Social impact investments, which fund for-profit social enterprises, are still poorly understood. Most people still can't figure out how a company can be both profitable and have a social impact at the same time! Isn't this an oxymoron? The traditional belief has been that if you want to create social impact, the best means of doing good is either charity or philanthropy. Aren't social services are profit diametrically opposed to each other? Their belief is that if you try to serve two masters you'll end up doing a bad job at both.

The reality is that social impact enterprises can be far more profitable than a regular commercial enterprise. This is true for many reasons. 

For one, when you're focusing on solving a social problem, you have a well-defined target at hand. This means that unlike many commercial entrepreneurs, you don't go looking for a market for your pet technological solution. The reason most start-ups fail is that they fall in love with their product, and then go looking for customers who will pay to use it. Social entrepreneurs, on the other hand, identity the social problem they want to solve first with laser sharp focus, and then look for viable solutions which they can scale up. Their product-market fit is likely to be much better because of this perspective.

What makes them unique is that their solutions have to be frugal, sustainable, and scalable. This is the big problem with depending upon charity and philanthropy to solve social problems. When you give charity, you make people dependent on you. When the charity ends, the poor beneficiaries stop getting the goodies which they have become dependent on. They often end up in a much worse situation than they were when they were left to their own devices. This is why foreign aid has managed to accomplish so little over so many years, and why it now has such a bad reputation.

Social enterprises have a huge edge because there's very little competition for these consumers at the bottom of the pyramid. Most companies don't think that it's possible to make any profit from them, as a result of which these start-ups can dominate because they find themselves in pretty much a virtual monopoly situation. If you are capable of thinking up a clever and creative solution to their problem, you have an unassailable competitive advantage, because there are no incumbents you need to battle to win market share. It is this which makes social impact entrepreneurs so unusual, and this is why I'm so willing to back them. These founders have a strong sense of purpose, because they are “mission driven”. They are not distracted by competition, valuation, praise or what others think. They do not hanker after publicity and have a single-minded focus. Everyone in their company is able to answer the question, “Why am I doing this?”

As my friend Michael Koss says, " Frugal social businesses that solve real problems can create new, market appropriate " sticky " solutions that allow them to become self sustaining, so that they have the luxury of seeking funding only when they want grow even faster."

When investors offer them financial capital, they can leverage the fact that they are tackling socially important problems. The fact that they're addressing a cause which is worth tackling gives them a head start. Consumers have a soft corner for social enterprises, and are more willing to buy their products, and even pay a premium for them. Equally importantly, they are fortunate because they can attract high quality human capital. The employees in these companies are a different breed, because they go to work for a cause. They are populated by people who are passionate about the cause. Not only do they work much harder, they are also much more loyal, because they are committed, and will not leave just because another company pays them a little more. This kind of loyalty is priceless.

This is why social impact investments have become such an attractive alternative asset class for the millennials, who want to see their money being put to good use. Doing well by doing good is a very powerful mantra for success!