While the impetus for impact investing is growing, many different terms are used by impact investors, institutions and entrepreneurs – social business vs. social enterprise, social impact investing, triple bottom line, 3D investing.
At ClearlySo, we work with a range of business and charities, entrepreneurs, investors and investment funds – all of which are creating or looking to create strong social or environmental impacts.
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, B Corps, 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.
Words for types of investors…
Angel (angel investor; business angel): an individual who invests his or her own money (usually as equity, sometimes as debt) in a startup, to help it grow. They might invest entirely on their own or as part of a group of Angels or syndicate – like our group Clearly Social Angels.
Boot-strapping: a situation where an entrepreneur starts and grows a venture using only their own personal finances and the venture’s revenues.
Community Development Finance Institution (CDFI): these are social enterprises themselves, which aim to provide affordable finance to other social impact organisations that are unable to raise funds from high street banks. They usually offer debt.
Friends and family: in an investing context, this refers to the early funding that an entrepreneur might raise from people they know well. Often these people are investing primarily because they know and like the entrepreneur and so they’re happy to take on higher risk.
Lead investor (deal lead): the investor who helps the entrepreneur get all other investors involved. The lead investor might be the first, largest, most influential, or just most proactive investor. They’ll often take the lead on doing the due diligence and negotiating the valuation.
Venture Capital (VC): a company that invests money (usually equity, sometimes debt) in startups that they think have long-term high-growth potential. There are a few impact-focused VCs in the UK.
Words for types of investment…
Bridging loan: this is a short-term loan that acts as a brief stopgap whilst new funding is secured.
Capital: refers to all types of wealth owned by an entrepreneur or a venture including cash and assets
Community Shares: refers to the sale of shares in enterprises that serve a community purpose, usually bought by the community themselves in a form of crowd-funding. This type of funding can only be raised by co-operatives or community benefit societies.
Convertible debt (convertible bond; convertible note): this is a loan that can be converted to a pre-determined amount of equity in a venture, generally at a discount to the next round, at certain times such as when the venture raises another round of funding. It’s particularly useful if the venture is so young that a valuation is not possible and therefore an equity price can’t be set initially.
Crowdfunding: a type of funding that pools contributions from lots and lots of investors via an online platform. It can be grant funding (Kickstarter, Indiegogo), debt funding (Buzzbnk, Zopa) or equity (Seedrs, Crowdcube).
Debt (secured & unsecured): money given to a venture, which is paid back to the funder over a set period of time, usually in regular installments, and usually with interest. Secured debt is money loaned with an asset (such as a property) used as security, so if you fail to pay back the money the funder can seize and sell the asset. Unsecured debt is money loaned without an asset as security.
Equity: this is a type of finance where the funder gives a venture cash in return for ownership of a share of the venture. This is common for high-growth companies limited by shares.
Grant: money given to a venture, often for a specific purpose at a specific time, which will not be returned to the funder.
Overdraft facility (Standby Fund; Revolving Credit): just like a personal overdraft at your bank, a business overdraft facility is a loan of a pre-determined amount that you can take out if, as and when you need. It can be a useful way to manage your working capital, for example if you are waiting for invoices to be paid.
Quasi Equity: a category of debt taken on by a venture that has some traits of equity, such as having flexible repayment options,being unsecured, or repayments linked to company performance.
Seed Financing: often a small or initial amount of financing to an entrepreneur to prove a concept that includes investors outside of the friends and family. Rounds following the seed round are typically identified by an alphabetical sequence reflecting their order: Series A, B, and C.
Subordinated Debt: a type of debt that, if a venture defaults, gets paid back to investors last, after other debt has been paid. This type of debt is often viewed similar to equity and can provide an added layer of security to entice more risk averse-investors to put debt into the business on top of the subordinated piece.
Words/ Acronyms about tax relief for investors…
Enterprise Investment Scheme (EIS): A tax relief for investors offsetting 30% of the value of their investment again their inclome tax liability, designed to encourage investment into young businesses.
Seed Enterprise Investment Scheme (SEIS): Similar to EIS, but allows investors to offset 50% of the value of their investment, eligible only in investments into very young startups companies.
Social Investment Tax Relief (SITR): modelled on EIS, this is a tax relief providing investors with an offset against their tax-bill of 30% of the value of their investment, but it is different from EIS and SEIS because a) the ventures must be charities, CICs or sometimes community benefit societies and b) debt financing is eligible, which makes this relief quite unique.
Words used during the process of getting investment…
Balance Sheet: a financial statement that shows the value of a venture at a given point in time by detailing what a venture owns, and what they owe. It includes of the value of all of a venture’s assets (property, cash, etc) and all of a venture’s liabilities (debt, outstanding invoices, etc). You can read more here from Hannah Sheath on how to build a financial model.
Business Model: a plan for how to generate revenue and make a profit from operations.
Business Plan: a written document that explains how a business is going to reach its goals, typically covering financials, sales & marketing, operations, the market, and competition. Investors often want to see it, and it’s a very useful exercise to ensure an entrepreneur has thought everything through. Our advisor Hannah Sheath has top ten tips for writing one.
Cap Table: a table describing the capitalization (i.e. how the company has been funded to date) of a company including the names and number of shares owned by each founder and the investors.
Cash Flow Statement: a financial statement that shows the actual cash that flows in and out of your business to pay for expenses or received as revenue. It doesn’t show profitability, but it does show how much cash the business has at any point, and can help determine how much investment a venture needs. This is critical for most investors to see prior to making an investment.
Deck (Pitch Deck; Slide Deck): a set of slides used to accompany an entrepreneur’s ‘pitch’ to investors explaining why they should invest in their venture. Companies often have a more detailed version of the deck they use to send to potential investors they don’t have the opportunity to pitch to.
Dilution: the reduction in percentage of ownership of a venture that investors suffer when a venture raises more funds as equity. This occurs because to raise equity a company will issue shares to new investors and therefore the shares they hold will form a smaller percentage of all the shares issued.
Due Diligence: the process when a potential investor investigates a venture in much more detail to ensure that they want to invest in it. This process can take anywhere from 1-week to 1-year and often depends on the preparedness of the founder but also the experience of the investor.
Executive Summary: a document containing a summary of a venture for investors to read. Might include the venture’s business model, its USP, its key customers, the team, and financials. Can be from 2 to 10 pages depending on the needs of the investor, and it is often the first thing a potential investor reads.
KYC (Know Your Client): a standard form that entrepreneurs fill in before an investment. It checks an entrepreneur’s identity and financial position.
LOI (Letter of Intent): a note from investors saying they intend to invest in a particular venture subject to any particular points (such as satisfactory completion of due diligence). It can sometimes be included in the term sheet.
P&L (Profit & Loss Account; Income & Expenditure Account): a financial statement that shows a venture’s revenue and costs over a given period of time, and therefore shows the venture’s net profit or loss over that time.
Shareholders Agreement (SHA): a legal document agreed to by all shareholders of a venture specifying what the shareholders are and are not allowed to do with regards to operating and transferring (selling) shares.
Term Sheet: a summary of the proposed major terms and conditions of an investment that is agreed upon by all parties before the investment is made. It is not legally binding. It usually covers things like the type of investment being made, any board representation or other governance requests, and the timeline and process for completing the investment. The SHA is drafted based on this document.
Words used when working out how much a business is worth…
Burn rate: the speed at which a new venture spends its cash, usually measured as an amount per month
Dividends: proceeds paid by the company to an investor as a return on an original investment. Dividends can be paid either in cash or in kind, i.e. additional shares of stock, they can also be capped.
Down Round: price per share is less than on the previous occasion that the company raised funding, because the company’s valuation is lower. This occurs if things don’t go to plan or if the company raised money at too high a valuation in the first (or previous) round.
Exit: the moment when an investor gets rid of their stake in a company and therefore makes a profit or loss on the money they invested. It can happen by them selling their share to another investor, another firm, or by the company listing on the public stock exchange.
Exit Strategy: a company’s plan for how to create an opportunity for an investor to get back their investment, plus any returns on top of it.
Return on Investment (ROI): this measures how much profit an investor will make (or has made) compared to the amount of money they put into a business. A high ROI means an investor will gain (or has gained) lots of money for a relatively small investment.
Runway: the amount of time a venture has left before it runs out of cash, based on the current burn rate/ amount being spent each month. It is calculated by dividing the cash in bank by the burn rate.
Target Multiples: the desired return on investment of private investors in early stage companies, defined in a multiple of the original investment.
Terminal Value: a key part of valuation using the ‘discounted cash flow method’. It refers to the value of all future cash flows beyond those that have been forecast, and therefore you add it to the forecast (discounted) cash flows to get to a total valuation.
Valuation (pre-money and post-money): A ‘valuation’ states how much a venture is worth and usually takes place when an investment is about to happen. A pre-money valuation is how much the business is theoretically worth just before the money is invested. A post-money valuation includes the money that has just been invested.
Working Capital: the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
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.