Early-stage impact investing
When Mark Zuckerberg needed early-stage financing for Facebook, he found Peter Thiel. But there was no one there when Rajesh Shah needed seed funding for SABRAS, a for-profit social enterprise that could improve the efficiency and life quality of Indian salt farmers. Why?
Because of a gap in funding in the social enterprise space. Acumen Fund was established to enable social enterprises to scale, by filling the funding gap between philanthropic donations and later-stage financing with “patient capital.” Today, with the growing number of impact investors operating, the gap is shrinking.
But there is still friction between the social entrepreneurs seeking funding and the impact investors looking for organizations to fund: many impact investors invest only in social enterprises that have gained some on-the-ground traction – be they multi-site pilots, early success in acquiring and satisfying customers, and some revenue generation. But how does a social enterprise get to a point at which it’s investment-ready for impact investors – even early-stage investors? How does it fund this evolution?
Immature social enterprises need money too, after they have tapped out the well-known “3 F’s” of raising start-up capital – Family, Friends, and Fools. And while in Silicon Valley there is a network of angel investors and other sources of seed funding to finance immature technology companies, the impact investing world has no equivalent. World Bank Institute Practice Manager for Innovation Aleem Walji, when interviewed by the SSIR, emphasized this issue: “We see a major gap between the needs of most social enterprises (requiring early stage angel finance) and where most impact investors sit along the conveyor belt of capital (wishing to deploy private equity/debt).”
Social business accelerator programs and social entrepreneur fellowship programs have been very successful at helping seed-stage socents push their organizations along so that they can demonstrate early success and be considered for funding by impact investors. Examples of successes are:
- Embrace founder Jane Chen was an Echoing Green fellow in 2008 and was a Rainer Arnhold fellow; the company has since started clinical trials in India for their infant incubators, and has partnered with GE for distribution
- VisionSpring, an Acumen Fund investment made in 2005, was founded by Jordan Kassalow, who was a Draper Richards Kaplan Foundation Fellow in that same year.
- David Kuria, founder of Ecotact, became an Ashoka fellow in 2007; Acumen Fund invested in Ecotact in 2008.
- Husk Power Systems co-founder Manoj Sinha was a Global Social Benefits Incubator fellow in 2009; that same year Acumen Fund invested in the company
- Ziqitza Healthcare Limited, also known as 1298, is an ambulatory service in Mumbai; the organization was a Global Social Incubator Benefits Incubator participant in 2007, the same year it became an Acumen investee.
But there is still the seed-stage funding issue to deal with. Now aiming to fill this new earlier-stage gap are organizations like Village Capital, a spin-out from early-stage impact investor First Light Ventures, and Toniic, a globally-focused impact-investor-oriented angel network – both of which were launched last year (Investor’s Circle, launched in 1992, is an impact investing angel network focused on US and international businesses). Village Capital awards seed financing to early-stage social businesses by running incubator programs. In order to make this cost-effective, the funding is awarded by the incubator participants themselves with peer-voting, not by Village Capital or its investors. This funding democratization positively enhances peer-to-peer interaction and review, as participants pitch and judge each other. And it frees Village Capital investors to mentor the social entrepreneurs without having to grade them at the same time. Village Capital cheaply distributes early-stage funds to worthy social businesses while providing critical learning and networking opportunities. SABRAS - the social enterprise mentioned at the beginning of this post – went through Village Capital’s 12-week business accelerator program (a partnership with Dasra/Social impact) in India in 2011 and was voted by peers in the program to recieve funding at the end of the program.
Realizing that there is no silver bullet when thinking about how to enable and fund social enterprises, it was exciting for me to dig into the early-stage investing space as part of my internship, to understand the ways these types of organizations (seed-stage funders, business accelerators, early-stage impact investors) complement one another and are working towards offering a full continuum of financing options for social entrepreneurs – from the time they conceive an idea to the time they need financing to scale their businesses.
Together, these investors and advisors are offering innovative business models, critical business development, and funding support that are certainly making it easier for high-potential social entrepreneurs to find what they need to succeed.
Clare Hunt is a student at Stanford University’s Graduate School of Business and an Acumen Fund Summer Portfolio Associate.