Description
In this description social investing fundamentals of an impact first investment strategy.
Social Investing
Fundamentals of an impact-first investment strategy
By
Dr. Wolfgang Spiess-Knafl
Zeppelin University,
Civil Society Center
Bjoern Struewer
Roots of Impact
1
2
Business Model
Market / Sector
1
2
3
Management Team
Missions Fit
Value Coincidence
Social
Impact
Return
3 Financing
Risk
Mission &
Values
1
2
1
2
3
3
Financial Risk
Impact Risk
Risk for Mission Drift
Sustainability
Direct Impact
Indirect Impact
2
Wolfgang Spiess-Knafl is a post-doctoral research fellow at the Civil Society Center and the
Chair for Strategic Organization and Financing at the Zeppelin University in Friedrichshafen
(Germany). After completing his studies in management engineering at the University of
Technology in Vienna in 2007 he worked as a financial analyst for Morgan Stanley in
Frankfurt until 2009. In 2009 he started working on his doctoral studies at the Chair for
Entrepreneurial Finance at the Technische Universität München which he completed in 2012.
His research focuses on social finance and social innovations.
Bjoern Struewer is the founder and CEO of Roots of Impact, an incubator and consulting firm
that is building the market for impact investing. He is also senior advisor to Ashoka on social
finance, co-founder of the Financing Agency for Social Entrepreneurship (FASE) and initiator
of the Ashoka Angels Network - a dedicated group of Social Business Angels committed to
investments with high social and environmental impact. Bjoern brings along more than 20
years of experience in the finance sector. Until 2013 he was Managing Director of Credit
Suisse. He is actively engaged in developing solutions for responsible investments, social
finance and impact investing for many years.
Date of publication: January 2015
The authors can be contacted at [email protected] and bstruewer@roots-of-
impact.org.
This manual is the result of on-going interactions with social entrepreneurs, social investors
and experts in the field over the last years. We would like to thank all of them for sharing
their insights. We also thank Selina Duelli for her research assistance.
3
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4
1 Introduction
More and more investors are attracted by the promise of impact investing. However, just
transferring the rules of traditional finance to the financing of social enterprises or other
impact organisations may limit the opportunities for generating social impact.
Investors looking for social and environmental impact have to incorporate this approach
throughout the whole investment process. It is not only an additional criterion but a guiding
principle for sourcing, evaluation, due diligence and financial structuring. There are various
other specifics to be considered, especially when the social entrepreneur runs a hybrid
business and is able to use grants as a funding source in addition to repayable financing.
1
This manual is written for investors who want to understand the social investment sphere and
the investment they can make in it. The purpose is to introduce key aspects of social
investing to investors interested in this field. Furthermore, it is focused on the process of
direct investing rather than selecting a fund or other kind of discretionary vehicle. The
management of a social investment during its lifecycle is not within the scope of this guide.
2
We use the term “social investing” synonymously for “impact-first investing” where the
expected social impact is the determining factor for the investor. The primary objective of the
investor is the achievement of positive social impact rather than generating market rate returns
while preserving the capital base as a minimum requirement. We focus on this end of the
impact investment market realising that there is already a lot of literature and guidance for
more mainstream and commercial types of impact investing.
Just as in traditional asset and wealth management, impact investors should develop a
dedicated investment policy prior to investing. This is required in order to perform the
investment process in a professional way and for briefing advisors, providers and
intermediaries as well. This systematic approach keeps investors from investing by accident.
The starting point is a definition of the investment strategy, objectives, preferences and
priorities. Such investment policy and guidelines can either cover a specific part of the overall
asset allocation (carve-out) or the whole portfolio of the asset owner including other, more
commercial and liquid investment styles (integrated approach). Typically, the overall
portfolio of an active impact investor covers, beside impact-first investments, other values-
based investment styles like socially responsible investments, sustainable and thematic
investments.
3
1
In fact there is a great untapped potential for combining philanthropic with investment capital.
2
See for example Achleitner, Mayer, Heinecke, Schöning & Noble (2012) or Roder (2010)
3
Both investors using an integrated approach and investors performing a carve-out strategy might find it necessary to align their social
impact investment policy and guidelines with their overall investment policy regarding asset allocation, bandwidths, constraints,
governance model, etc.
5
This paper guides the reader through the relevant steps to be considered when designing and
executing the impact investment policy. If the investment scope is broad, it might be helpful
to define priorities and timelines for implementation. This way the strategy can be executed
step by step alongside the defined targets and milestones.
This manual is structured along four guiding questions which structure the investment
process:
- Mission: What do I want to achieve?
- Return: What return do I expect?
- Structure: How should I invest?
- Dealflow: Where do I find my deals?
Figure 1: Steps to determine an investment strategy
Own illustration
6
2 Mission
The main question to consider when determining the mission is
What do I want to achieve?
In order to support enterprises, projects or initiatives with investment capital, a target picture
for society and the environment based on individual values and priorities is a key anchor
point. A mission statement based on investors’ core beliefs and values has to be defined first.
Solutions for solving social and environmental issues can focus on different levels and
perspectives. The impact value chain is a widespread approach toward a better understanding
of the desired impact of a social enterprise.
Figure 2: Impact value chain
Illustration based on Clark et al. (2004) and Roder (2010)
The model is based on the fact that in most cases there is a difference between the results and
the impact of the social enterprise activities. For instance, there might be measurable results
such as the increase of employment rates in the target group or the reduction of dropout rates.
However, important for the assessment of the activities is the effect on the entire social
system (outcome). The actual impact, then, is the outcome reduced by the effects of what
would have happened anyway.
In the following we discuss three different perspectives on how to think about the mission:
- Chronological perspective
- Social problem perspective
- Sector perspective
7
2.1 Chronological perspective
One perspective can be the analysis of social problems over their lifetime. It needs actors to
identify a social problem, other actors to tackle a social problem and still other actors who
could additionally build a business model to support the beneficiaries. Just consider HIV,
deforestation of the rainforests or child labour. Those topics were first discussed within small
circles such as focus media, academia or industry events. The topic is then perhaps covered by
the mass media and then put on the political agenda (Schetsche, 2014).
2.1.1 Identification of social problems
The effects of the deforestation in Amazonia, the significance of HIV and child labor are
examples of social problems which all needed ‘actors’ to raise interest and mobilize support.
Awareness-raising is the business of social activists. Social activists aim at taking measures
concerning certain societal deficits such as pollution, inequality, human rights. They do not
create commercial value as a priority, but draw societal attention to certain issues.
Box 1: Greenpeace
Greenpeace is a non-governmental organization which aims to represent the interests of
nature and environmentally conscious people in politics and society. The organization was
founded in Canada in 1971 and has its headquarters in Amsterdam. The organization has
1,400 employees and 2.8 million supporters worldwide.
Greenpeace became known through public campaigns (e.g. banning of CFCs, Brent Spar oil
platform, mahogany wood). The campaigns are coordinated at an international level, but
each national office is responsible for its own local campaigns. The organization is financed
through donation and is independent of any government, political parties or economic
interest groups.
Source: Greenpeace.com
2.1.2 The provision of social services
Every society needs organizations which run basic services such as elderly care homes,
kindergartens, hospitals, emergency services, soup kitchens or shelters for the homeless. In
most countries non-profit organizations are the backbone when it comes to providing this.
They do not distribute any profits and are often dependent on public fees or donations.
8
Box 2: Care International
Care International is a Geneva-based non-private organization which was initially best
known for the distribution of ‘care packages’ during the economic depletions after the
Second World War. The aim of the organization, founded in 1945, continues to be global
poverty reduction and emergency aid.
The projects Care International supports on gender equality alone have had 2,393,982 direct
participants involved with 135 projects in 48 countries. These programs help women and
men promote women’s rights and provide solidarity and support groups for women as well
as prevention, services and support for survivors of sexual and gender-based violence.
Today, the organization employs more than 10,000 people in Switzerland and the regional
offices in around 70 countries and has a budget of !550 million, more than half of which
comes from government and non-governmental agencies grants.
Source: www.care-international.com
2.1.3 The creation of business models
When workshops for disabled people first began selling their products they invented their own
income-generation business model. When the software company SAP decided to hire
employees with autism for software testing and other highly specialized tasks they were
partnered by Specialisterne, a social enterprise with the mission to generate one million jobs
globally for people with autism. When disabled people in Africa are able to buy affordable
wheelchairs this is made possible because of the business model of Shonaquip. A broad
spectrum of social innovation is driven by income generating strategies using the market
mechanics to scale.
Another example illustrating a double bottom line is ‘Discovering Hands’. Frank Hoffmann
has developed a standardized tactile medical procedure. In this procedure, visually impaired
women use their superior tactile senses to detect early signs of breast cancer. This solution
increases the chances of survival, integrates visually impaired women into the employment
market and changes the way disabled people are perceived. A disability is thus turned into a
capability. Additionally, the costs for the social and health care system are considerably
lowered.
4
These examples illustrate that business models can be created which combine
sustainable income streams and the provision of social goods. Social impact and a successful
business are not mutually exclusive, but on the other hand are not
4
The social enterprise generates income through patented orientation strips and license fees. After start-up investments, Discovering Hands
will be long term self-sustaining through this earned income. Profits will be distributed to the non-profit holding- and affiliated
organizations. In order to scale the concept, a hybrid business model was developed, which combines two not-for-profit entities and one
for-profit social business. The different components are financed sustainably through specific financing models and financial partnerships.
The international expansion succeeds through a social franchising model.
9
interrelated in general. In practice there is a broad range of social enterprises which are
generating earned income with one part of their operations and additionally have different
other income streams. According to the European Union definition, social enterprises are
managed in an entrepreneurial, accountable and transparent way and have as their primary
objective the achievement of measurable, positive social impacts rather than generating profit
for their owners, members and shareholders.
Box 3: Dialogue Social Enterprise
Dialogue Social Enterprise and its subsidiaries (hereinafter DSE) seek to overcome barriers
between “us” and “them” and to redefine “disability” as “ability,” and “otherness” as
“likeness” (Dialogue Social Enterprise, 2011).
To reach this goal, DSE runs exhibitions in
which blind guides lead visitors through a completely dark environment to experience the
daily routine of blind persons. The visitors are led through a real-life environment which
includes supermarkets, a city theme or a café. Based on this concept, the social enterprise
has also developed “Dialogue in Silence”, “Dialogue with Time” and workshops for
corporate clients. Since its foundation, 7 million visitors have experienced the exhibition
and 7,000 blind persons have gained access to the employment market through their work
with DSE.
The social enterprise has two revenue streams. The concept is scaled globally using a
franchise system which supplies DSE with income to provide for planning and development
support. Additionally, DSE operates permanent exhibitions globally and conducts
workshops with corporate clients on all continents generating revenues through visitors and
workshop participants. The annual revenues amount to around !5 million without
dependence on federal funding or donations and its stable business model makes DSE
suitable for financing through Venture Philanthropy funds.
Extract from Spiess-Knafl & Achleitner (2012)
2.2 Sector perspective
Impact investors often have a preference for a specific sector. There are benefits of having
increased knowledge of a field and using synergies within the portfolio of activities. It can
also be combined with a focus on a specific target group such as education for children or
social services for immigrants.
A list of sectors is provided below (see e.g. Scheuerle et al. (2013):
• Education and science
• Work integration
• Social inclusion
• Social services
10
• Economic development
• Environmental protection
• Sports, culture & recreation
• Health care
• Intermediation and consultancy
• Advocacy
• Housing
• Development aid
2.3 Social problem perspective
There is also the possibility to take a social problem and find organizations which are active
in this field. If the focus is on the social problem “insufficient financial strength” the
investment strategy can focus on actors providing consulting services, banking services or
education.
A list of social problems is provided below (Scheuerle, Schmitz, Spiess-Knafl, Schües &
Richter, 2013). This overview can be starting point for the development of a investment
strategy focused on solving specific problems:
• Permanent or temporary physical disability
• Permanent or temporary psychological disability
• Poor housing situation / homelessness
• Severe threat to life/ emergency aid
• Missing or insufficient mobility
• Language and linguistic skills
• Insufficient educational opportunities
• Insufficient opportunities for self-realization and realization of life plans
• Insufficient access to information and participation opportunities
• Insufficient structural access to art, natural experiences, positive interpersonal
relationships
• Insufficient financial strength
• Insufficient ecological consciousness
• Isolation and insufficient sense of belonging
• Insufficient integration with the work environment
• Insufficient knowledge of civil rights
11
3 Return
There is one major question when determining the level of financial return expectation:
What is the return expectation?
The different return expectations are shown in the following graph, ranging from market rate
financial returns to no financial returns at all. We use “return” synonymously for “financial
performance”.
5
Figure 3: Return expectations
Based on Spiess-Knafl (2012)
5
Return has always to be considered in context with the associated risk.
12
3.1 Income possibilities
Social enterprises have access to a range of revenue streams. From the public authorities there
are fixed fees paid for contractible services and subsidies for projects. Private funds are
earned income, membership fees, sponsoring or other revenue streams such as penalty
payments, prize money or income from accumulated capital
6
Figure 4: Revenue streams
Source: Spiess-Knafl (2012)
Social enterprises rely on many different income streams. Although on average the income
structure seems to be balanced, they have on a company basis a primary income stream which
accounts for the majority of the income.
Age Public Fees Earned-
Income
Market
Public
Subsidies
Donations Foundation
Grants
Sponso-
ring
Member-
ship Income
Other
1-2 12.9% 22.6% 9.0% 27.6% 2.0% 6.3% 4.7% 14.8%
3-4 10.9% 18.2% 11.6% 14.1% 11.4% 14.2% 6.5% 13.1%
5-9 16.1% 22.5% 18.5% 7.4% 6.7% 11.7% 5.7% 11.3%
10-14 13.9% 24.1% 5.6% 12.8% 10.3% 8.2% 11.5% 8.5%
15-19 13.5% 16.5% 19.2% 9.6% 10.3% 9.0% 2.0% 20.0%
20-29 36.4% 22.2% 15.8% 6.5% 3.6% 0.5% 2.4% 12.6%
>30 38.8% 20.5% 21.3% 1.6% 4.7% 1.1% 3.1% 8.9%
Total 20.8% 21.0% 15.4% 10.3% 7.1% 8.0% 5.0% 12.6%
Table 1: Income distribution per age
Source: Scheuerle et al. (2013)
There are no figures on the profitability of social enterprises but empirical as well as
anecdotal evidence point in the direction of a low-profit segment.
6
Donations are classified in line with the accounting theory as a financing instrument.
13
3.2 Particularities of the Social Investment Market
At the core of the social investment market is the trade-off between financial and social
return. Financial return includes all payments which are in some way appropriated by owners,
investors or management while social return is the return generated for the beneficiaries (if
applicable) or the public in general.
Social entrepreneurs are constantly balancing social benefit and economic value. Their
investors may expect to generate a financial return, while other stakeholders expect a focus on
scaling the social impact. In this respect, social entrepreneurs are challenged to avoid mission
drift due to balance sheet necessities.
7
Even though markets may be efficient and powerful, they are often imperfect – especially
when it comes to externalities (positive or negative). Social enterprises generating positive
external effects may thus end up underperforming financially.
Catalytic solutions can explicitly address this market failure and reconcile the interests of
different stakeholders involved. Typically financed by the public sector or strategic
philanthropists, these solutions can be structured as first-loss capital, pay-for-performance
instruments, hybrid financing models or grant programmes focusing on investment readiness.
3.2.1 Financing conflicts
‘Trade-off’ refers to the situation where capital providers pursue different interests (e.g. banks
and donors) at the same time, which can lead to conflicts between social and financial
returns.
8
‘Crowding out’ refers to the phenomenon that an increase in public funding can lead
to a lower amount of donations. ‘Tight contractual terms’ refers to the fact that public funding
can, in certain cases, prohibit the use of additional financing sources. ‘Interest payment
restrictions’ means that public funding prohibits, in certain cases, the use of funds for interest
or dividend payments.
7
There are various business models where revenue potential and social impact respectively are highly correlated but this is not the overall
rule. Even in these cases the management has to manage trade-offs between mission and economics in the day-to-day business.
8
The trade-off is considered between different investors. It would be similar on the operating basis.
14
Investors with
market-rate
return
expectations
Investors with
reduced
financial return
expectations
Investors
without
financial return
expectations
Public funds Target group &
beneficiaries
Investors with
market-rate
return
expectations
- Trade-Off Trade-Off Interest
payment
restrictions
(no conflict)
Investors with
reduced
financial return
expectations
Trade-Off - Trade-Off Interest
payment
restrictions
(no conflict)
Investors
without
financial return
expectations
Trade-Off Trade-Off - Crowding Out (no conflict)
Public funds Interest
payment
restrictions
Interest
payment
restrictions
Crowding Out - Tight
contractual
terms
Target group &
beneficiaries
(no conflict) (no conflict) (no conflict) Tight
contractual
terms
-
Table 2: Financing conflicts
Source: Achleitner, Spiess-Knafl & Volk (2014)
However, recognizing these potential conflicts, the different sources of capital can be
combined to create hybrid financing models. These models require a sophisticated approach
to syndication. The major success factor in overcoming the mentioned conflicts is to address
and create potential leverage and synergies between the different funders. Leverage effects
can be achieved for example by grants allowing early-stage social enterprise to get investment
ready or catalytic capital such as guarantees which could attract additional capital with lower
risk appetite.
15
3.2.2 Missing link between return and risk
One of the cornerstones of the traditional capital markets is the link between return and risk.
Companies with better ratings can expect lower financing costs respectively. This link is
missing for social enterprises. Some investors expect a certain return, while others are willing
to provide interest-free loans or even grants. They reduce their financial return expectation in
return for a higher social return. This complication is something investors have to keep in
mind as well when considering syndicated deals or joining the existing shareholders.
3.2.3 Missing pecking order
Organizations in the social sector usually have access to a range of funding options which are
not accessible for mainstream companies. Whereas there is a relatively clear pecking order for
mainstream companies (internal financing preferred to debt capital preferred to equity
capital), there is no such pecking order for organizations in the social sector. Grants are
assumed to be cheap money (non-repayable, not interest-bearing and no ownership rights),
equity capital often has no value as the underlying business has a low profitability and debt
capital could be provided at low costs. These facts distort the pecking order and lead to a
unclear picture of which instruments are preferred by organizations in the social sector.
Additionally, there is a trend toward using hybrid financing instruments especially designed
for the funding of social enterprises.
16
4 Structure
The main question to consider next is:
How should I invest?
4.1 Financing instruments
There are a number of financing instruments which social investors can use. Amongst other
things it depends on the theory of change which of the instruments is adequate for achieving
the mission as well as financial expectations.
The characteristics of different financing instruments are shown in the following table.
Financing
Instrument
Term Sheet Considerations for Social Investor
Grants
Duration:
Annual payments:
Repayment:
Short term
None
None
" Does the investee need a grant every
year?
" Has the investee enough flexibility in the
use of funds?
" Does it include overhead expenditures?
Debt
Capital
Duration:
Annual payments:
Repayment:
Long term
Interest payments
Yes
" Can the investee repay the loan?
" Which decisions should be taken jointly?
Equity
Capital
Duration:
Annual payments:
Repayment:
Unlimited
Dividend payments
No
- How do I want to be involved?
- What is my impact on the corporate
culture?
Mezzanine
Capital
Duration:
Annual payments:
Repayment:
Long term
Interest payments
Yes
- Can the investee repay the investment?
- How do I want to be involved?
Hybrid
Capital
Duration:
Annual payments:
Repayment:
Long term
None
Depends upon structure
- Which risk do I want to take?
- What is the most suitable financial
structure?
Table 3: Financing Instruments
Based on Achleitner, Heinecke, Noble, Schöning & Spiess-Knafl (2011)
However, there are also additional financing instruments which are structured according to the
needs of the investee, given the stage of development it has reached. For hybrid capital, there
are currently two approaches.
The first approach is focused on the financing instrument itself. Instead of equity or debt these
instruments are designed with major components of both, or even with donation elements as
17
an individual mixture. They are called quasi-equity, social loans, recoverable grants or
forgivable loans. The revenue participation agreement described in the following box is one
example.
Box 4: Case Study of a Revenue Share Agreement
Von Unruh & Team – the first social business for turnaround consultancy – offers advice
and support to entrepreneurs who find themselves in a business-threatening crisis and
threatened with bankruptcy. The overall goal is to prevent business failures through early
consultation with specially-trained consultants who have crisis experience, and to provide
assistance to those restarting out of bankruptcy. With this approach, von Unruh & Team
effectively creates a 'second chance' culture.
Von Unruh & Team is based on a hybrid business model with a for-profit and two
complementary not-for-profit entities. The profit generated is invested exclusively in the
further expansion of the business, and is donated to the non-profit entities running the
regional self-helping groups and supporting financial literacy.
While the not-for-profit organizations are funded by membership fees and private
donations, private seed capital from Angel Investors has been raised in the form of impact-
first investments for the establishment of the new private consultancy firm (a for-profit
social business). The financing model was structured to accommodate the accounts of the
business model by giving the social entrepreneur the necessary flexibility, but still giving
the investors a fair share in the success of the business. This conditional profit participation
agreement involves investors with a predefined share of up to a predetermined amount of
the company’s revenues. The revenue sharing leads to flexible financing costs for the social
enterprise, especially in the initial stages. The limitation of payments and flexible
repayment options, as well as increasing sales, will keep valuable liquidity in the company
in order to invest in the expansion of business activities. The social mission and the scaling
of the business model are substantially supported by the chosen financial instrument.
18
Source: Financing Agency for Social Entrepreneurship (FASE)
The syndication approach seeks innovative funding solutions that combine elements of donor,
grant and philanthropy funding with conventional applications of debt and equity finance to
meet the financial needs of social enterprises. Eligible enterprises are usually in the space that
neither qualifies them exclusively for philanthropic funding nor for commercial forms of
funding, such as debt or equity financing.
For the syndication approach, a hybrid business structure with a combination of non-profit
and for-profit legal entities is required.
9
By separating the social business with an earned-
income strategy from the pure non-profit arm, tax and legal requirements are met and
different sources of funding can be attracted. Both units together seek to support the desired
social mission in an integrated way. Obviously, the relationship between the non-profit and
the for-profit has to be defined by contractual agreements, with a specific focus on
governance and business development supporting the overall mission.
4.2 Social Capital Market
The major challenge in impact investing is less about raising more funds than about building
an effective and efficient market infrastructure. A social capital market is developing which
has institutions comparable to those of the traditional capital market. A possible investment
can also be directed towards those institutions.
9
In a few countries hybrid legal forms are established that could qualify for hybrid financing as well.
19
Figure 5: Social Capital Market
Source: Achleitner, Spiess-Knafl, Heinecke, Schöning & Noble (2011)
Value banks are banks which have focused on the financing of ecological, cultural and social
projects, acting transparently and pursuing ethical goals.
Comparable to investment banks, there are social investment advisers and even a social
investment bank which are trying to match supply and demand. Social stock exchanges are
aiming to set up functioning trading places but are currently more like market places in the
sense of acting to increase the visibility of social enterprises.
Venture philanthropy funds are often considered to be the crystallization point of the
development as they were among the first to actively invest in social enterprises by applying
venture capital techniques. Social investment funds are pooling capital and investing those
assets in specific fields or regions. Microfinance is a popular sector for those investments.
There are also consultancies which provide research on specific sectors and give investors, as
well as social enterprises, the knowledge for informed investments.
20
5 Dealflow Management
The main question considered in this section is
Where do I find adequate deals?
5.1 Deal Sourcing
Sourcing of social investment opportunities differs greatly from originating investments in the
mainstream markets even compared to the traditional illiquid private markets. Reasons for this
are, among others, a small absolute size of the market compared to the overall investment
market and the limited relative income potential for intermediaries. Where financial
intermediaries are rare, other organizations such as NPOs and specialized networks may fill
the gap.
The most common ways for sourcing social investments are social investing and entrepreneur
networks, conferences, competitions for social impact ideas, co-investing with individuals or
funds, specialized web platforms and impact investment advisors.
Figure 6: Options for deal sourcing
Based on Heister (2010)
Choosing the adequate sourcing strategy depends on the level of involvement for the investor
but all of them are more time consuming than traditional investment sourcing. The overall
effort required for deal sourcing should be considered in defining objectives and timelines for
implementation of the investment strategy.
21
5.2 Deal Assessment and Due Diligence
Before assessing individual deals investors need to obtain a deep understanding of the sector
corresponding to the social problem and the underlying theory of change. By researching the
sector and sorting out what works and what does not, investors are in a position to assess
individual investment opportunities and benchmark them against best practices in the market.
Whether to perform one’s own research or use third party research (which can be sourced
from the major players in the community) depends on the desired level of involvement.
An important topic in evaluating social investments is the additional social impact dimension
of any investment. The rule of thumb is
Analysis = Traditional analysis + impact analysis + analysis of interdependencies
The due diligence for a social investment is thus more complex than the due diligence for a
traditional investment. Investors also have to consider how social impact is generated from a
qualitative and from a quantitative perspective; they must check whether the expected social
impact matches their mission and pre-defined impact objectives, how impact risks are
managed, and much more.
10
11
An assessment model is shown in the following figure.
Figure 7: Assessment Model for Impact Investments
Own illustration
10
Reporting standards have been developed in recent years. Examples are the Social Reporting Standaard (SRS) or the Impact Reporting &
Investment Standards (IRIS).
11
As social entrepreneurs are often looking for the fastest and smartest way to raise impact rather than the safest way to generate profits and
pay back investments, they are usually more focused on their solutions than on their financing and their (potential) investors. Nevertheless,
to raise repayable investments, they have to fulfil minimum standards according to best market practice and the requirements of investors.
1
2
Business Model
Market / Sector
1
2
3
Management Team
Missions Fit
Value Coincidence
Social
Impact
Return
3 Financing
Risk
Mission &
Values
1
2
1
2
3
3
Financial Risk
Impact Risk
Risk for Mission Drift
Sustainability
Direct Impact
Indirect Impact
22
Literature
This manual is based on interviews, confidential material belonging to the interview partners,
previous work by the authors and the following literature:
Achleitner, A.-K., Heinecke, A., Noble, A., Schöning, M., & Spiess-Knafl, W., „Unlocking
the Mystery: An Introduction to Social Investment,” in Innovations, 6(3) (2011): 145-
154.
Achleitner, A.-K., Mayer, J., Heinecke, A., Schöning, M., & Noble, A., Corporate
Governance of Social Enterprises (2012).
Achleitner, A.-K., Spiess-Knafl, W., Heinecke, A., Schöning, M., & Noble, A., Social
Investment Manual (2011).
Achleitner, A.-K., Spiess-Knafl, W., & Volk, S., “The financing structure of social
enterprises: conflicts and implications”, in International Journal of Entrepreneurial
Venturing, 6(1) (2014): 85-99.
Heister, P., Finanzierung von Social Entrepreneurship durch Venture Philanthropy und
Social Venture Capital. Wiesbaden: Gabler Verlag (2010).
Roder, B. , Reporting in Social Entrepreneurship. Wiesbaden: Gabler Verlag (2010)..
Schetsche, M., ,Empirische Analyse sozialer Probleme. Das wissenssoziologische Programm
(2 ed.). Wiesbaden: Springer VS (2014).
Scheuerle, T., Schmitz, B., Spiess-Knafl, W., Schües, R., & Richter, S., ,Mapping Social
Entrepreneurship in Germany - A Quantitative Analysis (2013).
Spiess-Knafl, W., ,Finanzierung von Sozialunternehmen - Eine empirische und theoretische
Analyse (2012).
Spiess-Knafl, W., & Achleitner, A.-K., Financing of Social Entrepreneurship”, in C.
Volkmann, K. Tokarski & K. Ernst (eds.), Understanding Social Entrepreneurship &
Social Business, Wiesbaden: Springer (2012): pp. 157-173.
23
About the Civil Society Center
The “Civil Society Center | CiSoC” at the Zeppelin University (ZU) was founded by the
“Chair for Strategic Organization and Financing | (SOFI)” in 2010 in collaboration with
numerous patrons and partners.
The objective: measuring the emergence, the methods, the players, the interdependencies as
well as providing international comparative analyses of this new social interaction. In doing
so, the main focus is placed upon the national innovation system of society, that – we believe
– will be based upon the inclusion of different social groupings, trans-sectoral hybridization
of economic players, the state and civil society as well as the systemization of solutions in
new “business models” of an entrepreneurial civil society.
www.zu.de
About Roots of Impact
Roots of Impact is an incubator and consulting firm that is building the market for impact
investing. We create intermediaries, investment vehicles and partnerships to help finance
social enterprises and social innovation.
Our key focus is on implementing solutions for investors and philanthropists who are looking
for new ways of creating social value. These solutions combine the individual strengths of the
partners involved – and mobilise capital to scale successful impact- and business models. We
also advise and educate practitioners on the topics of impact investing and social finance. We
will soon be launching the first Social Finance Academy.
We collaborate closely with Ashoka, the leading organisation in the field of social
entrepreneurship, and with top business schools and renowned experts in their respective
areas.
Roots of Impact is shaping the market for social investment, so that capital for positive social
impact is deployed effectively.
www.roots-of-impact.org
doc_374508774.pdf
In this description social investing fundamentals of an impact first investment strategy.
Social Investing
Fundamentals of an impact-first investment strategy
By
Dr. Wolfgang Spiess-Knafl
Zeppelin University,
Civil Society Center
Bjoern Struewer
Roots of Impact
1
2
Business Model
Market / Sector
1
2
3
Management Team
Missions Fit
Value Coincidence
Social
Impact
Return
3 Financing
Risk
Mission &
Values
1
2
1
2
3
3
Financial Risk
Impact Risk
Risk for Mission Drift
Sustainability
Direct Impact
Indirect Impact
2
Wolfgang Spiess-Knafl is a post-doctoral research fellow at the Civil Society Center and the
Chair for Strategic Organization and Financing at the Zeppelin University in Friedrichshafen
(Germany). After completing his studies in management engineering at the University of
Technology in Vienna in 2007 he worked as a financial analyst for Morgan Stanley in
Frankfurt until 2009. In 2009 he started working on his doctoral studies at the Chair for
Entrepreneurial Finance at the Technische Universität München which he completed in 2012.
His research focuses on social finance and social innovations.
Bjoern Struewer is the founder and CEO of Roots of Impact, an incubator and consulting firm
that is building the market for impact investing. He is also senior advisor to Ashoka on social
finance, co-founder of the Financing Agency for Social Entrepreneurship (FASE) and initiator
of the Ashoka Angels Network - a dedicated group of Social Business Angels committed to
investments with high social and environmental impact. Bjoern brings along more than 20
years of experience in the finance sector. Until 2013 he was Managing Director of Credit
Suisse. He is actively engaged in developing solutions for responsible investments, social
finance and impact investing for many years.
Date of publication: January 2015
The authors can be contacted at [email protected] and bstruewer@roots-of-
impact.org.
This manual is the result of on-going interactions with social entrepreneurs, social investors
and experts in the field over the last years. We would like to thank all of them for sharing
their insights. We also thank Selina Duelli for her research assistance.
3
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4
1 Introduction
More and more investors are attracted by the promise of impact investing. However, just
transferring the rules of traditional finance to the financing of social enterprises or other
impact organisations may limit the opportunities for generating social impact.
Investors looking for social and environmental impact have to incorporate this approach
throughout the whole investment process. It is not only an additional criterion but a guiding
principle for sourcing, evaluation, due diligence and financial structuring. There are various
other specifics to be considered, especially when the social entrepreneur runs a hybrid
business and is able to use grants as a funding source in addition to repayable financing.
1
This manual is written for investors who want to understand the social investment sphere and
the investment they can make in it. The purpose is to introduce key aspects of social
investing to investors interested in this field. Furthermore, it is focused on the process of
direct investing rather than selecting a fund or other kind of discretionary vehicle. The
management of a social investment during its lifecycle is not within the scope of this guide.
2
We use the term “social investing” synonymously for “impact-first investing” where the
expected social impact is the determining factor for the investor. The primary objective of the
investor is the achievement of positive social impact rather than generating market rate returns
while preserving the capital base as a minimum requirement. We focus on this end of the
impact investment market realising that there is already a lot of literature and guidance for
more mainstream and commercial types of impact investing.
Just as in traditional asset and wealth management, impact investors should develop a
dedicated investment policy prior to investing. This is required in order to perform the
investment process in a professional way and for briefing advisors, providers and
intermediaries as well. This systematic approach keeps investors from investing by accident.
The starting point is a definition of the investment strategy, objectives, preferences and
priorities. Such investment policy and guidelines can either cover a specific part of the overall
asset allocation (carve-out) or the whole portfolio of the asset owner including other, more
commercial and liquid investment styles (integrated approach). Typically, the overall
portfolio of an active impact investor covers, beside impact-first investments, other values-
based investment styles like socially responsible investments, sustainable and thematic
investments.
3
1
In fact there is a great untapped potential for combining philanthropic with investment capital.
2
See for example Achleitner, Mayer, Heinecke, Schöning & Noble (2012) or Roder (2010)
3
Both investors using an integrated approach and investors performing a carve-out strategy might find it necessary to align their social
impact investment policy and guidelines with their overall investment policy regarding asset allocation, bandwidths, constraints,
governance model, etc.
5
This paper guides the reader through the relevant steps to be considered when designing and
executing the impact investment policy. If the investment scope is broad, it might be helpful
to define priorities and timelines for implementation. This way the strategy can be executed
step by step alongside the defined targets and milestones.
This manual is structured along four guiding questions which structure the investment
process:
- Mission: What do I want to achieve?
- Return: What return do I expect?
- Structure: How should I invest?
- Dealflow: Where do I find my deals?
Figure 1: Steps to determine an investment strategy
Own illustration
6
2 Mission
The main question to consider when determining the mission is
What do I want to achieve?
In order to support enterprises, projects or initiatives with investment capital, a target picture
for society and the environment based on individual values and priorities is a key anchor
point. A mission statement based on investors’ core beliefs and values has to be defined first.
Solutions for solving social and environmental issues can focus on different levels and
perspectives. The impact value chain is a widespread approach toward a better understanding
of the desired impact of a social enterprise.
Figure 2: Impact value chain
Illustration based on Clark et al. (2004) and Roder (2010)
The model is based on the fact that in most cases there is a difference between the results and
the impact of the social enterprise activities. For instance, there might be measurable results
such as the increase of employment rates in the target group or the reduction of dropout rates.
However, important for the assessment of the activities is the effect on the entire social
system (outcome). The actual impact, then, is the outcome reduced by the effects of what
would have happened anyway.
In the following we discuss three different perspectives on how to think about the mission:
- Chronological perspective
- Social problem perspective
- Sector perspective
7
2.1 Chronological perspective
One perspective can be the analysis of social problems over their lifetime. It needs actors to
identify a social problem, other actors to tackle a social problem and still other actors who
could additionally build a business model to support the beneficiaries. Just consider HIV,
deforestation of the rainforests or child labour. Those topics were first discussed within small
circles such as focus media, academia or industry events. The topic is then perhaps covered by
the mass media and then put on the political agenda (Schetsche, 2014).
2.1.1 Identification of social problems
The effects of the deforestation in Amazonia, the significance of HIV and child labor are
examples of social problems which all needed ‘actors’ to raise interest and mobilize support.
Awareness-raising is the business of social activists. Social activists aim at taking measures
concerning certain societal deficits such as pollution, inequality, human rights. They do not
create commercial value as a priority, but draw societal attention to certain issues.
Box 1: Greenpeace
Greenpeace is a non-governmental organization which aims to represent the interests of
nature and environmentally conscious people in politics and society. The organization was
founded in Canada in 1971 and has its headquarters in Amsterdam. The organization has
1,400 employees and 2.8 million supporters worldwide.
Greenpeace became known through public campaigns (e.g. banning of CFCs, Brent Spar oil
platform, mahogany wood). The campaigns are coordinated at an international level, but
each national office is responsible for its own local campaigns. The organization is financed
through donation and is independent of any government, political parties or economic
interest groups.
Source: Greenpeace.com
2.1.2 The provision of social services
Every society needs organizations which run basic services such as elderly care homes,
kindergartens, hospitals, emergency services, soup kitchens or shelters for the homeless. In
most countries non-profit organizations are the backbone when it comes to providing this.
They do not distribute any profits and are often dependent on public fees or donations.
8
Box 2: Care International
Care International is a Geneva-based non-private organization which was initially best
known for the distribution of ‘care packages’ during the economic depletions after the
Second World War. The aim of the organization, founded in 1945, continues to be global
poverty reduction and emergency aid.
The projects Care International supports on gender equality alone have had 2,393,982 direct
participants involved with 135 projects in 48 countries. These programs help women and
men promote women’s rights and provide solidarity and support groups for women as well
as prevention, services and support for survivors of sexual and gender-based violence.
Today, the organization employs more than 10,000 people in Switzerland and the regional
offices in around 70 countries and has a budget of !550 million, more than half of which
comes from government and non-governmental agencies grants.
Source: www.care-international.com
2.1.3 The creation of business models
When workshops for disabled people first began selling their products they invented their own
income-generation business model. When the software company SAP decided to hire
employees with autism for software testing and other highly specialized tasks they were
partnered by Specialisterne, a social enterprise with the mission to generate one million jobs
globally for people with autism. When disabled people in Africa are able to buy affordable
wheelchairs this is made possible because of the business model of Shonaquip. A broad
spectrum of social innovation is driven by income generating strategies using the market
mechanics to scale.
Another example illustrating a double bottom line is ‘Discovering Hands’. Frank Hoffmann
has developed a standardized tactile medical procedure. In this procedure, visually impaired
women use their superior tactile senses to detect early signs of breast cancer. This solution
increases the chances of survival, integrates visually impaired women into the employment
market and changes the way disabled people are perceived. A disability is thus turned into a
capability. Additionally, the costs for the social and health care system are considerably
lowered.
4
These examples illustrate that business models can be created which combine
sustainable income streams and the provision of social goods. Social impact and a successful
business are not mutually exclusive, but on the other hand are not
4
The social enterprise generates income through patented orientation strips and license fees. After start-up investments, Discovering Hands
will be long term self-sustaining through this earned income. Profits will be distributed to the non-profit holding- and affiliated
organizations. In order to scale the concept, a hybrid business model was developed, which combines two not-for-profit entities and one
for-profit social business. The different components are financed sustainably through specific financing models and financial partnerships.
The international expansion succeeds through a social franchising model.
9
interrelated in general. In practice there is a broad range of social enterprises which are
generating earned income with one part of their operations and additionally have different
other income streams. According to the European Union definition, social enterprises are
managed in an entrepreneurial, accountable and transparent way and have as their primary
objective the achievement of measurable, positive social impacts rather than generating profit
for their owners, members and shareholders.
Box 3: Dialogue Social Enterprise
Dialogue Social Enterprise and its subsidiaries (hereinafter DSE) seek to overcome barriers
between “us” and “them” and to redefine “disability” as “ability,” and “otherness” as
“likeness” (Dialogue Social Enterprise, 2011).
To reach this goal, DSE runs exhibitions in
which blind guides lead visitors through a completely dark environment to experience the
daily routine of blind persons. The visitors are led through a real-life environment which
includes supermarkets, a city theme or a café. Based on this concept, the social enterprise
has also developed “Dialogue in Silence”, “Dialogue with Time” and workshops for
corporate clients. Since its foundation, 7 million visitors have experienced the exhibition
and 7,000 blind persons have gained access to the employment market through their work
with DSE.
The social enterprise has two revenue streams. The concept is scaled globally using a
franchise system which supplies DSE with income to provide for planning and development
support. Additionally, DSE operates permanent exhibitions globally and conducts
workshops with corporate clients on all continents generating revenues through visitors and
workshop participants. The annual revenues amount to around !5 million without
dependence on federal funding or donations and its stable business model makes DSE
suitable for financing through Venture Philanthropy funds.
Extract from Spiess-Knafl & Achleitner (2012)
2.2 Sector perspective
Impact investors often have a preference for a specific sector. There are benefits of having
increased knowledge of a field and using synergies within the portfolio of activities. It can
also be combined with a focus on a specific target group such as education for children or
social services for immigrants.
A list of sectors is provided below (see e.g. Scheuerle et al. (2013):
• Education and science
• Work integration
• Social inclusion
• Social services
10
• Economic development
• Environmental protection
• Sports, culture & recreation
• Health care
• Intermediation and consultancy
• Advocacy
• Housing
• Development aid
2.3 Social problem perspective
There is also the possibility to take a social problem and find organizations which are active
in this field. If the focus is on the social problem “insufficient financial strength” the
investment strategy can focus on actors providing consulting services, banking services or
education.
A list of social problems is provided below (Scheuerle, Schmitz, Spiess-Knafl, Schües &
Richter, 2013). This overview can be starting point for the development of a investment
strategy focused on solving specific problems:
• Permanent or temporary physical disability
• Permanent or temporary psychological disability
• Poor housing situation / homelessness
• Severe threat to life/ emergency aid
• Missing or insufficient mobility
• Language and linguistic skills
• Insufficient educational opportunities
• Insufficient opportunities for self-realization and realization of life plans
• Insufficient access to information and participation opportunities
• Insufficient structural access to art, natural experiences, positive interpersonal
relationships
• Insufficient financial strength
• Insufficient ecological consciousness
• Isolation and insufficient sense of belonging
• Insufficient integration with the work environment
• Insufficient knowledge of civil rights
11
3 Return
There is one major question when determining the level of financial return expectation:
What is the return expectation?
The different return expectations are shown in the following graph, ranging from market rate
financial returns to no financial returns at all. We use “return” synonymously for “financial
performance”.
5
Figure 3: Return expectations
Based on Spiess-Knafl (2012)
5
Return has always to be considered in context with the associated risk.
12
3.1 Income possibilities
Social enterprises have access to a range of revenue streams. From the public authorities there
are fixed fees paid for contractible services and subsidies for projects. Private funds are
earned income, membership fees, sponsoring or other revenue streams such as penalty
payments, prize money or income from accumulated capital
6
Figure 4: Revenue streams
Source: Spiess-Knafl (2012)
Social enterprises rely on many different income streams. Although on average the income
structure seems to be balanced, they have on a company basis a primary income stream which
accounts for the majority of the income.
Age Public Fees Earned-
Income
Market
Public
Subsidies
Donations Foundation
Grants
Sponso-
ring
Member-
ship Income
Other
1-2 12.9% 22.6% 9.0% 27.6% 2.0% 6.3% 4.7% 14.8%
3-4 10.9% 18.2% 11.6% 14.1% 11.4% 14.2% 6.5% 13.1%
5-9 16.1% 22.5% 18.5% 7.4% 6.7% 11.7% 5.7% 11.3%
10-14 13.9% 24.1% 5.6% 12.8% 10.3% 8.2% 11.5% 8.5%
15-19 13.5% 16.5% 19.2% 9.6% 10.3% 9.0% 2.0% 20.0%
20-29 36.4% 22.2% 15.8% 6.5% 3.6% 0.5% 2.4% 12.6%
>30 38.8% 20.5% 21.3% 1.6% 4.7% 1.1% 3.1% 8.9%
Total 20.8% 21.0% 15.4% 10.3% 7.1% 8.0% 5.0% 12.6%
Table 1: Income distribution per age
Source: Scheuerle et al. (2013)
There are no figures on the profitability of social enterprises but empirical as well as
anecdotal evidence point in the direction of a low-profit segment.
6
Donations are classified in line with the accounting theory as a financing instrument.
13
3.2 Particularities of the Social Investment Market
At the core of the social investment market is the trade-off between financial and social
return. Financial return includes all payments which are in some way appropriated by owners,
investors or management while social return is the return generated for the beneficiaries (if
applicable) or the public in general.
Social entrepreneurs are constantly balancing social benefit and economic value. Their
investors may expect to generate a financial return, while other stakeholders expect a focus on
scaling the social impact. In this respect, social entrepreneurs are challenged to avoid mission
drift due to balance sheet necessities.
7
Even though markets may be efficient and powerful, they are often imperfect – especially
when it comes to externalities (positive or negative). Social enterprises generating positive
external effects may thus end up underperforming financially.
Catalytic solutions can explicitly address this market failure and reconcile the interests of
different stakeholders involved. Typically financed by the public sector or strategic
philanthropists, these solutions can be structured as first-loss capital, pay-for-performance
instruments, hybrid financing models or grant programmes focusing on investment readiness.
3.2.1 Financing conflicts
‘Trade-off’ refers to the situation where capital providers pursue different interests (e.g. banks
and donors) at the same time, which can lead to conflicts between social and financial
returns.
8
‘Crowding out’ refers to the phenomenon that an increase in public funding can lead
to a lower amount of donations. ‘Tight contractual terms’ refers to the fact that public funding
can, in certain cases, prohibit the use of additional financing sources. ‘Interest payment
restrictions’ means that public funding prohibits, in certain cases, the use of funds for interest
or dividend payments.
7
There are various business models where revenue potential and social impact respectively are highly correlated but this is not the overall
rule. Even in these cases the management has to manage trade-offs between mission and economics in the day-to-day business.
8
The trade-off is considered between different investors. It would be similar on the operating basis.
14
Investors with
market-rate
return
expectations
Investors with
reduced
financial return
expectations
Investors
without
financial return
expectations
Public funds Target group &
beneficiaries
Investors with
market-rate
return
expectations
- Trade-Off Trade-Off Interest
payment
restrictions
(no conflict)
Investors with
reduced
financial return
expectations
Trade-Off - Trade-Off Interest
payment
restrictions
(no conflict)
Investors
without
financial return
expectations
Trade-Off Trade-Off - Crowding Out (no conflict)
Public funds Interest
payment
restrictions
Interest
payment
restrictions
Crowding Out - Tight
contractual
terms
Target group &
beneficiaries
(no conflict) (no conflict) (no conflict) Tight
contractual
terms
-
Table 2: Financing conflicts
Source: Achleitner, Spiess-Knafl & Volk (2014)
However, recognizing these potential conflicts, the different sources of capital can be
combined to create hybrid financing models. These models require a sophisticated approach
to syndication. The major success factor in overcoming the mentioned conflicts is to address
and create potential leverage and synergies between the different funders. Leverage effects
can be achieved for example by grants allowing early-stage social enterprise to get investment
ready or catalytic capital such as guarantees which could attract additional capital with lower
risk appetite.
15
3.2.2 Missing link between return and risk
One of the cornerstones of the traditional capital markets is the link between return and risk.
Companies with better ratings can expect lower financing costs respectively. This link is
missing for social enterprises. Some investors expect a certain return, while others are willing
to provide interest-free loans or even grants. They reduce their financial return expectation in
return for a higher social return. This complication is something investors have to keep in
mind as well when considering syndicated deals or joining the existing shareholders.
3.2.3 Missing pecking order
Organizations in the social sector usually have access to a range of funding options which are
not accessible for mainstream companies. Whereas there is a relatively clear pecking order for
mainstream companies (internal financing preferred to debt capital preferred to equity
capital), there is no such pecking order for organizations in the social sector. Grants are
assumed to be cheap money (non-repayable, not interest-bearing and no ownership rights),
equity capital often has no value as the underlying business has a low profitability and debt
capital could be provided at low costs. These facts distort the pecking order and lead to a
unclear picture of which instruments are preferred by organizations in the social sector.
Additionally, there is a trend toward using hybrid financing instruments especially designed
for the funding of social enterprises.
16
4 Structure
The main question to consider next is:
How should I invest?
4.1 Financing instruments
There are a number of financing instruments which social investors can use. Amongst other
things it depends on the theory of change which of the instruments is adequate for achieving
the mission as well as financial expectations.
The characteristics of different financing instruments are shown in the following table.
Financing
Instrument
Term Sheet Considerations for Social Investor
Grants
Duration:
Annual payments:
Repayment:
Short term
None
None
" Does the investee need a grant every
year?
" Has the investee enough flexibility in the
use of funds?
" Does it include overhead expenditures?
Debt
Capital
Duration:
Annual payments:
Repayment:
Long term
Interest payments
Yes
" Can the investee repay the loan?
" Which decisions should be taken jointly?
Equity
Capital
Duration:
Annual payments:
Repayment:
Unlimited
Dividend payments
No
- How do I want to be involved?
- What is my impact on the corporate
culture?
Mezzanine
Capital
Duration:
Annual payments:
Repayment:
Long term
Interest payments
Yes
- Can the investee repay the investment?
- How do I want to be involved?
Hybrid
Capital
Duration:
Annual payments:
Repayment:
Long term
None
Depends upon structure
- Which risk do I want to take?
- What is the most suitable financial
structure?
Table 3: Financing Instruments
Based on Achleitner, Heinecke, Noble, Schöning & Spiess-Knafl (2011)
However, there are also additional financing instruments which are structured according to the
needs of the investee, given the stage of development it has reached. For hybrid capital, there
are currently two approaches.
The first approach is focused on the financing instrument itself. Instead of equity or debt these
instruments are designed with major components of both, or even with donation elements as
17
an individual mixture. They are called quasi-equity, social loans, recoverable grants or
forgivable loans. The revenue participation agreement described in the following box is one
example.
Box 4: Case Study of a Revenue Share Agreement
Von Unruh & Team – the first social business for turnaround consultancy – offers advice
and support to entrepreneurs who find themselves in a business-threatening crisis and
threatened with bankruptcy. The overall goal is to prevent business failures through early
consultation with specially-trained consultants who have crisis experience, and to provide
assistance to those restarting out of bankruptcy. With this approach, von Unruh & Team
effectively creates a 'second chance' culture.
Von Unruh & Team is based on a hybrid business model with a for-profit and two
complementary not-for-profit entities. The profit generated is invested exclusively in the
further expansion of the business, and is donated to the non-profit entities running the
regional self-helping groups and supporting financial literacy.
While the not-for-profit organizations are funded by membership fees and private
donations, private seed capital from Angel Investors has been raised in the form of impact-
first investments for the establishment of the new private consultancy firm (a for-profit
social business). The financing model was structured to accommodate the accounts of the
business model by giving the social entrepreneur the necessary flexibility, but still giving
the investors a fair share in the success of the business. This conditional profit participation
agreement involves investors with a predefined share of up to a predetermined amount of
the company’s revenues. The revenue sharing leads to flexible financing costs for the social
enterprise, especially in the initial stages. The limitation of payments and flexible
repayment options, as well as increasing sales, will keep valuable liquidity in the company
in order to invest in the expansion of business activities. The social mission and the scaling
of the business model are substantially supported by the chosen financial instrument.
18
Source: Financing Agency for Social Entrepreneurship (FASE)
The syndication approach seeks innovative funding solutions that combine elements of donor,
grant and philanthropy funding with conventional applications of debt and equity finance to
meet the financial needs of social enterprises. Eligible enterprises are usually in the space that
neither qualifies them exclusively for philanthropic funding nor for commercial forms of
funding, such as debt or equity financing.
For the syndication approach, a hybrid business structure with a combination of non-profit
and for-profit legal entities is required.
9
By separating the social business with an earned-
income strategy from the pure non-profit arm, tax and legal requirements are met and
different sources of funding can be attracted. Both units together seek to support the desired
social mission in an integrated way. Obviously, the relationship between the non-profit and
the for-profit has to be defined by contractual agreements, with a specific focus on
governance and business development supporting the overall mission.
4.2 Social Capital Market
The major challenge in impact investing is less about raising more funds than about building
an effective and efficient market infrastructure. A social capital market is developing which
has institutions comparable to those of the traditional capital market. A possible investment
can also be directed towards those institutions.
9
In a few countries hybrid legal forms are established that could qualify for hybrid financing as well.
19
Figure 5: Social Capital Market
Source: Achleitner, Spiess-Knafl, Heinecke, Schöning & Noble (2011)
Value banks are banks which have focused on the financing of ecological, cultural and social
projects, acting transparently and pursuing ethical goals.
Comparable to investment banks, there are social investment advisers and even a social
investment bank which are trying to match supply and demand. Social stock exchanges are
aiming to set up functioning trading places but are currently more like market places in the
sense of acting to increase the visibility of social enterprises.
Venture philanthropy funds are often considered to be the crystallization point of the
development as they were among the first to actively invest in social enterprises by applying
venture capital techniques. Social investment funds are pooling capital and investing those
assets in specific fields or regions. Microfinance is a popular sector for those investments.
There are also consultancies which provide research on specific sectors and give investors, as
well as social enterprises, the knowledge for informed investments.
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5 Dealflow Management
The main question considered in this section is
Where do I find adequate deals?
5.1 Deal Sourcing
Sourcing of social investment opportunities differs greatly from originating investments in the
mainstream markets even compared to the traditional illiquid private markets. Reasons for this
are, among others, a small absolute size of the market compared to the overall investment
market and the limited relative income potential for intermediaries. Where financial
intermediaries are rare, other organizations such as NPOs and specialized networks may fill
the gap.
The most common ways for sourcing social investments are social investing and entrepreneur
networks, conferences, competitions for social impact ideas, co-investing with individuals or
funds, specialized web platforms and impact investment advisors.
Figure 6: Options for deal sourcing
Based on Heister (2010)
Choosing the adequate sourcing strategy depends on the level of involvement for the investor
but all of them are more time consuming than traditional investment sourcing. The overall
effort required for deal sourcing should be considered in defining objectives and timelines for
implementation of the investment strategy.
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5.2 Deal Assessment and Due Diligence
Before assessing individual deals investors need to obtain a deep understanding of the sector
corresponding to the social problem and the underlying theory of change. By researching the
sector and sorting out what works and what does not, investors are in a position to assess
individual investment opportunities and benchmark them against best practices in the market.
Whether to perform one’s own research or use third party research (which can be sourced
from the major players in the community) depends on the desired level of involvement.
An important topic in evaluating social investments is the additional social impact dimension
of any investment. The rule of thumb is
Analysis = Traditional analysis + impact analysis + analysis of interdependencies
The due diligence for a social investment is thus more complex than the due diligence for a
traditional investment. Investors also have to consider how social impact is generated from a
qualitative and from a quantitative perspective; they must check whether the expected social
impact matches their mission and pre-defined impact objectives, how impact risks are
managed, and much more.
10
11
An assessment model is shown in the following figure.
Figure 7: Assessment Model for Impact Investments
Own illustration
10
Reporting standards have been developed in recent years. Examples are the Social Reporting Standaard (SRS) or the Impact Reporting &
Investment Standards (IRIS).
11
As social entrepreneurs are often looking for the fastest and smartest way to raise impact rather than the safest way to generate profits and
pay back investments, they are usually more focused on their solutions than on their financing and their (potential) investors. Nevertheless,
to raise repayable investments, they have to fulfil minimum standards according to best market practice and the requirements of investors.
1
2
Business Model
Market / Sector
1
2
3
Management Team
Missions Fit
Value Coincidence
Social
Impact
Return
3 Financing
Risk
Mission &
Values
1
2
1
2
3
3
Financial Risk
Impact Risk
Risk for Mission Drift
Sustainability
Direct Impact
Indirect Impact
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Literature
This manual is based on interviews, confidential material belonging to the interview partners,
previous work by the authors and the following literature:
Achleitner, A.-K., Heinecke, A., Noble, A., Schöning, M., & Spiess-Knafl, W., „Unlocking
the Mystery: An Introduction to Social Investment,” in Innovations, 6(3) (2011): 145-
154.
Achleitner, A.-K., Mayer, J., Heinecke, A., Schöning, M., & Noble, A., Corporate
Governance of Social Enterprises (2012).
Achleitner, A.-K., Spiess-Knafl, W., Heinecke, A., Schöning, M., & Noble, A., Social
Investment Manual (2011).
Achleitner, A.-K., Spiess-Knafl, W., & Volk, S., “The financing structure of social
enterprises: conflicts and implications”, in International Journal of Entrepreneurial
Venturing, 6(1) (2014): 85-99.
Heister, P., Finanzierung von Social Entrepreneurship durch Venture Philanthropy und
Social Venture Capital. Wiesbaden: Gabler Verlag (2010).
Roder, B. , Reporting in Social Entrepreneurship. Wiesbaden: Gabler Verlag (2010)..
Schetsche, M., ,Empirische Analyse sozialer Probleme. Das wissenssoziologische Programm
(2 ed.). Wiesbaden: Springer VS (2014).
Scheuerle, T., Schmitz, B., Spiess-Knafl, W., Schües, R., & Richter, S., ,Mapping Social
Entrepreneurship in Germany - A Quantitative Analysis (2013).
Spiess-Knafl, W., ,Finanzierung von Sozialunternehmen - Eine empirische und theoretische
Analyse (2012).
Spiess-Knafl, W., & Achleitner, A.-K., Financing of Social Entrepreneurship”, in C.
Volkmann, K. Tokarski & K. Ernst (eds.), Understanding Social Entrepreneurship &
Social Business, Wiesbaden: Springer (2012): pp. 157-173.
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About the Civil Society Center
The “Civil Society Center | CiSoC” at the Zeppelin University (ZU) was founded by the
“Chair for Strategic Organization and Financing | (SOFI)” in 2010 in collaboration with
numerous patrons and partners.
The objective: measuring the emergence, the methods, the players, the interdependencies as
well as providing international comparative analyses of this new social interaction. In doing
so, the main focus is placed upon the national innovation system of society, that – we believe
– will be based upon the inclusion of different social groupings, trans-sectoral hybridization
of economic players, the state and civil society as well as the systemization of solutions in
new “business models” of an entrepreneurial civil society.
www.zu.de
About Roots of Impact
Roots of Impact is an incubator and consulting firm that is building the market for impact
investing. We create intermediaries, investment vehicles and partnerships to help finance
social enterprises and social innovation.
Our key focus is on implementing solutions for investors and philanthropists who are looking
for new ways of creating social value. These solutions combine the individual strengths of the
partners involved – and mobilise capital to scale successful impact- and business models. We
also advise and educate practitioners on the topics of impact investing and social finance. We
will soon be launching the first Social Finance Academy.
We collaborate closely with Ashoka, the leading organisation in the field of social
entrepreneurship, and with top business schools and renowned experts in their respective
areas.
Roots of Impact is shaping the market for social investment, so that capital for positive social
impact is deployed effectively.
www.roots-of-impact.org
doc_374508774.pdf