Practice Variation as a Mechanism for Generating Institutional Complexity

Local Experiments in Funding Social Impact Businesses

Tracy ThompsonJill Purdy

Support from the Center for Leadership and Social Responsibility, Milgard School of Business, University of Washington Tacoma is gratefully acknowledged

Changing the Rules of Finance in Seattle

• Social entrepreneurs and impact businesses struggle to find capital

• Three new organizations are trying to solve this problem using unconventional means

• Since 2012 they have channeled nearly $2 million to over 125 impact businesses

• Challenging purpose and desired outcomes of investment to add a social dimension

Seattle Impact Finance CompaniesAccelerate: innovation accelerator

Shareland: crowdfunded lending platform

Impact Angels: angel investor group

Seattle Impact Finance Companies“Members believe that impact investing can meaningfully address our world’s social, environmental, and economic issues while generating sound financial return and measurable change. We are attempting to prove this hypothesis by gaining investing knowledge and experience in order to carefully direct our investment capital. Our work requires us to work through cultural taboos surrounding money, and to reimagine generally accepted investment strategies which ignore human and environmental factors.” [Impact Angels’ Mission]

Financing Social Impact Businesses

The market for capital is culturally constructed and embodied in practices (Thornton, Ocasio & Lounsbury, 2012; Zajac & Westphal, 2004).

These firms ascribe to multiple logics:• The market logic dominates practices for

financing for-profit business• The community logic informs practices for

social impact businesses

Dimensions of Complexity

• The presence or absence of conflict among means and ends of two or more logics (Pache & Santos, 2010)

• The degree of ambiguity or specificity of practices associated with different logics (Goodrick & Salancik, 1996)

• Complexity exists across multiple dimensions

Cultural Tensions in Societal-Level Logics Market Logic Community Logic

Economic System Market Capitalism Cooperative Capitalism

Social Orientation Self interest Common interest

Definition of Value Money Honor, status, commitment to group

Orientation toward capital Maximization Sufficiency

Spatial Perspective Global, outward looking Local, inward looking

Time Orientation Current, short-term Futuristic, long-term

Our Research Questions

• To what extent are impact finance organizations aligned with the market logic and the community logic?

• What practices are these organizations employing to increase capital flows toward impact businesses?

• How do variations in their practices affect the institutional complexity of the finance field?

Methods

• Comparative case analysis of three organizations based on interviews and archival data

• Identified and analyzed each organization’s practices

• Compared each to their conventional counterpoint to understand the differences

• Examined how they justified their practices, esp. those that varied from the conventional practices

AccelerateTypical Innovation Accelerator Accelerate

Definition Selects cohorts of high growth startups; provides seed investment, mentorship, education and networking over a limited time period

Same

Legal structure For-profit, usually LLC SameTarget customer Tech sector Differs: "Impact",

"conscious companies"Source of funding for operations

Ongoing investment in portfolios of firms generates return over time.

Same

Criteria for investing capital

Potential for rapid, high growth and quality and passion of team

Differs: Potential to reach $2 million in revenues in less than 10 years

Impact AngelsTypical Angel Group Impact Angels

Definition A group of accredited investors who screen deals, watch pitches and invest individually & collectively

Differs: grant-like process to determine investments’ focus; on 2 year formal curriculum delivered to cohort of investors

Legal structure Varies to include affiliation, no profit and for profit

Same

Target customer

Tech sector Differs: Focus on a "significant and measurable social and environmental impact"

Source of funding for operations

Fees/dues from members, sponsorships, events grants

Same

Criteria for investing capital

Potential for rapid, high growth (includes quality and passion of team) in 3-5 years

Differs: Slower growth is acceptable, emphasize ability to repay loan

SharelandTypical Peer to Peer Lending Shareland

Definition Platform for funding debt on the Internet by attracting small contributions from a large number of individuals

Same

Legal structure

For profit, usually LLC Differs: Social Purpose Corporation

Target customer

Lending for individuals and small business

Differs: Focus on local, small businesses

Source of funding for operations

Borrower pays fees based on size of loan and credit rating; funders pay service fee based on size of loan

Differs: Borrower pays flat listing fee plus monthly fee until loan is paid off

Criteria for investing capital

Risk based - ability to pay back loan

Differs: ability to pay back loan plus community impact of company

Analysis: Practice Variations• Standard practices

– Ends and values of dominant finance practice either align with or don’t directly conflict with the ends of non-dominant logic

– Moral legitimacy (Suchman, 1995; Tolbert & Zucker, 1983)• Adapted practices

– Ends and values of imported practice are new/differ but don’t directly conflict with dominant logic

– Pragmatic legitimacy (Suchman, 1995)• “Invented” practices

– New practice introduced/created that straddles or accommodates multiple logics

– Requires decoupling and revision of ends and values associated with dominant logic

– Cognitive legitimacy (Suchman, 1995)

Chal

leng

e to

Dom

inan

t Log

ic

Lower

Higher

Practice VariationsCompany Description of Practice Practice Area OrientationShareland Crowdsourcing loans

Product/ Service Strategy

External / Client

Impact Angels Offering seed capital Accelerate Offering a limited-time, cohort-based program w/ mentoring Impact Angels Soliciting applications for a grant-like funding process Shareland Limiting to a local geographic market Shareland Offering matching loans Shareland Charging clients using a monthly fee

Terms of capital

transaction

Impact Angels Investing via straight equity, loans and revenue-based equity investing

Shareland Limiting the amount an individual can loan Shareland Returning only principal (no interest loan) Accelerate Using revenue based equity investing

Shareland Attracting capital through choice of legal form

Funding the org

Organizational

Accelerate Diversifying revenue streams with related services Accelerate Organizing as a for-profit backed by seed money Impact Angels Requiring members to pay dues Accelerate Recycling capital to fund more companies Impact Angels Cultivating the supply of capital (angel investors)

Internal operations

Impact Angels Evaluating impact funds Impact Angels Making investing decisions on a consensus basis Impact Angels Meeting in small groups/cohorts Impact Angels Meetings structured around educational program

Standard Adapted Invented

Type of Practice Variation by Internal vs. External Orientation

Internal/Organizational External/Client

Standard 4 funding the organization1 internal operations 3 product/service strategy

Adapted 1 funding the organization4 internal operations

3 product/service strategy1 terms of capital transaction

Invented None 4 terms of capital transaction

Externally, these organizations innovate and “sell” unconventional financial practices.Internally, these organizations use conventional means for ensuring their own financial sustainability.

Symbolic Meanings of Practices

Market Logic Community Logic

Definition of Value Money Honor, status, commitment to group

Orientation toward capital Maximization Sufficiency

Spatial Perspective Global, outward looking Local, inward looking

Time Orientation Current, short-term Futuristic, long-term

How did our organizations/actors situate these practices vis-à-vis the market and community logic to balance four tensions?

Representation of Societal Logics in Practice Justifications

59%9%

31%Community Logic

Market Logic

Both Market and Community

Practices and Cultural Tensions AddressedEXTERNAL PRACTICES Money /

ValueMaximization /Sufficiency

Short Term /Long

TermGlobal /Local

PRODUCT/ SERVICE STRATEGYLimiting to a local geographic market Value LocalSoliciting applications for a grant-like funding process Both Sufficiency LocalCrowdsourcing no interest loans Value Sufficiency LocalOffering matching loans LocalOffering a limited-time, cohort-based program with mentoring Both Offering seed capital TERMS OF CAPITAL TRANSACTIONLimiting the amount an individual can loan Value Sufficiency Charging clients using a monthly fee Both Sufficiency Long term Returning only principle (no interest loan) Both Sufficiency Using revenue based equity investing Money Sufficiency Long term Investing via equity, loans and revenue-based equity Money Maximization Long term

Standard Adapted Invented

Practices and Cultural Tensions AddressedINTERNAL PRACTICES Money

/ValueMaximization /Sufficiency

Short Term /Long Term

Global /Local

FUNDING THE ORGANIZATIONAttracting capital through choice of legal form Both Sufficiency LocalDiversifying revenue streams with related services Both Organizing as a for-profit company backed by seed money Both Requiring members to pay dues Recycling capital to fund more companies INTERNAL OPERATIONSMeeting in small groups/cohorts LocalEvaluating impact funds Both Cultivating the supply of capital (angel investors) Both Meetings structured around educational program Both Making investing decisions on a consensus basis

Standard Adapted Invented

Building Theory: Richer View of Conflict between Logics

• Suggests a positive relationship between the degree of perceived conflict and practice variation

• Community and market logics not viewed as conflicting absolutely; actors identified areas where the logics were aligned or oblique and justify practices accordingly

• Practices are means to the ends among multiple institutional orders, where the ends are:– Aligned– Oblique– Conflicting

Building Theory: Specificity

• Practice variation is a way to alter the specificity of a dominant logic

• Variations are justified by pulling down legitimated meanings from an alternate societal logic

• Adapting and inventing practices serves to decrease the specificity of the dominant logic, broadening its scope and creating openings for additional innovation

Creating Field-Level Complexity

Market

Family

Community

Religion Profession

StateCorporation

= existing logic= existing field

Businesses Nonprofits

Societal Level Logics

Finance FieldPractices

Impact Businesses

Accelerate

Shareland= emerging field

Market

= organization

Community

ImpactAngels

= new field logic

Findings

• Adoption of practices designed to increase the plurality of logics is self-reinforcing

• Independent but consistent actions of distinct organizations allowed localized practices to be seen as more conventional

Findings

• Importance of entrepreneurial organizations in creating institutional complexity

• Entrepreneurs who are able to sustain their own resources (using conventional/standard practices) are able to skirt conformity in the field without a centralized or high power position.

Conclusion

• The incumbent system of “competitive capitalism” (Adler, 2014) governs access to capital, legal forms of organization, and tools for accountability and legitimacy

• We shed light on how actors interact with existing conventions of capitalism to develop institutional conditions in which to pursue the goal of a social economy