way: they only invest if they see a clear path towards financial self-sufficiency.
The next source of capital comes from those impact investors who do expect their
money back because this allows them to re-invest the funds into other deserving
startups. Such impact investors usually do not expect market returns and they often
are also more patient about repayments than standard investors would be.
However, as part of their investing model,
social enterprises need to repay the invested capital in the future.
These impact investors can do this in two ways.
Firstly, they can take an equity share in the social enterprise, they thus
effectively co-own your venture. This is a risky process for the impact investors.
On traditional capital markets, startup investors can reclaim their investment,
usually with a healthy profit, by selling the shares to other investors.
There are two types of so-called liquidity events where they can do this.
The first is the initial public offering,
an IPO, in which the startup sells shares on the stock market.
The second is a trade sale, in which case the startup is acquired by
a larger company that wants to integrate the startup in its processes.
eBay, for example, has acquired Skype and
Unilever has bought the ethical ice cream company Ben & Jerry's.
IPOs and acquisitions are tricky for most social enterprises since their
social mission might not allow them to generate sufficient profits for investors.
However, without a liquidity event,
impact investors are not receiving a return on their capital.
A way around this problem is for
impact investors to provide capital in the form of long-term debt.
These loans are usually less costly for
social enterprises than a standard bank loan would be.
They also are usually more patient about the repayment schedule.
An example for
such a patient impact investor is the Danish Social Capital Fund,
DSK, run by Lars Jannick Johansen.
The DSK provides loans to social enterprises that want to
scale up and grow.
A further type of impact investor concerns angel investors and
social venture capitalists.
Angel investors tend to be wealthy individuals who usually have
already started several companies and
who now want to make use of their capital and their knowledge.
Social venture capital funds collect the money of several angel investors into
a fund that makes it possible to invest in
a number of social enterprises over the lifetime of the fund.
Angel investors and social venture capitalists are as interested in
the financial returns as they are in the social outcome.
Thus, they will expect the social enterprise to be profitable, and
to pay market returns to its shareholders.
However, they will also be supportive of the social mission and
they are thus less likely to require social startups to
give up on their mission in order to maximize returns.
Finally, social enterprises can tap into the traditional startup finance.
These investors will require you to pay back their investments with
a considerable markup to account for
the risk they have taken, when they invested in your startup business.
However, even these investors can bring additional value to your startup,
beyond the capital they provide.
For example, they know the startup process and its problems.
They can provide you with valuable advice and
often also come with a useful network of contacts.
In return they will often ask for
a seat on your board, allowing them to be engaged in the startup process.
Now, let me turn to your assignment for next week.
Your assignment will be to outline in two to three paragraphs how your
team expects to raise startup capital.
However, before outlining how you want to raise the money, first, indicate how
much funds you expect will be needed and what you will use those funds for.
Then outline who you will ask for money and what they can expect in return.
Will you offer them market rate interest?
Or are you looking for investors for whom the social impact is sufficient?
Next, let me outline today the assignment for the coming week,
since next week's assignment will require you to do more work than usual.