Seven Reflections on the Investment Landscape for Social Tech - Roundtables with Early-Stage Social Tech Ventures

Nov 11, 2021 

At Social Tech Trust, we’ve invested in over 300 early-stage, purpose-driven tech ventures. While some of the organisations we back go on to raise significant venture capital funding, our recent blog discusses how many struggle to access the capital they need to fuel their long-term growth and scale their impact. 

To inform our response to this challenge, we held a series of online roundtables with early-stage social tech ventures to better understand their experiences and the alternative approaches they would like to see. 

1. Challenging the dominant VC model 

Almost all the founders who took part in the research expressed frustration in their attempts to access the capital they need to scale their ventures successfully and to fulfil their impact potential. They highlighted how the narrow focus of VC investors on return expectations and business models, combined with the lack of alternatives, meant that numerous promising businesses were finding it hard to access suitable capital. 

“If you look at the last 5 or 10 years at the number of UK companies that have IPO’d at £1bn, it’s tiny, which means that most VC firms are never going to have that unicorn company. So what are they searching for? What are they expecting?” 

2. Importance of value-aligned investors 

Founders tended not to be averse to investors making high returns if they were prepared to take upfront risk and did not divert the venture’s mission. However, they expressed strong concerns about the underlying values and principles of the VCs they’d engaged, which they viewed as encouraging behaviours at odds with their growth plans and impact objectives. 

“What’s off-putting about institutional VC is that it’s a total boom or bust. There’s no space to build a medium-sized (e.g. £20-£100m valuation) company. This leads to some value-destroying behaviours by founders in chasing top-level growth at all costs and having to ignore opportunities to have more positive societal impact on the way.” 

3. Investor perceptions of social tech ventures

Although there has been a proliferation of new impact-focused venture funds, the ventures were sceptical about how committed these funds really are to impact. They shared their experiences of investors closing down discussions over concerns that the social mission would limit the potential financial upside. 

“The problem is the moment you mention you’re a social enterprise, they believe you are not going to hit a multi-billion pound valuation. So we sit in this grey area. In our articles, 51% of profits must be reinvested in the social mission, leaving 49% for dividends. Can you find me a company that has ever paid 49% of its profits in dividends in any single year? It never happens. So why is that a barrier or a problem?” 

 

4. Investor understanding of tech 

Tech is increasingly used as a tool to deliver social impact, yet finalising investments with social investors remains challenging. The ventures pointed to some investors demonstrating a lack of technical knowledge and confidence in making investments into social tech ventures. 

“We went for a big raise of £1.3 million pre-product, and we got all the way to due diligence with a Trust and a well-known social impact foundation, but right at the end, they decided that they couldn’t take a risk on technology because they weren’t tech savvy. That was a painful experience, but we thought if we could get that far, maybe we could do something here.” 

5. Alternatives to equity and debt 

Most participants showed a preference for equity financing over repayable debt to provide risk capital for the business. Many also highlighted that these remain the only two options and, as they look to the future, would like to see more investors willing to explore different approaches, including revenue-based investment. 

“The experience we had was that institutional funding seemed to be structured as either debt, that is, predictable debt with a fixed interest rate, or equity for early-stage. In contrast, we wanted an equity-like debt instrument. Having explored that for about four months and having spoken to the obvious social investment institutions that we could, we went back to the drawing board and then went to raise equity instead.” 

6. A desire for patient capital 

Parallel to a desire for alternative forms of investment was the importance of recognising the value of patient capital. Pursuing transformative approaches may require new business models, creating new markets and engaging with complex procurement channels, and it can take longer to make significant progress. 

“With civic tech, or social tech, we are building systemic change. Systemic change does not happen in three months, or six months or a year.” 

7. Increased optionality 

Having optionality in funding was generally very attractive to social tech ventures. They were receptive to the idea of either repaying a loan or converting it to equity, or having the option to pay down equity later. For founders, flexibility was key, enabling them to adapt and retain control over the right path for their company to achieve its goals. 

“We’re already using 3-year debt to fund inventory, revenue-based financing to fund marketing and angel/equity to fund general burn rate, all of which are great.” 

With so many inspirational ventures presenting new approaches to addressing entrenched challenges, there is a genuine opportunity to build a fairer society as we emerge from the pandemic. This will require investment that meets the needs of the ventures as much as it does the investors.  

We thank those who took part and shared their experiences in our roundtables; insights from ventures such as these are crucial if we are to form a clearer picture of the need for alternative forms of investment and help more social tech ventures to thrive.