How a VC-Style Investment System Can Support a More Just and Humane World
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require establishment of a banking relationship, 70 percent or greater expense coverage through revenues, or the adoption of for-profit accounting standards. Those types of requirements lay the groundwork for a handoff to equity or quasi-equity investors.
* Create a “toolkit” for social capital investors that establishes best practices for different phase investors, including grant-makers, soft lenders, quasi-equity investors, equity investors, and commercial lenders.
* Form a “basket” of related social enterprises that can share operational metrics and expansion strategies, reducing transaction costs and diligence costs for investors.
Our study respondents—including impact investment pioneers and powerhouses like Acumen Fund, Good Capital, Root Capital, and Toniic,—almost universally stated that they would like to participate in syndicated investments, either in the context of a specific financing event or horizontally along a phased investment structure – but felt a need to learn more about their potential collaborators.
Fifty-eight percent of the investors we surveyed are “single sourced” from a foundation, a family business, or a high net worth individual. Participation by corporations and financial industry firms is still relatively light, despite the proliferation of social-benefit investment arms at such entities. We believe that we must address the needs of base-of-pyramid markets in sustainable and scalable ways to create emerging markets. There are good economic reasons to do, because essentially all of the population and economic growth will take place in these markets over the next few decades. Corporations would be wise to engage in impact investing, both for the social benefit it creates and as windows into their future markets.
Our data reveal that some funds are creating internal systems for phased investing, which indicates a mounting need for such a “horizontal capital aggregation” system for across the whole impact investing community.
Ad hoc syndicates are beginning to form. We give the example of Gray Ghost Ventures. When making an equity investment in solar flashlight company D.Light Design, Gray Ghost reached out to other impact investors, sharing its due diligence and investor knowledge with them. Investor-led syndication freed up D.Light management to pursue its core business, rather than devote its energy to finding more financing.
Accelerating the impact of more social enterprises will help meet the needs of more of the 4 billion people in base-of-pyramid markets, defined as living on less than $3,000 per year. Sustainable and scalable ventures are clearly required to foster systemic change in these communities. A robust impact investment ecosystem is not just a nice-to-have, but a humanitarian necessity. That happens to align with Santa Clara’s Jesuit values of creating a more just, humane, and sustainable world: it’s our mission.
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