In past few years, impact investment has attracted lot of mainstream investors and everyone has been talking about it. After success in US, there is growing awareness among the community of investors in UK and Europe as well. Despite of this rapidly expanding market, there is still a large section of entrepreneurs who have no idea about impact investing. Purpose of this article is to help you understand the concept of impact investment and why it might be a better funding option. We have also summarized some points on how you can prepare yourself before approaching an impact investor.
What is Impact Investment?
Impact investments as defined by GIIN are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
Impact investments can be done in emerging as well as developed markets and target a range of returns depending on the strategic goals of an investor. This fast growing market deals with the biggest challenges faced by the world in various sectors including sustainable agriculture, renewable energy, conservation, microfinance and basic services such as healthcare, education and housing.
Following are the four core characteristics which defines the impact investing:
- Intention: The most crucial part of impact investment is the ‘intention’ of investor to have a positive social or environment impact.
- Investment with Return: Impact investment is made with an expectation to have a financial return on capital or at minimum a return on capital.
- Range of Return: In impact investment, the target financial return could range from below market to risk-adjusted market rate and can be made across asset classes which may include but not limited to cash equivalents, fixed income, venture capital, and private equity.
- Impact Measurement and Management (IMM): Another key feature of impact investment is the commitment from investor measure and report the social & environmental progress underlying the investments, ensuring transparency and accountability.
Why should you raise funds through impact investors?
- Huge Investor Market: Global impact investment market as estimated by GIIN is US$ 502 billion and growing. Majority of the entrepreneurs are not aware of this as media likes to focus on the giant mainstream investors but the impact investing industry has grown significantly and is still developing. Some people think that you can raise funds either from impact investor or non-impact investor. However, the truth is that if you are raising funds from impact funds it doesn’t limit you from concurrently raising funds from non-impact funds. Both types of funds are capable of co-existing in your portfolio. Impact investors not only can help you financially but generally they have a wide network of other investors, NGOs and financial institution that can bring different skillsets and viewpoints on the table.
- Side Benefits: Not all but some impact investors offer better terms such as lower interest rates, longer grace period and additional facilities like technical assistance funds. At the same time, there is a minority of impact investors who expect more than market rates to cover for their large cost structure. Everyone has different approach and you need to find the one whose expectation matches yours.
- Market Reputation: Usually companies which are in their early stage find it easier to implement all right procedures and standards from the start so that there is a less chance of any scandal and rumors. Having an impact investor onboard doesn’t guarantee to eliminate the risks but they are able to guide the organizations on which areas to work which can help the company to build their market credibility.
- Aligning with Impact: With announcement of UN’s Sustainable Development Goals in 2015, there is a pressure on corporations and investors to align their operations towards global agenda. In next few years we might see some strict rules being imposed on corporates. Impact investors will be leading these changes and they can help the entrepreneurs to implement all the right standards before their competitor.
- Acquiring Talent with Impact: In today’s competitive market such as Southeast Asia, if an organization can show that they have a purpose beyond commercial success then it is sure an extra advantage.
How to find impact investors for your business?
Following are some of the important points that could help you while finding a suitable impact investor:
- What type of investment you want: Capital is not just capital. There are multiple ways to structure finance and relate your business to its investors. Once you draft a business plan you have an idea on how much of investment you need so the next step is to decide on what kind of investment you are looking for. Do you want to raise debt or equity and for how long will you need the money? Would you like to have a partner who can not only offer you capital but also advise on other relevant matters and provide you contacts? Are you looking for pure capital or a mixture of capital and grants? Answers to these questions will determine your next steps.
- Add impact measurement in your business plan: In impact investment, impact measurement is equally important as financial return. Impact investors are interested in businesses that are financially viable and have clearly defined and measurable social/environmental outcome targets. If you want to attract impact investors then make sure that impact metrics are prominent in your business plan. The key here is that you should choose metrics that are realistic, practical, fit properly in your business operations and comply with your strategic goals.
- Research Investors: There is a wide range of impact investors and each of them has different type of approaches. Some investors provide only capital while others mix capital with grants to promote growth. There are others who work as venture philanthropists who offer their extensive experience and network that help businesses to grow. Understanding about the different types of investors will help you target the ones that are most suitable for your business. Below are some different types of impact investors:
- Accelerators, Hubs and Intermediaries
- Angel Investors
- Venture Philanthropists
- Enterprise Capitalists
- Large corporations with sustainability agendas
- Foundations
- Family offices
- Governments
- International development agencies
- Build Relationships: Just like life business is all about relationship. Building good relationships with potential investors can help you in long run. To start with make a list of impact investors who would be suitable for your project and research about them before connecting with them. Understand their impact mission by studying the investments they have made in the past. In impact investment personal values are very important so it might be helpful to look for key personnel and gain some background knowledge about them. After understanding your investor, you need to show them how your project aligns with their mission and how it will help them to meet not only their financial goals but also their social impact goals.
How to pitch to an impact investor?
Impact investors and incubators are important funding option especially for small organizations that are looking to scale up their business. However, to reach these investors and to convince them for support, you need to pitch to some of the prominent leaders of this sector. Below are some of the points that might help you while pitching to investors for your project:
- Tell them about YOU: Storytelling is an important part of pitching to impact investors. But to get these investors to fund your project, you need to tell them a different story i.e. your story. More than your idea, the investors want to know the person who will be executing the project. The investor wants to see your commitment towards the project and they like to invest in people who have done their homework. Your pitch should reflect that why this cause is important to you and that you have spent your time or resources to design a solution you are presenting.
- Be Prepared: Most of the social problems are complex and influenced by number of factors. You cannot solve these problems by luck. Therefore, it is important for entrepreneurs to research and educate themselves with all the nitty-gritty of the issue involved. No matter what is your goal, you need to have deep understanding of your problem so as to convince the investors that you can bring the change.
- What sets you apart: One of the important parts of understanding the background of your cause is to learn about the approached that have failed in past. So that you can show to the investors that how your solutions will approach the problem in new way or will utilize the different resources. While presenting your project, highlight what you will do differently and how it will give better results.
Conclusion:
During the past couple of years there has been a lot of focus from financial services community on social impact investing. Investors who have not been involved in social impact are now incorporating changes in their portfolio to include impact driven investment for profit companies. Even Venture capital and private equity firms who earlier ignored the social impact are also participating in it. Therefore, future of impact investing looks very exciting.
