Individuals seem increasingly keen to invest in ventures that create social impact, and crowdfunding platforms are making this easier than ever.

But there is a catch. Unlike professional investors or major foundations which rely on hard data and cost-benefit analyses, retail investors often base decisions on the emotional connection they feel in an investment opportunity. Entrepreneurs who seek funds from them are therefore tempted to craft their message around feel-good stories rather than a rigorous impact strategy. Unfortunately, the stories that retail investors are drawn to and the activities that produce real impact are not always aligned.

Engaging retail investors

Take the case of Uncharted Play, the social enterprise that invented the Soccket – a football with a mechanism to convert kinetic energy into electric power. The idea was 30 minutes of kicking it around would generate enough energy to run an LED lamp for three hours, bringing hope that poor children worldwide with limited access to energy could study even at night.

In 2013, Uncharted Play raised over US$92,000 through the popular crowdfunding website Kickstarter. More than 1,000 eager supporters participated. Uncharted Play had hoped to scale to more than 50,000 Socckets a year, but this did not come to pass. There were complaints about shoddy workmanship and poor customer support, as the Soccket often stopped working within a few days of use.

More fundamentally, critics raised a concern about lack of unique value creation: the cost of a single Soccket was many times the combined cost of a solar lamp and a football. Also, there was an uproar over the top-down imposition of solutions which are not effective in terms of real development.

Therein lies the tension. While retail investors, in principle, care about creating change for good, too often they are drawn in with a cool story rather than considering the nuances of a venture’s business model or the real impact it creates. People who participate in crowdfunding rarely have the patience or the skills for digging into details of the needs analysis, evidence base, due diligence, measurement strategy or impact evaluation, all important to professional investors.

The power of stories

My recent article in Stanford Social Innovation Review illustrates a similar dilemma for Kiva, a social enterprise launched in 2005 as a crowdfunding platform that allows ordinary Americans to fund microfinance loans for entrepreneurs living in poverty in the developing world.

Through a contribution of as little as US$25, a Kiva “lender” could directly help someone far away – such as a beekeeper in Ghana, a spinach farmer in Cambodia or a carpenter in Gaza. What made the story even more enticing was that the money – provided as a loan rather than a donation – came back after supposedly having changed somebody’s life halfway across the world.

Read the rest of the article at INSEAD Knowledge