On: 18th July 2014
On the surface, the language and practices of Silicon Valley and other tech investors have brought the social sector a greater focus on ventures, accelerators, fast-growth innovations, of startups, incubators and investment. But there is a deeper lesson to be learnt by social tech entrepreneurs from their highly successful commercial counterparts, which might help our sector replicate the vast influence that Silicon Valley tech has on our lives.
Tech entrepreneurs and the young financiers who kick-started the new models of investment in the 1950s were motivated by a discontent with the norm. They were dissatisfied with the way in which funding was made available and the way that new technologies (at that time semi conductors) were being developed. They saw opportunities beyond the existing status quo, took the risk and created what we now know so well as a hub of global tech innovation, through which billions of dollars of investment travels every year.
This parallel is important. There’s currently a growing dissatisfaction with the way in which we’re using, and developing, digital technologies for social good, not because of the ambition or efforts to date, but based on the limited impact in comparison with commercial development of technology. As digital technology continues to penetrate almost every element of our life at home, work, school and everything in between, we are seeing only a small proportion of this influence harnessed for social good.
So what can help unlock this potential and allow social tech to grow faster and bigger and have considerably more influence in our lives? How can we evolve? How we design and develop social tech and transform the way it is funded to create significant inroads into some of the world’s biggest social problems?
At the heart of the solution is a stronger partnership between social entrepreneurs and investors. This partnership is evolving and developing in exciting ways, with new types of capital emerging into the social sector and new relationships forming. Big Society Capital and the network of social finance partners have been putting the foundations of a sustainable UK social investment market in place. But very little of this is currently harnessed to support social tech innovation. New forms of social tech investment, with considerably larger scale and ambition, need to emerge to take more ventures from operating at the margins to impacting in the mainstream.
Looking back to Silicon Valley, it wasn’t until the 1980s that capital was recycled into this investment approach through IPO exits, meaning the first cycle of tech investment unfurled over a 30 year period. If we’re taking a long view to developing a mainstream, fully functioning investment system for social tech innovation, or at least one stable enough to encourage new entrants as investors and entrepreneurs, and to recycle a proportion of the capital generated by successful social tech ventures, what needs to be set in motion?
This article is about how we believe social tech ventures best develop and grow, and sets out a direction to encourage more successful ventures, which we feel can help unlock higher levels of investment over longer periods of time. It rests upon a strong belief in the role of social tech ventures to deliver ambitious social progress and systemic change, addressing some of the most pressing challenges in the lives of people and their communities. But it starts with a relatively simple observation, that to grow a social tech venture successfully requires developing and proving three concurrent strands of value.
Three strands of value
Commercially minded tech entrepreneurs set out to generate and demonstrate two types of value: user value and financial value. Venture capital investment is designed to take a punt on the latter while the former is taking shape and growing, normally over a number of years. As the signs of genuine user value and the ability to convert this into financial value increase, so valuations climb and greater investment follows.
Social tech entrepreneurs have a different job. They have to establish and grow three types of value: social, user and financial. Parts of these three strands - or triple helix - are well known and understood within the social/third sector, while others have not been given enough attention. Nor has the relationship between them traditionally been examined and discussed in detail. By focussing on each of them and understanding how they interact and mutually reinforce each other, we hope to provide a helpful framework for thinking about, and developing many more successful social tech ventures.
At the heart of any social tech venture is the ambition to generate social value: a positive impact on the health, strength and sustainability of communities and society. It’s integral to all social activities and is at the top of the first piece of paper for social tech ventures.
Just as commercial tech startups make their way through the early stages of development on the promise of user value, so social tech entrepreneurs aim to create a strong argument for why their approach will generate social value. These arguments, or assumptions, become the focus for development. Strengthening this argument through testing, refinement, re-articulation and then evidencing it through data, stories, feedback and comparison are vital tools in developing a social tech venture as they become more able to explain their social worth and describe their ambition.
Despite the strong social measurement heritage of our sector, the traditional models, that often seek to measure the impact of programmes and policies over a number of years, need to continue to be updated for social tech ventures. These ventures, as they develop in a more lightweight and iterative way, need to gradually accumulate evidence of social value. This relies on the use of lean social metrics that look to provide an indication of the potential to create social value, rather than prove social value directly. This series of blogs will look at this question in more detail and explore specific examples of effective methods and metrics.
Traditionally, the clearer and earlier that evidence for social value emerges within the social tech venture, at whatever scale and within whatever context, the more likely it is to make it over that first hump and into further cycles of grant funding. This makes the formative design and development phases of a project highly focussed on generating and demonstrating social value.
The question of how and why these social ventures should simultaneously focus on user value is a little less clear.
In some ways, these two strands are naturally intertwined, with an inherent recognition that delivering social value relies on user engagement, which, in turn, relies on the establishment of user value. However, in other ways, these two strands can be allowed to drift apart within the third sector.
Profit seeking tech ventures focus relentlessly on creating value for their users and this relies on a profound understanding of the intrinsic motivations of the target audience. The process to establish this understanding is usually free of assumptions and idealism. It seeks to find evidence of existing behaviours - what people do do, not what they should do - and integrate this into every element of design, development and testing.
The third sector approach to user value tends to be more idealistic, with more assumptions built in and less of a focus on understanding the strongest motivations exhibited by target audiences. The design and development processes aren’t guided by an all consuming obsession to prove genuine attachment between user and product (or service, tool etc). This almost inevitable relegation of user value has several forces behind it.
Firstly, the relationship between social tech entrepreneurs and social investors doesn’t naturally drive an obsession with genuine user value. While venture capital investors look relentlessly for strong evidence of this in commercial tech ventures, the relationship between social entrepreneurs and funders can often skim over the question of whether target users love, demand and actively choose the budding product or service.
Secondly, social tech projects can survive for a pretty long time without being really loved and needed by users. If actual or potential social value is clear, regardless of whether it is driven more by high levels of intervention and support than genuine demand, then ventures can work through several cycles of funding and sponsorship and stay alive for many years.
Finally, the non-profit sector has traditionally tended to rely on the power of marketing to add perceived user value to initiatives. While modern marketing techniques are a vital weapon in our armoury, they can also be used to paper over the holes in genuine user value left by a design process that only really focussed on social value. User value has to be researched, understood, baked in and measured obsessively from the first stage of design through the ongoing cycles of marketing.
As with the social value strand, progress can be made with more sophisticated and practical ways of measuring user value at each stage of development. Currently, most social entrepreneurs normally only have access to weaker user value measures, such as feedback from focus groups or testing in contrived environments. Again, this series of posts will look in more detail at what commercial methods for measuring user value are relevant and feasible for social tech entrepreneurs.
This relationship between social and user value is subtle and complex. These sources of value can be inherently at odds - consumer demand, especially in the way it is reflected in and shaped by consumer marketing, often ignores or fights against what is good for society, communities or individuals. This tension, of course, is at the heart of much of what our sector does and why it exists.
However, this doesn’t mean that social tech entrepreneurs don’t have to take on the tough challenge of reconciling social value and user value within the same products and services and within the same user experiences. Moreover, the rewards of achieving this reconciliation are enormous. Generating genuine user value attaches social tech ventures to one of the most powerful, systemic forces in our society: consumer demand. When intertwined within genuine social value, this combination transforms the potential scale, breadth and depth of engagement, it opens up substantial new investment and it establishes real sustainability.
Crudely put, social value and user value relate to different forms of financial value: evidence of social value translates into grant funding, sponsorship and other investment that seek some kind social dividend, while evidence of user value translates into venture capital funding and investment that seeks a commercial dividend.
Simplistic as this is, it points to an obvious benefit of establishing both clear user value and measurable social value in the early stages of social tech development. These two strands of value become intertwined with a stronger third strand of financial value. In the early stages and throughout the venture’s life, this would take the form of a much wider pool of potential investors and, after launch, of income linked to broad, deep user engagement.
Again, this brings us to the question of how to measure financial value. While it's a natural instinct for an early social tech venture to assess its progress in terms of accumulating impact data that can be taken to second stage funders, it is less natural to examine budding user value in relation to eventual commercial value. The means of gathering and articulating this evidence represents a different skill set and bringing these skills into social tech teams, either permanently or through consultation and external support, is essential.
As we have touched on, the social investment market is evolving quickly, with new forms of capital emerging all the time, from quasi-equity to debt based investment now available for social ventures with good commercial potential. In some ways, this is driving the fully integrated dual value that we’re describing by demanding social and financial returns. This potential can be realised with more support for social tech innovation within these new investment streams. It can also be realised through stronger, more open relationships between social tech entrepreneurs and investors.
Beyond the financial benefits of generating both social and user value, there is another advantage to emphasising three concurrent strands of value as ventures are designed: internal discipline. The rigour introduced to the development of a social venture when it is preparing for social investment based on evidence of impact and commercial investment based on demonstrating genuine user value provides the ideal design environment. This combination of pressures removes the ability to make assumptions - the product or service has to be genuinely useful and in demand and this has to be proven, just as the social impact on users and their communities has to be evidenced.
More investment over longer periods
We hear in the media of overnight Silicon Valley success stories and the rapid rise of tech startups, but the reality is normally long, tough development runways, taking place over 5-7 years and involving many cycles of development. This is the kind of runway that new commercial ventures need to establish genuine user value and start translating this into financial value. Of course, over this period there is ongoing assessment of the evidence for commercial potential through user value, with this evidence used to unlock several rounds of venture capital funding. However, there is an underlying acknowledgement that the kind of design, testing and iteration process needed for success takes place over time, building momentum, getting a better understanding of consumer demand and market fit and establishing valuable core technology.
This acknowledgement doesn’t exist in the same way with social tech ventures. The default is still a ‘build, launch and hope’ culture, fed by 12 month funding designed to cover complete development cycles, from initial research to market launch. As we’ll talk more about in this series of blogs, the gradual growth of all three strands of value takes time and happens through many short, iterative cycles of research, prototyping, testing and iteration. Research phases of social tech ventures, for example, have twice the task of commercial startups, assessing and understanding both social need and consumer demand. Just learning enough to start prototype design takes considerable time.
We also have to recognise that successful social tech entrepreneurs have to be able to unlock a much, much bigger scale of investment than social funding has traditionally been comfortable with. Spending 6 and 7 figure sums over several years on top of developer resources is an essential part of moving good social tech ideas to major products and services affecting and improving millions of people’s lives. This kind of scale of investment is very rare and this exploration of three strands of value needs to test itself on its ability to help unlock much larger investment, without sacrificing the core social purpose of these ventures.
An ongoing conversation
There are some big questions in here and we’ll continue to explore and write about them over the coming weeks and months. They act as conversation starters, not statements, and we’ll look forward to bringing in as broad and diverse a community of entrepreneurs and investors into that conversation.
[As one example of such partnership, this piece is written based on conversations between many social entrepreneurs and social investors. It is authored by Nick Stanhope, Kieron Kirkland and Dan Sutch]