For an overview of the support available to help entrepreneurs and startups scale their high-impact businesses, check out our 2014 Guide for the Ambitious Social Entrepreneur.
All businesses have a social and environmental impact, from huge corporates to startups. At ClearlySo, we work with all kinds of businesses – those that tackle social or environmental challenge in a scalable, measurable and sustainable way. This can include charities, Community Interest Companies, BCorps, large corporates and many other types of business.
Some companies describe themselves as “social enterprises” or “social businesses”. Definitions vary but usually differentiate between social enterprises as more focused on social impact first – often structured so their profits are reinvested, for example – while social businesses are seen as more commercial.
Entrepreneurs who are tackling social or environmental challenges come from hugely diverse backgrounds – some of them consider themselves to be “social entrepreneurs”, whose core purpose in running a business is to effect social change.
Arunachalam Muruganantham, whose innovative business tackles sanitation issues in rural India is seen by many as a social entrepreneur.
Triple bottom line
The triple bottom line accounts for profit, people and planet in business, considering impact upon the environment and society alongside financial value.
Corporate Social Responsibility (CSR)
Many large corporates will work to create positive social or environmental impacts that may or may not be aligned with their larger mission – rather than being at the core of the business, these are seen as corporate social responsibilities. These might include philanthropic work, working for sustainability and ethical practices in supply chains, or meeting environmental targets.
Unilever is well known for its Sustainability Living Plan that ties in various aspects of the company’s CSR.
Investment readiness work delivered by ClearlySo helps businesses to get ready to take on debt, equity or other kinds of investment, and offers charities the chance to prepare business and financial models for repayable finance and innovative business models.
This can involve incubators, such as the Social Incubator North, accelerators – like the Wayra and Bethnal Green Ventures tech for good accelerators – and advice from intermediaries like ClearlySo on preparing a company for investment, structuring a deal and pitching to investors.
The UK government’s Investment and Contract Readiness Fund and Big Lottery’s Big Potential Fund provide opportunities for investment readiness funding, and ClearlySo is a delivery partner for both organisations.
Also known as social investing and social impact investing, impact investing means actively sourcing and investing in businesses, charities and funds that are directly tackling social or environmental challenges.
It is also known as “3D Investing” because, unlike traditional investing that considers only risk and return in investment decision-making, impact investing considers impact as the third dimension, where a company’s social or environmental impact is as much part of the equation as its risk profile and its potential returns.
It is differentiated from Responsible Investing, or ESG (environmental, social and governance) Investing, which screen portfolios to remove negative impacts while impact investors seek out opportunities to create positive social or environmental change with their capital.
Philanthropic Foundations and Trusts also make Program-Related Investments (also known as Mission-related Investing), where charitable funds are used to make investments that align with the grant-making activity of the organisation as a whole. The 100% Impact movement is made up of those who have committed 100% of their assets to positive social or environmental impact.
Bill Gates made his first impact investment in 2014 to help businesses support health and education in India, the Acumen Fund have invested in Vision Spring, which runs microfranchises selling glasses in developing countries, while in the UK impact investments can range from half a million in an education startup up to multiple millions into community transport company HCT.
To see examples of impact investments, check out Our Clients to see how they have raised many millions to grow their businesses alongside their social impacts. If you would like to find out more about how to make impact investments for yourself, or on behalf of clients, please do get in touch.
Institutions are involved in impact investing in many ways.
Mainstream banks and financial institutions may invest in impact-focused deals or funds (such as JP Morgan investing over $60m across nine impact funds), while impact-orientated banks such as Unity Trust Bank or Charity Bank may invest debt or equity into early-stage and growing businesses. Similarly, charitable foundations and family offices are making impact investments internationally and locally.
Impact Investment Funds are specifically set up to invest in high-impact organisations, including both charities and businesses. This may be via debt, equity, convertible debt or through products such as Social Impact Bonds. ClearlySo’s previous client IVUK is an impact fund by LGT and Berenberg, which targets a 7% net return from its investments, investing particularly in businesses focused on education, skills and training and health.
Businesses that are themselves focused on impact also invest their profits into businesses serving the community – in 2014 The Phone Co-Op invested in HCT Group, while Big Issue Invest is a branch of the Big Issue that has created an impact fund using the profits from sales of The Big Issue magazine.
Big Society Capital was set up in the UK to catalyst the impact investment market; with funding from dormant bank accounts and four high street banks, they invest in companies that are building the impact investment infrastructure in the UK – including investing in ClearlySo.
Other institutional impact investors include Local Authorities and Housing Associations – who invest in business solutions that directly improve lives in their local communities. To find out more about investing as an institution, get in touch with our Institutional Business team at ClearlySo.
Social Impact Bonds
One way in which institutions are making impact investments is through Social Impact Bonds (SIBs). Through delivering publicly-funded services – such as work that reduces homelessness or reoffending – organisations receive outcome payments for meeting success criteria (also known as Payment by Results). Investors put their money into a bond at the beginning of a project and then receive payments based on its outcomes.
Development Impact Bonds are structured similarly but focus on achieving international development rather than publicly-funded domestic outcomes.
Current SIBs in the UK include the Greater London Authority’s Homelessness SIB and the world’s first ever SIB – Peterborough’s reoffending reduction SIB. You can find out more from the government’s SIB Knowledge Box.
Impact Angel Investing
Private investors who want to invest in startups and early-stage ventures that have a positive social or environmental impact can join the growing numbers of angels making impact investments. In the UK, Clearly Social Angels is the largest impact investing angel network, led by impact angel Suzanne Biegel, while in the US Investors’ Circle has been making angel-level impact investments since 1992. Angel-level investments can vary from £15k up to millions in debt or equity, with investors considering different risk, return and impact profiles depending on their personal motivation.
Investments vary from seed investment to venture capital, from pump-priming grants or social impact bonds to convertible debt or equity. A range of instruments and products are available for investors and investees who want to support innovative business models to tackle social challenges.
For other individuals without the capacity for angel investing, our investor network gives access to deal flow and events for impact investors who want to invest at all levels. Retail-level investments can also be made through crowdfunding platforms that offer impact-orientated deals.
Tax Relief and Impact Investing
In the UK, impact investors find various tax reliefs support them in making investments into early-stage companies that are eligible for the relief.
The Enterprise Investment Scheme (EIS) allows investors to put capital into small, unlisted companies for up to £1m a year; tax relief of 30% can be claimed on investments, while any gain is Capital Gains Tax free if the shares are held for at least three years and the income tax relief was claimed. The Seed Enterprise Investment Scheme (SEIS) tax relief, similarly, helps to de-risk the investment, where investors can receive income tax relief of 50% on investments up to £100k in qualifying shares.
Social Investment Tax Relief (SITR) was introduced in 2014 specifically for impact-focused deals in companies with particular legal structures. Up to a maximum of £1m, SITR offers investors 30% income tax relief into qualifying enterprises and it is eligible for debt investments as well as equity. You can check out our infographic to see how it works in practice.
Almost all of our early-stage deals at ClearlySo are eligible for one of these tax reliefs.
A Company Limited by Shares has shareholders as well as company directors, and can take on equity or debt impact investment. Aduna, which sells sustainably and ethically sourced superfoods, is one example of an impact-focused company limited by shares. A public limited company is traded publicly on a market – in the UK this includes the option to be part of the Social Stock Exchange.
Some impact-focused entrepreneurs will choose to register at Companies House without share capital or shareholders – as a Company Limited by Guarantee. Impact investment in the form of debt is suitable for companies limited by guarantee, and it is also the chosen form for many charities using business models to create sustainable finance.
The London Early Years Foundation is a company limited by guarantee that raised debt investment from two institutional impact investors.
Community Interest Company (CIC)
A CIC is a legal form (limited by shares or guarantee) set up for impact-orientated organisations, specifically described as legally constructed social enterprises. The key features are an asset lock – which means profits and assets must be used for community benefit – and a Community Interest Statement and Report that must be lodged to certify the company is formed to serve the community.
Goodwill Solutions is a logistics organisation that supports social impact through back-to-work training programmes and is constituted as a CIC.
Industrial and Provident Societies Community Benefit Societies (BenComs) and Co-Operatives
Alternative constructions for organisations looking to enshrine social benefit within their organisation include the IPS (including Co-ops) and the BenCom. The Phone Co-Op is an example of a co-operative founded on ethical principles, and is in fact itself an impact investor.
Many of our clients at ClearlySo are public sector spin-outs. These companies are set up by experts who want to take a solution developed within their sector – for example, within a university or NHS Trust – and scale it. Time for Medicine is one such health sector spin-out that we have helped to raise capital.