Coordinating Impact Capital
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The document discusses the challenges and strategies of venture capital investing in the developing world, emphasizing the importance of local impact and the scarcity of up-round capital. It highlights the need for efficient syndication and capacity development, suggesting phased investing as a model for financing small and growing businesses. The report recommends actions such as treating capital as work in process and increasing collaboration with local capacity development organizations to improve investment outcomes.
Coordinating Impact Capital
- 2. moderatorJohn KohlerProgram Director for Social Capital at the Center for Science, Technology and Society
- 3. Venture capitalists have it easy…Venture investing in the developed worldTargets of opportunity are sourced locally
- 4. Investment syndicate drawn from local venture capital relationships
- 5. Results of venture capital backed product or service has a global impact
- 6. Well-defined path of “up-round” investing
- 7. Ready-made pools of “up-round” capital waiting for winners to emerge from previous financingVenture investing in the developing worldTargets of opportunity are sourced remotely
- 8. Investment syndicate drawn from the global impact investing community
- 9. Results of venture capital backed product or service has a local impact
- 10. Scarce “up-round” capital available 3
- 11. Are there…?Headwinds to Efficient impact investing markets-Dalberg
- 12. Horizontal Capital Aggregation ScopePrevious ReportsOutcomes of this studyExamine the requirements of capital from each source
- 13. Suggest a model for successful syndication
- 14. Participants across the ‘life cycle’ of SGB development
- 15. Terms to guide a successful ‘handoff’
- 16. Identify funding sources by mission and outcome
- 17. Provide examples of phased financing (rural electrification)
- 18. Suggest a template for future syndication
- 19. Building the case for impact investing
- 20. Study of the impact investing landscape
- 21. Larger scope of investing in businesses in the broader developing world – BOP loosely defined
- 22. Assertion of impact investing as an emerging asset class5
- 23. Direction of CapitalCapital SourcesCapital SourcesGeographyMissionIntermediaryFunding OrganizationSize of FundingType of CapitalDesired LiquidityType of SGBSGB Organizational ObjectivesDesired OutcomeReporting RequirementExpected Time FrameInvestmentOutcomesTarget6
- 24. Primarily foundations and individuals
- 25. Financial institutions and corporations are largely absent
- 26. Financial first vs. impact first discussion continuesSources of impact capital
- 27. Emerging use of multiple investing instrumentsSome funds are creating horizontal aggregation internally
- 28. Equity is tied to higher IRR targetsProgress in addressing the “missing Middle”Capital shift to > $750K
- 29. Multiple financing instruments used
- 30. The demotion of equityDirection of CapitalSegmenting The BOP(Base of Pyramid Market)Investors find more market rate opportunities in urban areas where income levels are higher and talent of entrepreneurs is higher, however, the majority make no preference to urban versus rural
- 31. When asked, the vast majority of respondents do not measure target income levels of their markets10
- 32. Direction of CapitalExpected Returns: Rural Vs. Urban Focus11Respondents indicated that there is simply not enough development in rural areas to achieve a market rate of return
- 33. Consequently, investors seeking a market rate return may initially focus on SGBs in urban areas which posses 3x - 5x disposable income versus rural, lower customer acquisition costs and lower service costsIntermediary Use To Deploy CapitalDirection of CapitalExpected Returns with Intermediary UseExpected Returns WITHOUT Intermediary UseMost investors who use an intermediary invest through debt instruments and need a local bank or partner to help deploy the loan
- 34. The majority of respondents believed they were best situated to select SGBs when they were operating “in country.” This implies that an arms-length relationship with SGBs reduces return expectations relative to a direct investment relationship12
- 35. Direction of CapitalCapacity Development UseFew organizations use Capacity Development Organizations (CDOs), also referred to as Technical Assistance organizations
- 36. “We do not know who they are in the areas where we operate”
- 37. “They are a big added cost”
- 38. Many organizations provide their own capacity development services (business mentoring, operational management and consulting as part of their investment)
- 39. Redefine who CDOs are: Local business leaders, corporations, advisors and consulting firms13
- 40. Monthly contactNon-Monthly Contact14Frequency of contact between investors and SGBsInvestors who practiced “high-touch” portfolio management (defined in our study as “monthly contact or greater”) reported significantly higher return expectationsPolarization of return expectationsExpectations are softening but still the debate rages
- 41. Sets the stage for syndicationRe-calibration of investment durationVast majority of respondents are adjusting their time horizon
- 42. 75% are now expecting 5 - 10+ year holding period
- 43. Time is the enemy of IRRThe unintended consequence of IRR targetsTight screens are used in assembling impact portfoliosEquity instruments are assumedCreative investment instruments could align with what social enterprise can deliver
- 44. 18Phased Investing HypothesisPhased Investing (baton pass) – Different impact investors contributing capital at each phase of the SGBs’ development cycle. Examples of this may include:Grant (capacity building)Soft loan (proof of concept)Quasi equity / equity investment (scale the business) Debt provider (long-term, commercial loan—scale the business Co-Investing—Multiple investors pooling capital to make one type of investment. Internal Syndication—An organization participates in multiple phases of the same small and growing business investment cycle; i.e., providing capital in the form of a grant that is later followed by an additional investment in the form of debt or equity.
- 45. Co-investing vs. Phased InvestingAlthough syndication is happening, it is not happening on a regular basis
- 46. Phased investing is a much more efficient type of syndication and is not happening19
- 50. Recommended ActionsBegin treating capital as ‘work in process’ - know your upstream and downstream partners and help prepare your investee for the next ‘round’
- 51. Increase the use of local capacity development organizations
- 52. Develop new investment instruments that reward investors from free cash flow, not valuation build-up
- 53. Establish mechanisms for ‘mezzanine’ financing to reward the early and brave impact investor
- 54. Work on market mechanisms that earn greater investor confidenceDiligence and validationMentoring and capacity developmentMetrics that matterFinancial and regulatory consistency
- 55. ResearchersSol TranJared AbercrombieKrishnan ManjeriContributing EditorsGreg DalliRachel HaleyProject LeadJessica Sawhney
- 56. Panel discussion Susie LeePrincipal, TBL CapitalSean FooteManagement Team, Labrador VenturesTaryn GoodmanSenior Manager, Impact Investing, RSF Social Finance
- 58. Global social benefit incubator
- 59. Download onlineFull Report Available Onlinewww.scu.edu/socialbenefit/socialcapital.cfm