is impact investment the answer?
Quite often, if you ask any social enterprise what they need to scale their impact they would possibly say the same thing: financing, investment…basically cash. As someone who has given that answer on more than one occasion, many many occasions in fact - there is of course much truth in that. Could impact investment be the answer?
I read a really interesting journal this morning ‘Current demand and supply of impact investments across different geographical regions, sectors and stages of business: Match or Mis-Match’ (Islam and Scott 2021) which really got me thinking about impact investment in Ireland. The article doesn’t mention Ireland specifically but highlights the potential for different geographical zones and different stage social enterprises.
“Impact investing can be a powerful instrument of change”
Judith Roden (President of Rockefeller Foundation 2005 - 2017)
Before I investigate that option - let me offer up a definition for clarity.
The Global Impact Investment Network (The Giin) describes impact investment as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
There have been some really interesting recent strides made to make impact investing and financing more accessible to social enterprises across Europe. For example, the European Social Innovation and Impact Fund (ESIIF) was set up to help increase impact investment in social enterprises and to de-risk the investment or loans to a certain extent and therefore making it more attractive to investors. It uses a structure called ‘Mezzanine Capital’ - which in basic terms means that ESIIF will insert itself into a lending relationship in order to reduce the cost and/or risk of the lending or investment. In this instance, the impact investment is partially secured by a European Investment Fund guarantee (known as the EaSI guarantee - still with me?!). A recent publication of recipients of the scheme shows an impressive list of over 900 organisations across Europe, majority of these have been through loans rather than investments. Interestingly none are from Ireland. I don’t know if that is because none applied or none were approved, I would hazard a guess at the former.
The impact investment infrastructure is building in Europe, working hard to break down barriers and challenges with creative solutions - however, does that mean that social enterprises in Ireland suddenly have a whole new world of investment and lending potential opened up to them? I’m not so sure it does - actually no, I’ll increase that to, I’m pretty sure it doesn’t. Not yet anyway.
One of the challenges we have here in Ireland is that for the most part many social enterprises are set up as CLGs (Company Limited by Guarantee) and don’t have a share capital. A normal investment relationship works just like Dragons Den says it does, I will give you €100,000 investment in return for 10% of your business and perhaps X payment per year (if you’re lucky!). We can overly simplify the impact investment relationship to, I will give you €100,000 investment in return for 8% of your business and an agreed achievement of ‘X’ measurable social goals. If you are a CLG, you have no share capital, no part of your social enterprise to give to an investor in return to secure their investment, so they can give you a loan - or a donation (if you are also a registered charity). Therefore some of the more useful investment tools in Ireland are not an option to most (such as EIIS). Basically, if you are a social enterprise set up as a CLG, impact investment is going to be challenging for you. Perhaps that is why we now see a number of social enterprises setting up a CLS or Ltd companies alongside their CLG. This is for another blog post, but I believe not a good long-term solution. This is not to undermine the benefits of setting up as a CLG, it is a good legal framework - more to illustrate the challenges as you look to scale and the business model becomes more complex.
Thankfully, under the guidance of Community Finance Ireland - social financing is becoming a more common option who has now lent an impressive €72 million in Ireland, however a caveat here that much of that has been to community sports organisations and for capital development.
‘When it comes to solving problems of poverty, impact investing can act as a catalyst, but it is not a silver bullet. Successful businesses serving the poor, need more than investment capital. They also need infrastructure to enable effective distribution, strong regulatory systems, access to markets, technical assistance as they scale up and more’
Jacqueline Novogratz - CEO of Acumen, a non-profit global venture capital fund whose goal is to use entrepreneurial approaches to address poverty.
The above quote from Novogratz reinforces where I personally stand, I don’t think access to cash is the number 1 reason social enterprises aren’t scaling. We need more than impact investment to solve wicked problems, so much more, although it certainly would make alot of things easier. I look on wistfully at the infrastructure built around startups in Ireland and see that as a potential blueprint for what we need in the social enterprise sector to support both those who are in start-up but also solutions that have been identified as high potential to scale and that’s when the access to finance will become crucial.
“Nearly every problem has been solved by someone somewhere. The challenge of the 21st Century is to find out what works and scale it up.” Bill Clinton