Lodes of good?

There are plenty of ideas for tech-for-good. But finding funding for something that builds social rather than financial capital is desperately hard. David Hoghton-Carter challenges fintech to put its thinking cap on

I’m wearing a few different hats at the moment – fintech founder, consultant, non-exec, occasional writer and advocate – and there’s an elephant in the room that I keep noticing across my different roles.

There’s a big gap in the finance market for catalyst funding, especially for deep innovation, and particularly for anything that doesn’t look like it’s a potential unicorn with a snazzy minimum viable product (MVP) already designed.

The deeper the impact and purpose alignment, it seems, the more difficult to get that crucial first infusion of cash. Even though there’s a steady stream of content on platforms like LinkedIn, highlighting how impact-focussed approaches are the future of business, and how all of us should be getting onboard, it’s nightmarishly tough to find someone who’s willing to stump up for something that might really change the game in a positive way.

This cropped up in a recent conversation with a guy operating in the tech investment space, who was regularly sitting across from founders who were struggling with the chicken-and-egg, first-funding conundrum. We got into this a bit, shared some war stories and agreed that something needs to change.

Too many of us are being forced into Captain Ahab mode: indefinitely, obsessively hunting for our own white whale, deeply driven to do something that might make a difference, solve a problem we’ve experienced the hard way, but being thwarted by the cruel seas of investment funding.In the fintech space, it’s all about doing money and finance in new and better ways. So, why not try to solve this problem?

Right now, the market context is a barrier to positive solutions. Investors are backing high-growth businesses with a clear path to high returns if the company performs as hoped. That may sound like a good thing, but think about it. That means that mission and impact-driven initiatives, which require patient funding, especially from a very early stage, lose out. Tech-for-good initiatives and zebra projects struggle to catalyse. That’s
going to skew the outputs in favour of businesses that end up ‘making it’, further disincentivising investors to take part in funding the slow burners.

And there’s another problem. As we’ve learned to our cost, some of the deepest impacts of tech giants like Facebook, Google and Twitter can be baleful. Yet the rush to create a profitable product and establish a strong market position means that many developing tech businesses don’t factor this kind of risk analysis into their business planning. This can generate more problems than it solves, both for businesses and for society.

Meanwhile, there are some well-known dynamics within tech-for-good, as a sub-set of the impact landscape. There’s a contrast between how independent founders experience the search for funding, and how those taking a lead on new tech in spin-outs or well-established non-profits, experience the market. Scale-up funding schemes are plentiful across multiple stages; yet absolute project-start-level funding is very difficult to lock down. Independents often struggle, especially those that don’t have personal wealth to plough in.

With interest rates from key impact investors at or around 10 per cent (thanks partly to Big Society Capital (BSC) and its questionable approach), there’s a high barrier to entry for anyone not already starting to scale. The nuances of how BSC’s partner-investors work vary, but they tend to structurally favour well-set programmes that are able to demonstrate veteran governance, solid support and additional financial backing.
More broadly, startup loan schemes assume the potential to quickly develop a strong enough revenue stream to pay down the loan. The money that’s available isn’t enough to cover early development costs in full, and the assumption is that founders will make up the difference. The assumption that founders can afford to pay the rent, keep the lights on and put food on the table until something new is washing its face, is severely misplaced.

To my mind, the focus of all these funding channels is far too keenly zeroed in on minimising risk: clear financials, obvious comparators and competitors, developed markets, readily identifiable benchmarks for success. And yet strategic funders keep claiming that it’s tough to find fundable companies.

With such deep risk-aversion, the bar to entry is set so high that it’s next to impossible for newbie innovators to meet it. Trans-nationally, the message from impact investors is that, to be fundable, you’ve got to be well-established, generating revenue, with the market potential of a unicorn but the mission and impact profile of a mature non-governmental organisation (NGO).

Here in Britain, too many otherwise positive, existing tech-for-good funding streams cleave to solidly established organisations (venerable charities, university or NHS spin-outs, for example), and fund new tech that seeks to address well-worn issues. How does that square with true innovative thinking that spawns new solutions?

With fintech companies changing the game in so many other ways, I think it’s time for some positive disruption here. Someone needs to take some real risks and build a funding approach that focusses on the untested, and on new founders. We need to see a platform that enables money to flow into positive deep-innovation tech and impact projects in which the primary return is likely to come from social impact – and then it’s probably going to take a while to realise. Rather than relying on the dubious hope that market dynamics will create the right environment for a better, shared future, we need to actively build the systems that can create it.

Peer-to-peer lending and investment is one way to go, of course. Where I am, in Leeds, Rebuilding Society and UOWN are doing great work on democratising finance for SMEs and property investment respectively. And crowdfunding is ubiquitous, now, though with some caveats about the kinds of ideas, projects and approaches that tend to pull in the public’s money. That might be reinforced with some form of ‘social credit’ system, which rewards investors who put their money into newly registered, non-spin-out community interest companies and charitable incorporated organisations
– perhaps by offering localised discounts on goods and services if they’re helping to build stronger local economies. I’ve been looking at similar ideas across two different projects, and I believe there’s room to catalyse some deep, systemic change by linking together new financial approaches.
All it takes is for a first-funder with a fair bit of money and a genuine drive to do positive innovation to say ‘yes, let’s do this’ (I’m looking at you, challenger banks).

The next niche to fill is going to be peer-to-peer impact innovation support. I think there’s room for a platform that draws impact-curious investors, provides their money to very new and early-development projects on a mixed grant/loan basis across multiple phases, and then tracks the impact path instead of focussing on the financial return.

How you turn that into a viable business proposition is the question. But the fintech community has done big things with much thinner ideas, so I’m sure it can be made to work.

So, to sum up. Risk aversion stifles genuine innovation. The predominant model for tech and impact funding relies too heavily on readily foreseeable financial growth and outcomes. There is too little room to proactively think around unplanned outputs, consider unintended consequences and think bigger. It’s not adding up to a sustainable model. A crucial piece of the puzzle is missing. That means we’re arguably storing up financial, economic and social volatility with every transaction made and we’re not creating a big enough pressure valve. This won’t build the sustainable society and economy we all want. The big-picture question, ultimately, is how far can current approaches stretch the fabric of our economy before it tears itself apart?

This article was published in The Fintech Finance Magazine: Issue #15, Page 110 & 111.

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