Raising growth capital for social enterprises; finding the right financing mix
December 4, 2016
In this article we will outline a few basic steps to raise growth capital for ‘mature’ social enterprises, meaning for-profit companies that help create social or environmental ‘impact’.
Step 1: measuring impact
First and foremost a social enterprise needs to be able to show and validate that ‘impact’ comes first. Next to the ordinary financial details which every company has to provide, a social enterprise also has to make transparent the impact it actually makes, thereby enhancing its credibility as a social enterprise. In other words, a social enterprise should have two ‘bottomlines’; one financial and one on social impact. By making its social impact transparent a social enterprise is able to differentiate itself from the ‘greenwashers’ and window dressers. To make clear the elements and size of its impact will help to attract impact investors, who are only willing to invest if they have some level of security whether the company as a social enterprise is worth their investments. One needs to ask oneself: does my social enterprise truly create impact ? Is it for ‘real’ ? And will it continue to be so ?
To measure the impact of a social enterprise is not easy, however, with the right tool box and the right ideas on what to measure, it is quite do-able and rewarding in the end. It is also a rally point for the different stakeholders within the social enterprise. We make reference to the Impact Reporting and Investment Standards (IRIS) published by the Global Impact Investing Network (GIIN) which provides an appealing framework of common indicators to describe and measure an organization’s social and financial performance. IRIS provides a wide range of impact metrics for organizations in different industries to choose from. Please note that certain IRIS metrics refer to the Global Reporting Initiative (GRI) which was set up as part of the UN Environment Program.
Apart from these impact standards, social enterprises can give investors additional comfort by choosing a specific legal form for their company or, if these legal forms are not (yet) available, like in The Netherlands, amend their articles of association in order to embed and warrant the impact character of the social enterprise vis-à-vis its stakeholders. Apart from that, a social enterprise can also be certified, albeit for a ‘B Corp’ status or any other compliance programme that is available (for more details please refer to a recent article on this topic).
Step 2: finding cornerstone investors
The next step in the search for capital is activating the existing ´community´ of stakeholders belonging to the social enterprise. That group of people strongly believes in the company´s goals and supports its objectives, not necessarily by monetary contributions or investments, but also by supporting the set goals for social impact or by simply purchasing its services or products. Considering the positive and appealing ideas behind companies like Tony’s Chocolonely (slave-free chocolate), Dopper (re-usable water bottles), FastNed (providing electricity stations for electric cars) or Natural Tableware (providing premium disposables made exclusively from plant-based material), it is not hard to imagine that these companies were able to gather a lot of ‘fans’ already in the early stage of their ventures.
It should be do-able to select out of that stakeholders’ community one or more ‘cornerstone’ equity investors, who support you and your company through whatever challenges lie ahead. However, don’t be mistaken: although these savvy equity investors will for sure have a long(er) investment horizon, they will still require a fair ‘social’ return on investment (SROI) – expressed in realized impact and financial return – from the company for the money they are willing to put in.
Step 3: financing
Once a social enterprise has its cornerstone investors in place, it can look for additional funds to assist in growing the company’s business. Sources:
- impact investors;
- banks / crowdfunding; and
- Public offering
The sources of finance mentioned under (1) and (2) most often go hand in hand. There is a league of private equity investors whose sole focus is on impact investment. These parties all work with solid impact metrics to make sure that the social enterprise they aim to invest in not only ‘talks the talk’ but also ‘walks the walk’. Because of diverging business models of social enterprises in general, finding the right financing mix to fund the company’s business is key. In order to get the right mix of financing for a social enterprise the different forms of financing – i.e. equity, mezzanine financing / subordinated loans, bank loans or junior debt instruments supported by specific government guarantees – will need to be stacked on top of each other in a creative, sophisticated and comprehensive manner. Basic premise is that private equity parties and lenders acting jointly will have more comfort and will therefore lend money easier.
A final source of financing is the Initial Public Offering (IPO), which sounds much more grant and complex than it actually is. In particular as nowadays there are several platforms offering relatively easy and efficient public offerings without huge initial costs involved or the implementation of mandatory (and costly) compliance rules. These platforms enable SME’s to go ‘public’ and raise amounts starting already from EUR 1 million. Examples: NXchange, Marché Libre and NPEX. Each have their own specific requirements, however, all of these public offerings will even further commit the stakeholders’ community while an IPO will also rally the stature of your social enterprise.
We connect the dots. We know the right people in the right places and will guide you through the process from start till finish. And beyond :).
Pieter Holthuis and Bart Voorvaart
Corporate | Restructuring | Dispute Resolution