De-Mystifying Impact Investing. an Entrepreneurs' Guide
Total Page：16
File Type：pdf, Size：1020Kb
De-mystifying Impact Investing An Entrepreneurs' Guide Author: Rustam Sengupta Researchers: Somboddhi Ghosh & Sunaina Mullick Supported & Published by GIZ, India Published by: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, New Delhi Responsible Enterprise Finance Programme giz - Private Sector Development B 5 / 1 , Safdarjung Enclave, New Delhi -110029 , India W: www.giz.de Responsible: Wolfgang Leidig, GIZ Coordination and Contact: Katharina Kuehn, GIZ T: +91 11 4949 5353 E: [email protected] Author: Rustam Sengupta, Boond Design: Rouge Communications New Delhi, July 2015 De-mystifying Impact Investing An Entrepreneurs' Guide Author: Rustam Sengupta Researchers: Somboddhi Ghosh & Sunaina Mullick Supported & Published by GIZ, India This Handbook his handbook has been designed T as an easy read to provide information on not just a number of impact funds but also on investing essentials like the instruments used, investment process, term sheets as well as what investors look for. The information collected in this handbook was born out of interviews with numerous entrepreneurs and investors and envisages plugging the essential information dissymmetry present in the industry and supporting and encouraging entrepreneurs to make more informed and efficient decisions. Foreword Foreword Dear Readers, It is widely acknowledged that India is one of the major markets for impact investing with innovative entrepreneurs who serve the “Bottom of the Pyramid”, pioneering investors that walk the extra mile to help entrepreneurs scale their business models, and a supportive and highly evolved ecosystem comprising a diverse set of stakeholders. Together with SIDBI, the Small Industries Development Bank of India, GIZ, under the framework of Indo-German bilateral cooperation funded by the German Federal Ministry for Economic Cooperation and Development (BMZ) aims to make a contribution to further strengthen the eco-system for impact investing. Our joint “Responsible Enterprise Finance Programme” started in late 2013 and as one of our focus areas we work to increase the number of enterprises that have access to risk capital. Within this framework, we have collaborated with a number of stakeholders to increase transparency in the industry and support capital flow to social enterprises as well as strengthen incubators and help entrepreneurs get investment ready. A recent report launched together with Intellecap entitled The Indian Impact Investing Story shows that USD $ 1.6 billion of capital has been invested in 220+ impact enterprises across India since the year 2000. For social entrepreneurs it is often a challenge to understand when to raise which kind of capital including grants, seed funds, angel investments, impact oriented venture capital as well as debt, which investors to approach for their financing needs and how investor involvement may impact the development of their business. This guide addresses some of the questions we have heard frequently when talking to entrepreneurs, and we hope that it will be of help when looking for capital from impact oriented funds: Written by entrepreneurs for entrepreneurs, it lines out requirements, investor expectations as well as investor types in an easily accessible way, and also offers support to entrepreneurs in asking the right questions and approaching the right investors for their particular needs. We are very interested in your feedback as well as suggestions for our future work, and would kindly ask you to take a few minutes to fill in the enclosed postcard and send it back to us. Enjoy reading and good luck on your journey towards raising capital! Wolfgang Leidig Director Private Sector Development GIZ India Content Content Chapter-I Introduction 2 Chapter-II Type of Investment Instruments 9 Chapter-III When to Raise Investments, How Much and on What Terms? 21 Chapter-IV Impact Investors in India 51 Chapter-V Key Takeaways 119 Appendix-1 Impact Investment Map 123 Appendix-2 Sample Term Sheet 125 List of Abbreviations 136 References 138 About the Author 140 GIZ 141 Chapter-I Introduction Because the people who are crazy enough to think they can change the world, are the ones who do. –Steve Jobs C h ENTREPRENEURS HANDBOOK TO IMPACT INVESTMENTS a p t e r - I Introduction One of the most challenging tasks for any entrepreneur is to raise funds for his or her venture from others. It requires not just good business but also persistence, negotiation skills and a thorough understanding of the position of the investor sitting opposite him or her. Most entrepreneurs understand their own needs and constraints very well but often fail to acknowledge the requirements and limitations of the investors, creating deadlocks and breakdown of talks. In the development sector, this problem is further compounded as the return expectations are not clear and the investor mindset is harder to understand since their requirements cannot be boxed into financial parameters alone. Besides, entrepreneurs often start their journey heavily passionate about their missions and causes, speaking a language very different from the quantitative-heavy investor speak. This handbook has been designed for early stage entrepreneurs and potential change-makers and attempts to de-mystify the language and requirements of typical impact investors that they will encounter while raising funds. This handbook has been written by entrepreneurs and for entrepreneurs and has a number of interviews, quotes and comments from those who have successfully and unsuccessfully raised capital over the past five years. Furthermore, the handbook also tries to highlight some of the different 'impact funds' with the objective of reducing the time and effort that the entrepreneur spends in finding the right funding match. The Genesis The social sector has been historically grant funded. This means that based on the impact and social work that the entrepreneurs perform, philanthropic individuals have been giving them money and support, often not expecting any returns other than just evidence of the good work. This sort of funding has been extremely beneficial in areas where commercial models are challenging or the solutions are 2 C h a INTRODUCTION p t e r - I risky and require a high degree of experimentation or innovation. Besides, very early stage enterprises also gain from these grant funds as they can utilize it to ameliorate their business model and sharpen their offerings. Over the past few years, probably since the late nineties, there has been a tacit understanding that in some cases 'grant' or 'free' funds might not be the best way to have a social impact and might not be able to create a growth-based ecosystem. This realization might have also come from the lack of sustainable results and a high amount of pilferage that some social organizations have unfortunately shown. Also, the argument has been that the 'social' mindset and 'free funds' have also retarded professional behavior and innovation often leading to heavy wastage and high resource drain. Finally the recessions in the recent years and the drying up of grant funding sources have also reduced the popularity of pure philanthropic capital as many large donors have been forced to reduce their development spending significantly. From all this 'a new class of investors' has emerged who, while looking to make a social impact with their funds, also look for financial returns (or at least a return on capital). This group has coined themselves 'Impact Investors' and over the past five years, have mushroomed in every country and sector that earlier was grant funded or regarded as social. While this development is positive and has been welcomed by entrepreneurs, this class of investors is still very unstructured, unregulated and lacks a credible track record of matching their words with their actions. India, being one of the largest playgrounds for development professional has seen a large share of 'impact investment funds' with nearly 80 funds presently investing or looking to invest here (list of contacts enclosed in Appendix 1). 3 C h ENTREPRENEURS HANDBOOK TO IMPACT INVESTMENTS a p t e r - I ?? The Conundrum This 'Impact Investor' funding source is often confusing for entrepreneurs as even though they all call themselves 'impact focused', their expectations, metrics, requirements and expertise are all very diverse and very little information is available publicly on most of them (especially for the seed and early stage funds). This often makes entrepreneurs looking for funding waste a lot of time finding the correct match and also makes the search tedious, taking precious time and resources away from the real challenge that they have set out to solve. Another issue a number of entrepreneurs face with this source of funding is the difference in language used by the investors, often quite financial and quantitative in nature, which typically lies outside the domain of understanding of the social entrepreneurs. It might be interesting to note at this juncture, that our research while drafting this handbook showed that while a number of 'impact funds' proclaim their affinity to high impact, they are also typically very inclined to make 'tangible profits' from their investments and often use the same standards and terms that are prevalent in pure profit centric investments in other fields like technology or consumer goods. While interacting with over 25 potential entrepreneurs looking for funding during the research for this handbook, we observed that less than 25% were aware of what the investors looked for, what terms would be in place to get the investment and what to expect post investment and less than even 10% had proper information about the impact investors that they were going to pitch to (like the returns expected, length of fund cycle, support services etc.). This asymmetry of information is very dangerous to entrepreneurs since in order to get funding they are often expected to share fine details of their models (often without any Non Disclosure Agreement) while not knowing anything about the investors opposite him or her.