How safe is using market data to define social impact?

Social enterprises, in some shape or form, have been around for at least a century. However, it's in the last couple of years that social ventures have benefitted greatly from a rise in the amount of support or ‘incubation’ on offer. The recent rise in social incubation is charted in our ‘Good Incubation’ report.

One idea coming out of the research was to encourage the use of impact measures that can be compared across programs. Doing this would make it much easier for budding entrepreneurs to choose the right type of support for them and their ideas.

This point does reiterate an underlying consideration for social incubators and enterprises alike.

What impact measures should I use?

Defining social impact lets social incubators, ventures and investors track progress and support innovation. Still, it’s also important to remember that relying too heavily on markets to provide monetary valuations can overlook important aspects of impact.

The Unreasonable Institute provides metrics in a variety of areas, including the composition of active, failed and acquired ventures and subsequent funding raised by their enterprises, but also the number of lives benefitted through venture actions.

There is work available that discusses tools for impact measurement and comparison; the latter is particularly useful in defining relative effectiveness and reducing the information asymmetry present when funders are looking to back ventures.

Some well-known tools for impact measurement

1. Cost-benefit analysis deems a project viable if the value of benefits outweighs its respective costs, discounting over the duration of a project. This provides very clear-cut guidance but knowing which costs and benefits are suitable to include is tricky. Although, the increased incorporation of academic research aids this process.

2. The Social Rate of Investment (SROI) produces a ratio of derived monetary value to financial investment from using monetary values for social impact. SROI isn’t easily comparable as organisations inevitably monetise impact differently. That said, the ratio calculated is a relatable idea that allows everyone to consider social impact.

3. IRIS provides a catalogue of best practice metrics, with sections on social and environmental impact. Expert advisory committees are on hand to devise new measures and user feedback is encouraged.

4. Shadow pricing accounts for non-financial factors by adjusting prices using an accounting ratio. While theoretically useful, application is complex and not entirely suitable for early-stage social ventures.

There is a worry that metrics used are solely for the use of funders as opposed to measuring real impact. It’s also true, especially for early-stage ventures, ‘getting started on impact’ can be confusing and time-consuming; Nesta’s approach considers different levels of evidence, appropriate to the stage of development of ventures.

Knowing what information to collect is a further issue for innovative social startups that may pivot before market entry, perhaps because of a change in market focus or to remain relevant to their target audience.

A richer way?

A helpful way of thinking that compliments these concerns is one of capability expansion; asking the question, is a social venture improving the wellbeing of beneficiaries in the best possible way?

At the individual level, impact can be thought of as the expansion of a person’s capability; an increase in their capacity to choose between a number of alternative lives to lead, given their physical, social and environmental constraints. 

This thinking stems from Amartya Sen’s capability approach which encourages policy makers to evaluate wellbeing in a manner that challenges the sole use of income or expenditure measures to make approximations of welfare.

A bicycle is the classic example used to explain capability expansion. Its price reflects the capital, labour and the characteristics offered by the product; it enables individuals to move in a certain way. However, the extent to which a person can utilise the bicycle depends on whether they are physically able to ride it and if the environment or social factors permits riding.

In the social enterprise context

Suppose a venture supports unemployed people with training sessions to create employment opportunities. Collecting financial or hypothetical market data regarding costs or real income gains provides a good indication of value added.

However, focusing too much on defining impact this way pays too much attention to goods and services in their own right, without considering the freedoms granted by their characteristics.

While a training course may cost £x to run and may provide an individual with an increased probability of getting a paid job, it is also necessary to consider how the enterprise bolsters the freedoms of the session’s participants; e.g. they now have the opportunity to gain employment and may feel more confident/happy in doing so. In short, a focus on measurement through markets, or making use of easily-obtainable data, can limit the accuracy of impact measurement.

This thinking can be adopted at all levels, from a full-scale project evaluation based on improvement in some well-being index, to a basic attempt to include and reflect upon factors that can’t be captured easily by market forces such as happiness or community security.


Nick Moore

Nick Moore

Nick Moore

Research Assistant, Innovation and Economic Growth

Nick was a Research Assistant within Nesta's Innovation and Economic Growth team, specifically supporting work on startups and entrepreneurship. His main focus was on two European proj…

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