MODERATOR

John KohlerProgram Director for Social Capital at the Center for Science, Technology and Society

VENTURE CAPITALISTS HAVE IT EASY…

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Venture investing in the developing world• Targets of opportunity are sourced

remotely• Investment syndicate drawn from the

global impact investing community • Results of venture capital backed product

or service has a local impact• Scarce “up-round” capital available

Venture investing in the developed world• Targets of opportunity are sourced

locally• Investment syndicate drawn from local

venture capital relationships • Results of venture capital backed

product or service has a global impact• Well-defined path of “up-round”

investing• Ready-made pools of “up-round”

capital waiting for winners to emerge from previous financing

Are there…?

HEADWINDS TO EFFICIENT IMPACT INVESTING MARKETS

-Dalberg

HORIZONTAL CAPITAL AGGREGATION SCOPE

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• Examine the requirements of capital from each source

• Suggest a model for successful syndication• Participants across the ‘life

cycle’ of SGB development• Terms to guide a successful

‘handoff’• Identify funding sources by

mission and outcome• Provide examples of phased

financing (rural electrification) • Suggest a template for future

syndication

Previous Reports Outcomes of this study

• Building the case for impact investing

• Study of the impact investing landscape

• Larger scope of investing in businesses in the broader developing world – BOP loosely defined

• Assertion of impact investing as an emerging asset class

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Capital Sources

Direction of Capital

TargetInvestmentOutcomes

Capital Sources

Funding OrganizationIntermediary

MissionGeography

Size of Funding

Type of Capital

Type of SGBSGB

Organizational Objectives

Desired Outcome

Reporting Requirement

Expected Time Frame

Desired Liquidity

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• Pr imar i ly foundat ions and ind iv iduals

• Financ ia l inst i tut ions and corporat ions are largely absent

• Financ ia l fi rst vs . impact fi rst d iscuss ion cont inues

SOURCES OF IMPACT CAPITAL

Click icon to add picture• Some

funds are creating horizontal aggregation internal ly

• Equity is t ied to higher IRR targets

EMERGING USE OF MULTIPLE INVESTING INSTRUMENTS

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• Capital shift to > $750K

• Multiple fi nancing instruments used

• The demotion of equity

PROGRESS IN

ADDRESSING THE

“MISSING MIDDLE”

Segmenting The BOP(Base of Pyramid Market)

No Preference; 68%

Rural; 25%

Urban; 7%

Direction of Capital

• Investors find more market rate opportunities in urban areas where income levels are higher and talent of entrepreneurs is higher, however, the majority make no preference to urban versus rural

• When asked, the vast majority of respondents do not measure target income levels of their markets 10

Social ROI

1x Return + Interest

3% - 8% IRR

10% - 24% IRR

Expected Returns: Rural Vs. Urban Focus

Direction of Capital

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• Respondents indicated that there is simply not enough development in rural areas to achieve a market rate of return

• Consequently, investors seeking a market rate return may initially focus on SGBs in urban areas which posses 3x - 5x disposable income versus rural, lower customer acquisition costs and lower service costs

Rural Focus Urban Focus No Focus

Social ROI

1x Return + Interest

3% - 8% IRR

10% - 24% IRR

Intermediary Use To Deploy Capital

Expected Returns with Intermediary Use

Expected Returns WITHOUT Intermediary Use

• Most investors who use an intermediary invest through debt instruments and need a local bank or partner to help deploy the loan

• The majority of respondents believed they were best situated to select SGBs when they were operating “in country.” This implies that an arms-length relationship with SGBs reduces return expectations relative to a direct investment relationship

Direction of Capital

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Capacity Development Use

• Few organizations use Capacity Development Organizations (CDOs), also referred to as Technical Assistance organizations• “We do not know who they are in the areas where we operate”• “They are a big added cost”• Many organizations provide their own capacity development services (business

mentoring, operational management and consulting as part of their investment)

• Redefine who CDOs are: Local business leaders, corporations, advisors and consulting firms

Direction of Capital

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Yes; 18%

No; 82%

Social ROI

1x Return + Interest

3% - 8% IRR

10% - 24% IRR

Monthly contact Non-Monthly Contact

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• Investors who practiced “high-touch” portfolio management (defined in our study as “monthly contact or greater”) reported significantly higher return expectations

Frequency of contact between investors and SGBs

Annually

Quarterly

Monthly

0 2 4 6 8 10 12 14 16 18 20

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• Expectations are softening but st i l l the debate rages

• Sets the stage for syndication

POLARIZATION OF RETURN EXPECTATIONS

Click icon to add picture• Vast major i ty

of respondents are adjust ing their t ime hor izon

• 75% are now expect ing 5 - 10+ year hold ing per iod

• Time is the enemy of IRR

RE-CALIBRATION OF INVESTMENT DURATION

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Tight screens are used in assembl ing impact por t fo l ios

Equ i ty inst ruments are assumed

Creat ive investment inst ruments cou ld a l ign wi th what soc ia l enterpr ise can de l iver

THE UNINTENDED CONSEQUENCE OF IRR TARGETS

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Phased Investing (baton pass) – Different impact investors contributing capital at each phase of the SGBs’ development cycle. Examples of this may include:

1. Grant (capacity building)2. Soft loan (proof of concept)3. Quasi equity / equity investment (scale the business) 4. Debt provider (long-term, commercial loan—scale the business

Co-Investing—Multiple investors pooling capital to make one type of investment.

Internal Syndication—An organization participates in multiple phases of the same small and growing business investment cycle; i.e., providing capital in the form of a grant that is later followed by an additional investment in the form of debt or equity.

Phased Investing Hypothesis

CO-INVESTING VS. PHASED INVESTING

Syndicated; 61%

Not syn-di-

cated; 39%

Co-investing; 95%

Phased Investing; 5%

• Although syndication is happening, it is not happening on a regular basis

• Phased investing is a much more efficient type of syndication and is not happening

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Recommended Actions

• Begin treating capital as ‘work in process’ - know your upstream and downstream partners and help prepare your investee for the next ‘round’

• Increase the use of local capacity development organizations

• Develop new investment instruments that reward investors from free cash flow, not valuation build-up

• Establish mechanisms for ‘mezzanine’ financing to reward the early and brave impact investor

• Work on market mechanisms that earn greater investor confidence• Diligence and validation• Mentoring and capacity development• Metrics that matter• Financial and regulatory consistency

ResearchersSol TranJared AbercrombieKrishnan Manjeri

Contributing EditorsGreg DalliRachel Haley

Project LeadJessica Sawhney

PANEL DISCUSSION

Susie LeePrincipal, TBL Capital

Sean FooteManagement Team, Labrador Ventures

Taryn GoodmanSenior Manager, Impact Investing, RSF Social Finance

GLOBAL SOCIAL BENEFIT INCUBATOR

DOWNLOAD ONLINE

Full Report Available Online

www.scu.edu/socialbenefit/socialcapital.cfm