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World Cup Soccer & Social Enterprise: A Hybrid Financing Model

The potential of hybrid financing strategies to accelerate the growth of the social business sector was one of the topics at the fourth edition of the Impact Economy Symposium & Retreat in Switzerland on June 13-15, 2014. A group of key influencers, thought leaders, and practitioners from the worlds of investment, business, government, and philanthropy once again convened to explore the most effective solutions, innovations, and opportunities that have surfaced in the promotion of impact. Real Leaders is one of the seven global official media partners of the symposium and, in this exclusive series, Impact Economy’s Dr Maximilian Martin discusses content covered at the conference.

On June 28, the Round of 16 kicks off at the 2014 FIFA World Cup. Football (or soccer, as it is known in the United States) has the amazing ability to engage people around the world. The 2010 World Cup in South Africa was televised across 245 television stations in 204 countries. The forthcoming World Cup in Brazil will reach even more people.

At a time when the military advances of ISIS in Iraq and Syria are bringing to the forefront the issues that divide different parts of national and global populations, fresh ideas on everything ranging from alternative energy to sanitation are needed to drive real progress around the world. Mega events such as the World Cup remind us of our shared humanity and intertwined destinies.

By taking place in an emerging market and including teams from the developing world, the World Cup also draws attention to the realities there, emphasizing that transformational progress is needed on a number of social and environmental issues; the street protests in Brazil against the cost of this year’s World Cup being just one of many reminders.

Achieving a step change in impact requires fresh ideas

Social entrepreneurs are increasingly viewed as a source of the solutions now needed. Less clear has been the kinds of businesses that need to be built in order to live up to the huge expectations; this is to say nothing of the most effective ways to actually finance them. Globalization, long-term demographic trends, changing consumer preferences, and the state of public finances are collectively driving the emergence of an integrated social capital market for the first time in human history.

This so-called impact investing market is targeting both financial return and social impact and contains a fast-growing stock of assets currently valued at USD 46 billion—and social enterprises are uniquely positioned to become the primary recipient of the resulting attention, knowledge, and resources. To make the most of the potentially vast amount of capital that stands to be allocated, however, social entrepreneurs will need to deliver a step change in impact on a number of protracted challenges that conventional approaches have not been able to solve.

Money and talent will be key to making this happen. Amidst increasing chatter about whether impact investing is indeed a golden opportunity to capitalize smart solutions to protracted challenges or just more hype, “Building Impact Businesses through Hybrid Financing: Special Impact Starter Edition,” a new Impact Economy report, looks at the first principles that determine the most compatible forms of financing given the problems to solve, and considers the structures of corresponding business models. Leveraging football for development is among the cases considered.

Social enterprises can use hybrid financing to drive greater impact

A key finding is that successful social enterprises can use hybrid financing to drive greater impact. Grants remain the best way to seed a social enterprise, but they tend to become insufficient in providing the capital required for the venture to scale if it achieves initial success. Moreover, they are expensive to raise, with the combined cost of fundraising often ranging from 22 to 43 percent of the grant, all costs considered.

Hybrid financing models therefore also use non-grant capital to fund social business activities, namely some combination of up to four forms of capital (e.g., grants, debt, equity, and mezzanine or convertible capital), as well as a variety of possible financial instruments such as internal credit enhancement through subordination or reserves, or external credit enhancement via letters of credit.

Time also plays a hugely important role in these structures: hybrid financing can be synchronic (or tiered),combining for example grant and non-grant sources of capital simultaneously to fund the joint expansion of profitable, and the optimization of unprofitable, elements of a social enterprise’s value chain and reduce risk. Or they can be diachronic, with hybrid funding unfolding over time, typically beginning with grant funding and then “graduating”—as the venture achieves critical mass—to equity, debt and mezzanine funding.

Some social entrepreneurs use football as a means for social change

Hybrid financing solutions can also be used to fund solutions delivery when sport is harnessed for achieving positive social impact, and when social entrepreneurs engage in what is called “football-for-development.” Building on the popular passion for football, social entrepreneurs have been reaching young people with an offering of education and training services to reduce socio-economic disparities and overcome gender discrimination.

For example, streetfootballworld, which is the leading global social enterprise in football for development and is covered in the report, focuses on advocacy to legitimize football in general as an instrument for social change; capacity development to help local grassroots organizations to achieve greater impact in their work with young people; network development to strengthen the football-for-development movement as a whole; and partnership development to match funding organizations with actors on the ground who can deliver football-for-development programs.

Jürgen Griesbeck, the organization’s Founder and CEO, is optimistic that hybrid financing strategies offer “important components to transform entire industries. Like subsidies or public research grants in the private sector, donations are highly important to the social sector to fund for the purposes of innovation and to support hard-to-monetize thematic areas.” Hybrid financing strategies “can help to bridge the gap: from the current reach of clients in the social sector to all of those that are not yet served,” said Griesbeck.

Via its partnerships with industry players, streetfootballworld is working on creating leading models that could be scaled, for example by applying the legacy requirements of bid books for FIFA World Cups to social issues. With an estimated latent demand of at least 45 million children and youth who would benefit from the approach, streetfootballworld would have to serve 60 times more clients to meet demand. Unsurprisingly, the organization is actively considering all types of capital, beyond grants, to overcome this scale gap.

It is time to innovate so football’s positive impact can match its footprint

The scale gap is especially interesting when put in relation to the status of the global football industry. There are an estimated 3.5 billion fans around the world (i.e., ahead of cricket with 2.5 billion fans, field hockey with 2 billion fans, and tennis with one billion). FIFA has 209 member associations with over 327,000 clubs and more than 270 million players—roughly 3.75 percent of the global population are actively involved in soccer, whereby 265 million play, and 5 million serve as judges and functionaries. The soccer business is booming. Over recent years, the primary driver of the strong revenue growth of many football clubs has been derived from television broadcasting. Salaries of top end players are exploding.

Leading Spanish football clubs FC Barcelona and Real Madrid pay average salaries of EUR 6 million to their players. In 2014, stars such as FC Barcelona’s Lionel Messi had a market value of EUR 120 million, and Real Madrid’s Cristiano Ronaldo was worth EUR 100 million. The top 30 football clubs each now generate over EUR 100 million annually. Leading club FC Barcelona had 44 million fans, Real Madrid 41 million, and Manchester United 37 million.

Even so, the football industry is at a relatively early stage in terms of high-impact corporate social responsibility (CSR) strategies, lacking the sophistication present in its core business and comparable industries. The good news is that some associations, such as FIFA, are relatively ambitious, and some clubs, such as FC Chelsea, engage in corporate responsibility as part of their brand development. Additional pathways and innovative financing could enhance impact.

As the report illustrates, the example of streetfootballworld shows that cooperation and orchestration are essential to closing the gap between supply and demand. As concepts of branding, merchandising and large-scale commitments expand into a professionalizing social sector, hybrid financing strategies will play a more important role going forward: funders may provide up-front risk capital in return for a share of future expected revenues, and financial engineering will help to monetize future grant commitments from reputable counterparts ahead of actual payment.

Many will start looking forward to the 2018 FIFA World Cup in Russia following the 2014 finals. A step change in impact is possible in a couple of years, provided the combined use of philanthropic and commercial capital is used to build and finance the social enterprises of the future, and help football to develop a positive social impact that is commensurable with its global footprint. Used properly, hybrid financing can provide a head start to build a future that football fans around can look forward to.

Maximilian Martin, Ph.D. is the founder and global managing director of Impact Economy, an impact investment and strategy firm based in Lausanne, Switzerland, and the author of the report “Building Impact Businesses through Hybrid Financing: Special Impact Starter Edition.”

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