Impacting investing: trends, issues and capabilities
In 2013, there were between 80 and 100 venture philanthropy participants in Europe that provided approximately €278 million to increase social impact throughout the world.1 However, the European Venture Philanthropy Association (EVPA) has reported that that number has risen to €767 million in 2017 and that the average venture philanthropy organisations’ budgets have grown by 9% in the last year.2 Additionally, the 2018 European SRI Study shows that the volume of impact investments has increased from roughly €8 billion in 2011 to €108 billion in 2017.3,*
This is incredible growth, but we believe that social enterprises can be even more effective and productive when venture philanthropists and impact investors work together to fund these projects in innovative ways.
Definitions Venture philanthropy is ‘the application or redirection of principles of traditional venture capital financing to achieve philanthropic endeavours’.4 Often, financing provided by venture philanthropists is less focused on financial returns and profits and more focused on bringing about social and environmental good. Impact investing can be defined as ‘investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return’.5,** While impact investors often emphasise that financial returns are equally as important as the social or economic impact of their investments, venture philanthropists focus more strongly on impact results and are willing to take greater risks that may result in financial losses.
Venture philanthropy is also more focused on general capital building and is frequently carried out by foundations and private equity firms. On the other hand, impact investing is more focused on traditional private equity, and debt models facilitated by impact investing funds. Our experience As an integral part of a worldwide network of venture philanthropists, Wider Sense has been able to develop a unique perspective on the issues that surround social business. One trend that we have noticed is that many social enterprises struggle to move past grantbased funding towards professional investments. In order to maximise the potential good that these enterprises are capable of achieving, we believe that they must have access to proper funding that will both incentivise and catalyse various innovative solutions.
This can be achieved as venture philanthropists and impact investors work together, uniting their individual strengths. Challenges In 2012, Monitor Group published a report entitled From Blueprint to Scale outlining a major funding issue for social enterprises which they called ‘the pioneer gap’.
This gap occurs when organisations have a clear business solution to a social problem but do not have the means to properly develop or validate it in the marketplace. Because of the early and high-risk stage of these social ventures, investors are hesitant to provide the funds that are necessary to test and refine the product or service as well as the organisation and its governance.6 Venture philanthropy organisations, on the other hand, have the ability to make valuable contributions at this stage, but have historically been focused on dedicating their funds directly to projects and initiatives that have immediate impact.
Pioneers of social enterprises are then left suspended between these two sources of funding and are unable to make their desired impact. Additionally, we have observed that there is a tendency by many philanthropists to ignore impact investing altogether and lay all the responsibility on the shoulders of the financial industry. However, in our experience it is the close collaboration between venture philanthropy and impact investing that leads to real and innovative solutions.
… we have observed that there is a tendency by many philanthropists to ignore impact investing altogether and lay all the responsibility on the shoulders of the financial industry. However, in our experience it is the close collaboration between venture philanthropy and impact investing that leads to real and innovative solutions.
One solution to bridge the gap between venture philanthropy and impact investing that is growing in popularity is an incubator and accelerator model that is funded by grant money and/or investor’s money. These types of companies are purely focused on making organisations investment ready. This intermediary form of involvement allows many venture philanthropists to continue with their main focus of funding on direct impact and allows impact investors to make sound financial investments that are less risky. Often, incubator investors receive priority status for investing in businesses that successfully develop and scale as a result of the incubators.
An example of this type of solution is the Closed Loop Partners Circular Innovation Accelerator. Closed Loop Partners is an investment fund partnered with some of the largest corporations in the world such as Coca-Cola, Johnson & Johnson and Amazon. The investment fund focuses on building circular economies by investing in better recycling and energy-efficient production methods. The winner of the funds NextGen Cup Challenge is admitted into the accelerator and offered ‘access to a network of experts, business and technical resources, and testing opportunities to ensure that their innovations can successfully scale to serve the needs of the industry’.7 These companies turn into investment opportunities for Closed Loop Partners and its investment partners because the accelerator makes them investment ready.
2: Blended finance
Toniic, an international impact investing network organisation, published an article in 2016 that proposed blended financing as a solution. Venture philanthropists can continue funding early-stage, high-risk and high-impact organisations and projects and impact investors can offer additional funds through equity capital.
Through collaboration and measurement, the two parties can better organise and plan a funding strategy for social enterprises that would ‘generate a forecast return that meets the investors hurdle rate of return for a given risk profile’.6 One innovative application of this solution is the German-based Financing Agency for Social Entrepreneurship (FASE). FASE seeks to bridge this gap by bringing together the entire spectrum of financing to fund social enterprises in a way that meets the goals and expectations of all parties. Not only does FASE facilitate collaboration between foundations and impact investors, it also includes private investors, banks and family offices.
The organisation focuses on matching funding sources with the appropriate critical growth periods in the development of an enterprise. For example, when working with SignTime, a business that provides online sign language translation through an avatar, FASE helped secure a €1.1 million grant from the European Commission to cover much of the production and testing phase. Additionally, the Erste Bank provided an overdraft account to cover the company’s working capital and a private investor provided a conditional loan based on the achievement of a predetermined impact goal. More funding came through a €100k investment loan with interest rates dependent on the progress of the enterprise.7 Each funding method met the expectations of the financier and accomplished the overall goal of providing a social service through a for-profit business model.
A slightly different approach was valuable in the development of Justice42, a start-up that provides online divorce services. Justice42 developed as a spin-off of a social enterprise called HiiL (The Hague Institute for Innovation of Law). HiiL sponsored the company with a series of grants that were able to fund many trials with online tools and with interactions with mediators, lawyers and judges. These grants embodied the role of venture philanthropy.
They were high-risk but encouraged an innovative solution to a social problem. When Justice42 approached SI2 , a Belgian-based social venture fund, it had been verified in the marketplace, and had a well-operated organisation to support the innovative product. The SI2 Fund was able to make a sound equity investment in Justice42 because of the previous work done through the philanthropic funds of HiiL. SI2 ’s investment gave Justice42 the means to scale and provided investors with an opportunity for substantial returns.
Fortunately, there has already been improvement in collaboration between venture philanthropy and impact investing. However, there is still a clear gap in the development of companies between the venture philanthropy grant phase and the impact investing phase. In order to continue making progress in working together, clear communication is imperative. By identifying shared impact goals as a basis for a common impact language, organisations would be able to facilitate more effective collaboration. This type of collaboration has the potential to combine financial tools in innovative ways that support the growth of social and environmental business and increase the effectiveness and productivity of social start-ups.
*These numbers vary depending on the definitions for venture philanthropy and impact investing according to the organisations that performed the research. ** The definitions and understanding of these terms vary among organisations and individuals. These definitions are not universally accepted but suffice for the purpose of this article.
1 Buckland, L, et al. “The Growth of European Venture Philanthropy.” Stanford Social Innovation Review, 2013, pp. 34–35.
2 Gianoncelli, A, et al. The EVPA Survey 2017/2018: Investing for Impact. EVPA, 2018, pp. 46–50, The EVPA Survey 2017/2018: Investing for Impact.
3 “European SRI Study.” Eurosif, 201. http://www.eurosif. org/wp-content/uploads/2018/11/European-SRI-2018- Study.pdf, accessed May 2018
4 Kenton, W. “Venture Philanthropy.” Investopedia, Investopedia, 12 Mar. 2019, www.investopedia.com/ terms/v/venture-philanthropy.asp.
5 Mudaliar, A, et al. Annual Impact Investor Survey. 7th ed., Global Impact Investing Network, 2017, p. 58, Annual Impact Investor Survey.
6 Koh, H, et al. From Blueprint to Scale. Monitor Group, 2012, pp. 10–14, From Blueprint to Scale.
7 “Accelerator.” Closed Loop Partners, www. closedlooppartners.com/the-center-2/accelerator/.
8 Venture Philanthropists & Impact Investors. Toniic, 2016, pp. 11–12, Venture Philanthropists & Impact Investors.
9 Case Study Social Entrepreneurship: SiMAX Scale-up of a Social Innovation Business Plan, Social Impact, Financing. FASE, 2018, pp. 13–16, Case Study Social Entrepreneurship: SiMAX Scale-up of a Social Innovation Business Plan, Social Impact, Financing.