Impact inves­t­ing: getting the most out of funding and investment

A tradi­tio­nal grant-giving foun­da­tion is limi­ted to two roles: inves­t­ing on the one hand, and gene­ra­ting impact on the other. Inves­t­ing is inten­ded to preserve the foundation’s exis­ting assets and gene­rate income from them. The use of the income gene­ra­tes an impact in the form of grants or project finan­cing that fulfils the foundation’s purpose.

In recent years, a range of oppor­tu­ni­ties for ‘impact inves­t­ing’ have opened up between the two tradi­tio­nal roles. These combine the ‘impact’ and ‘inves­t­ing’ sides. In the broa­dest sense, this is an invest­ment that should yield a return but at the same time have a certain impact.

Sustainable invest­ment solutions

‘Sustainable invest­ment solu­ti­ons’ are prima­rily about gene­ra­ting returns. Howe­ver, these invest­ment solu­ti­ons are also desi­gned with a posi­tive impact on the envi­ron­ment and society in mind – where possi­ble, without having to accept a loss of income or an increase in invest­ment risk. Sustainable invest­ment solu­ti­ons are now wide­spread among the leading provi­ders in Switz­er­land, well-estab­lished on the market and are in fact sought after by the majo­rity of Swiss foundations.

Venture phil­an­thropy

The other side of the spec­trum is more exci­ting, as there is much more in deve­lo­p­ment. Here, the impact of the invest­ment is the clear focus and the finan­cial return is of secon­dary importance. This is where impact inves­t­ing is beco­ming ‘venture phil­an­thropy’. The finan­cing methods are fami­liar from venture capi­tal: capi­tal is made available, either as a loan or as an equity invest­ment, while accep­ting high risks. Venture phil­an­thropy supports compa­nies that are expec­ted to have a measura­ble envi­ron­men­tal or social impact. Impact inves­t­ing thus takes the form of entre­pre­neu­rial support with the aim of achie­ving a speci­fic impact. The reci­pi­ents are social entre­pre­neurs or start-ups that are at a very early stage. At the heart of social entre­pre­neur­ship is the company’s purpose, which must entail a posi­tive social, envi­ron­men­tal or some­ti­mes even cultu­ral impact. The company might be enga­ged in various fields of acti­vity, inclu­ding: work inte­gra­tion, medi­cal care, child­care, deve­lo­p­ment of remote areas, neigh­bour­hood aid, circu­lar economy, rese­arch and inno­va­tion, etc. An important aspect of social entre­pre­neur­ship is that surplus income from products or services is reinves­ted to a signi­fi­cant extent for social impact.

Multi­ple use

What’s inte­res­t­ing about venture phil­an­thropy is the poten­tial for boos­ting impact through capi­tal flowing back to the foun­da­tion and thus the multi­ple use of the phil­an­thro­pic franc inves­ted. Venture phil­an­thropy does not focus on retur­ning inves­ted capi­tal or gene­ra­ting a return that would corre­spond to the risk assu­med. That’s why foun­da­ti­ons invest in areas where profes­sio­nal inves­tors cannot be found owing to a lack of return pros­pects. Foun­da­ti­ons with a venture-phil­an­thropy approach often combine the capi­tal contri­bu­tion with skills deve­lo­p­ment in the form of coaching, know­ledge trans­fer and making their network available.

Assets

If the main goal of impact inves­t­ing is to achieve its objec­ti­ves and thus make an impact, it is not a tradi­tio­nal asset invest­ment, but rather a funding acti­vity. This defi­ni­tion of objec­ti­ves is then reflec­ted in the foundation’s accoun­ting: while tradi­tio­nal grants are trea­ted as expen­dit­ure, entre­pre­neu­rial forms of support are recor­ded as assets. Howe­ver, in accordance with the prin­ci­ple of prudence under commer­cial law, this usually requi­res a memo­ran­dum entry, as they have no market value at the time of acquisition.

An array of diffe­rent arrangements

Forms of entre­pre­neu­rial support come in diffe­rent shapes and sizes, in parti­cu­lar loans or share­hol­dings, but also conver­ti­ble loans or social impact bonds. Here’s an exam­ple: a foun­da­tion that has defi­ned social cohe­sion in Switz­er­land as its objec­tive could provide a long-term, low-inte­rest loan to a social entre­pre­neur deve­lo­ping a digi­tal plat­form for neigh­bour­hood aid. Instru­ments for measu­ring impact and repay­ment are contrac­tually defi­ned in terms of mile­sto­nes. In addi­tion to finan­cial support, the foun­da­tion provi­des social entre­pre­neurs with coaching on stra­te­gic and finan­cial management.

Conclu­si­ons:

1. Impact inves­t­ing – achie­ving a social or envi­ron­men­tal impact through invest­ment – is an exci­ting tool­kit that foun­da­ti­ons can use to increase their impact. After all, every franc inves­ted recei­ves addi­tio­nal leverage.
2. For start-ups and social entre­pre­neurs, foun­da­ti­ons can cover capi­tal requi­re­ments that are not available from profit-orien­ted investors.
3. Howe­ver, the effort invol­ved should not be unde­re­sti­ma­ted. Impact inves­t­ing signi­fi­cantly increa­ses comple­xity compared to a tradi­tio­nal setup with tradi­tio­nal invest­ments on the one hand and grants on the other.