Investor Alignment
For social ventures generating repeat revenues and seeking new sources of income, impact investment could represent a good fit. Money received can help diversify the funding pool beyond existing contract or earned income as well as enable longer term planning.
The proceeds can even be put to work to establish new on-mission activities that will eventually yield a surplus that funds the core service provision. A virtuous funding circle, if you will.
No matter what form of finance is needed and the work undertaken in preparation, all paths will ultimately lead to having to secure commitments from investors. Social ventures are rarely alone in this undertaking and should be aided by a partner organisation armed with the knowledge of what is required. In some ways ventures’ work attracting investors is doubly difficult. As well as requiring the ability to manage and forecast future cashflows to show that future obligations to investors can be repaid, social ventures must also demonstrate social impact through an impact framework and report against it. And to win the trust of investors at the outset, social venture leaders require a multitude of skills; they must present well, demonstrate belief, passion and understanding of their model (in equal measure) and convince those on the other side of the table they can deliver on a bold strategic vision.
This diversity of interest in socially-motivated investment poses a challenge in terms of how to structure the proposition to attract the widest pool. Whilst it would be mistake to treat all investors as a homogenous group, they nonetheless have certain points in common. Investors ideally want to see features in the investment that reduce their risk (such as supportive structuring mechanisms such as underwriting, partial guarantees and accompanying grants), be offered a menu of different risk-return profiles and additional means to protect them in the form of ‘covenants’. Liquidity is often prized but elusive in practice (tradability can be enough to tick that box). Indeed given the difficulty in finding a subsequent buyer their investment is usually part of a ‘buy and hold’ strategy. Some will do a great deal of due diligence before they invest, testing a wide range of assumptions and several rounds of probing questioning.
Once investment has been successfully won, monitoring and evaluation begins. Some investments have a specific requirement to produce a social impact report at predetermined stages of the investment, usually annually. Here the goalposts on what needs to be measured are not usually moved, as they can be in the grant world. Performed well, the impact results should provide lessons that are no less valuable to help with programme refinement and strategy. In the termsheet however impact investors may prefer to see the funds marked as for general (social) purposes rather than earmarked for a specific project. This allows social ventures greater flexibility than with restricted finance, allowing them to either pursue new opportunities as they arise or to use the funds more defensively if the market backdrop changes. If a social venture finds the business plan isn’t working, an investor is likely to be open to you finding one that’s more likely to succeed. For all of the seeming complexities of this market, it’s easy to lose sight of one thing. The investors that back social ventures have already demonstrated that they are on your side, as a highly aligned subgroup of a wider group that is supportive and impact-favouring.
Alex Jarman