Suzanne Biegel | Routes in to impact investing – why we must embrace different motivations
In the past few weeks, I have spent time in Africa and the UK working with entrepreneurs, charities, grantmakers and investors who want to make the world a better place. Something that is becoming clear to me is the need to talk about the different ways investors can be involved. When we are encouraging individuals who want to use their personal capital (as well as foundations using their endowment or their grantmaking pot), it is vital that we recognise that investors can (and should) have different roles to play. Only once we’re comfortable recognising the different motivations of different investors will we be able to really unlock the capital needed by the thousands of businesses doing good and doing well.
From catalytic startup capital to business growth funding, or investment into infrastructure, or much more diversified investment into funds, there are ways to invest that will not suit every investor – but most investors will see space for them to play a role in one of these. And whether it’s philanthropy or first loss guarantees on a loan, or equity stakes, there are many places to participate in driving impact through business.
We need to get smart about how we talk to new investors, so they know which of these is their “entry point”, or their ramp onto the road of impact investment. Once they’re on that road, they may discover they want to participate across the whole spectrum of investments, but the key is to signpost the one “sweet spot” of impact investment that gets them involved. It’s much more nuanced than the relatively simple – at what stage do you want to invest? – road from angel investing to Venture Capital to private equity, and investors will have different motivations, and need different vehicles to get them involved.
For some investors this will be the recreational Sunday afternoon drive; this isn’t their day-to-day but they enjoy impact investing and getting hands-on involved with a particular business (because let’s be honest, it’s actually pretty fun). For others, this will be the daily commute – their whole portfolio might be made up of impact investments – from their direct and fund investments to all those made by their family office or wealth advisor.
The On-Ramp of High Returns
For some of those I speak to who’ve been doing impact investing for years, there can sometimes be resistance to starting with investments with potentially high return profiles. Of course, it’s difficult for some of us who have been investing patient capital for years to see the conversation shift to more liquidity and higher returns (and yes, sometimes we worry about the potential for impact to be sidelined in these discussions). But it is true that you can make excellent returns and see more liquidity – and if that’s the thing that tempts in a wealthy individual looking to do something more with her capital, then that’s okay. Focusing on those high-growth businesses offering outstanding returns will mean an investor can see that caring about impact can mean and therefore potentially higher returns and perhaps help them think more carefully about what change they want to see in the world, and how investment can help them make that change.
So, regardless of motivation, the key is to ask – where should I start to engage as an investor? How can I best help scale impact?
Investing in funds
Investing in funds is one way in for those (individuals or foundations) who want to get diversity in a portfolio but might be time-poor, disinclined to make direct investments or are still learning about impact investing. Impact funds can be focused on particular sectors – Nesta’s investment funds, for example, focus on UK communities and particularly on innovation and technology, while Cheyne Capital’s Social Property Impact Fund helps tackle housing shortages for disadvantaged group. Investing in a fund can allow a focus on particular impacts or particular industries but does not demand the hands-on commitment of direct investments in growth ventures. Some impact funds and LPs also offer direct learning opportunities for investors who want to understand more about investing in this way.
Another potential on-ramp for investors looking at impact can be the potential to invest in infrastructure in the impact investing market itself – the “gears” of the market. Businesses like ClearlySo have been able to shape the UK impact investment market because they themselves were backed by individuals willing to take a risk on this growing trend. This might mean investing in intermediaries, but it might also mean providing funding for product development, research or incubation, or investing in leadership and development for the entrepreneurs (and sometimes the investors) who are pioneering figures in the movement. That might mean providing funding, but it might also mean acting as a mentor or an advisor – Expert Impact, for example, matches seasoned entrepreneurs with new entrepreneurs in their area of expertise. There is an increasing number of organisations providing that opportunity – all of whom need funding.
The super-highway of angel investing: early stage and follow-on
Angel investing is a clear route in for many people. They have the opportunity to join groups like our Clearly Social Angels, where they can learn from other investors but also learn by doing as they make their first few investments. However, it’s important to stress that investors will be able to add value differently – some might only ever want to provide capital and see their co-investors take a Board seat or advisory role. Some might want to be that earliest stage investor and then take a step back; others will want to focus on follow-on capital once the business has more traction. Or they may want to directly help a venture because they are operating in an area in which the investor is an expert.
All of these are possible, and all of them add value to a growing impact-focused company. We find a mixture of angels with different motivations has really helped our Clearly Social Angels group to grow and find the right, values-aligned entrepreneurs.
This is an exciting route to take – and it might mean you need a fast car, in contrast to the boxy-but-safe Volvo of diversified impact investments through funds and property, for example. Investors need to decide on their own mode of transport, and the roads they want to take.
First loss capital and loan guarantees
Particularly for investors who are coming to this from the philanthropy world, the opportunity to provide catalytic first-loss capital or loan guarantees is an option. First-loss capital is hugely valuable in bringing other (often, larger) investors to the table – if you’re an individual or a foundation with a strong commitment to a particular social impact and can see the potential for scalable change through a business model, providing first loss capital will ensure they can tap into the larger pots of money they might need to scale. In this case, an investor would agree to take a position behind all the other capital in a stack – in the event the business can’t repay debt, that capital covers some of the losses.
This might not be a fast route to high returns – it might be more like the scenic, cycle path – but it’s one way to play an extremely important role tackling deep-rooted social challenges.
Grantmaking in impact investment
Although we often have to emphasise the difference between grantmaking and impact investing, grants can play an integral role in building the market. Grants can unlock ten times the original capital when they de-risk an investment, or they can provide much-needed funds for impact measurement (the Education Endowment Fund, for example, have funded a randomised control trial to assess the impact of Third Space Learning). They can also provide seed money for transformative solutions to global problems – they are especially powerful in global development innovation.
Catalytic capital might mean giving entrepreneurs time and space to prove their model, and then they can raise investment later when they’re sure of what works, or it might mean committing to match fund – this leverage approach can help other investors feel more comfortable, particularly where an individual or institution providing that match funding can offer impact or industry expertise as the business grows.
Investors might want to support this market through a mixture of grants and investments, or seed-stage grants to businesses might be their “on-ramp” into impact investing.
The routes don’t matter: the destination does
Regardless of which of these options bring people into impact investing – and they may then diversify, or simply remain committed to one way of investing that works for them – we need to be clear that there are many ways to be involved, and that all of them are valuable. It doesn’t matter which ramp gets us on; any road will get you there (from the super highway to the footpath or the cycle path that might just take a bit longer), or you might try out a few different modes of transport along the way before you find the one that works for you.
Of course, these are just a few of the options out there – other routes in include rewards-based or equity-based crowdfunding (the world’s first equity crowdfunded exit was an impact investment, with the crowd joining angel investors and an institutional investor to help the company scale). Community investment, or investing through a foundation, are also possibilities. Recently, for example, our Clearly Social Angels group invested in Extremis, which then went on to raise investment through Crowdcube.
Presenting impact investment as if it were all one thing, or as if it were all about one type of vehicle or one type of capital, is not serving this growing movement. Differentiation matters – so let’s talk about debt investments into charities like the London Early Years Foundation, backing an impact fund like Impact Ventures UK, using investments to leverage match funding (like that on the Big Venture Challenge), investing through an angel network like Clearly Social Angels, through a community energy investment, or directly into companies like Third Space Learning or Eyejusters.
We need the right route in for the right audience; investment is shifting, and impact investing is not one homogenous whole. Investors are so diverse – but luckily for all of us, so are the opportunities to invest for impact.