Transcript Document

Financing Options
Hyderabad
January 26, 2007
Charly Kleissner, Co-founder
www.social-impact.org
Introduction
• Objectives:
– Understand investment types, e.g., equity,
debt, social loans, etc.
– Understand investors, e.g., motivation,
risk/return expectations, value proposition,
etc.
– Understand relationship between scaling a
social enterprise and financing options
www.social-impact.org
Introduction
• Methodology:
– Set context with definitions
– Use case study to explain definitions and
trade-offs
– Discuss your own opportunities /
challenges
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Introduction: Enterprise Life Cycle
• Type of Investor
High
Seed
Investment
Risk
Start-Up
• Risk/return
expectations
• Exit strategies
• Type of Investment
• Size of Investment
Early Expansion
Late Expansion
Low
Enterprise Life Cycle
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Investment Types
• Equity: Ownership of a company which is sold in
order to provide cash for a growing company. Equity
appreciates and depreciates based on the company’s
value. Equity defers all payment to the investors until
the time of sale.
• Debt: Loans or bonds – usually require full
repayment plus interest. Loan institution dictates
terms like timeframe, collateral, interest rate, and
default risk management.
• Grant: Donation without repayment expectation.
Grantor expects social / environmental returns.
www.social-impact.org
Investment Types
• Social Loan: Debt structure below market, e.g.,
longer term, interest only, low interest rate, etc.
• In-kind equity: Non-monetary contribution of
founders, employees, business partners to equity
financing round, e.g., intellectual property, consulting
hours, facilities, services, etc.
• Program Related Investment: Social investments
from within US based Foundations (usually social
loans).
www.social-impact.org
Investor Types
• Entrepreneurs: In-kind equity, equity
• Family and Friends: equity, debt, grants
• Individual Investors (angels or social investors): equity, grants,
debt
• Foundations: Grants, Program Related Investments (PRI’s)
• Venture Funds: Equity
• Social Venture Capital: Equity, debt
• Banks: Debt, equity
• Corporations: Equity, debt
• Corporate Business Partners: Warrants, equity, debt
• Government: Grants
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Investment Strategies
High
• Social Investors
• Foundations
Grants
Social Loans
Investment
Risk
• Social Investors
• Foundations
• Social Venture Funds
• Banks
Grants
Social Loans
Commercial Loans
• Social Investors
• Foundations
• Social Venture Funds
• Banks
• Governments
• Corporations
Grants
Social Loans
Commercial Loans
Government Loans
Equity
Low
Seed
Start-Up
Early Expansion
Enterprise Life Cycle
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• Banks
• Governments
• Corporations
• Etc.
Commercial Loans
Government Loans
Equity
Late Expansion
Investment Definitions
• Double bottom line investing: Focuses on financing
vehicles with explicit social and economic return
expectations. Social venture capital and program
related investments are types of double bottom line
investing.
• Triple bottom line investing: Focuses on economic,
environmental, and social value.
• Blended value: Focuses on idea that the value of an
organization is fundamentally indivisible, i.e.,
economic, social, and environmental value are simply
part of one essential value. Builds upon and
transcends double and triple bottom line investing.
www.social-impact.org
Investment Definitions
• Venture Capital: Refers to equity investments in new
or young companies. Venture Capital is a subset of
private equity, often included in the term ‘alternative
investments’ by institutional investors such as
foundation endowment managers.
• Social Venture Capital: A financing vehicle (equity
or debt) that invests in for-profit and not-for-profit
companies in a wide range of sectors with explicit
social and financial return expectations.
www.social-impact.org
Investment Definitions
• Venture Philanthropy: A model for charitable giving
that arose in the 1990’s based on the application of
venture capital investment principles to social
investments. Funders ‘invest’ not just money but
energy and expertise in the organizations they
support. Venture philanthropists manage a ‘portfolio’
of organizations and seek to increase its social
impact by providing management support and
expecting results and accountability from
organizations they fund.
www.social-impact.org
Debt Definitions
• Loan Guarantee:
– Investor assures the repayment of a loan made by
a third party by pledging his financial resources as
collateral.
– Investor increases the amount of credit available
to the third party by assuming all or part of the
third-party lender’s risk.
– Loan guarantees increase third party’s access to
credit.
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Debt Definitions
• Insured Deposits (includes certificates of deposits):
– Funds placed in a depository institution (typically a
Community Development Financial Institution), typically
earning interest and insured by governmental agencies.
• Linked Deposits:
– Through a linked deposit, a funder might agree to deposit
funds in the bank for a specified period of time and agree to
accept a below-market rate of interest, in effect subsidizing
the loan. The funder would link the loan to an agreement by
the bank to pass the subsidy along through a loan to a
particular borrowing organization
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Debt Definitions
• Senior Loan:
– Holds higher priority for repayment than
subordinated loans.
• Subordinated Loan:
– In the event of the debtor’s bankruptcy, has a
lesser claim to the assets of the debtor than other
classes of debt.
• Line of credit:
– Short-term loan used to fill temporary cash needs.
– Typically, funds are advanced as a percentage of
outstanding contracts or receivables.
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Debt Definitions
• Asset purchase:
– Real estate, equipment, or other assets are
purchased by a foundation for the benefit of one or
more charitable purposes.
– The foundation retains ownership of the assets
and arranges for its use.
• Convertible Loan:
– Option to convert loan to equity (e.g., when
company is acquired for stock).
www.social-impact.org
Debt Definitions
• Social Loan:
– Loan below market (longer term, lower interest
rated, etc.)
• Recoverable Grant:
– Provide for the return of capital under certain
circumstances.
www.social-impact.org
Myths
• If you want to do good, you have to create a
not-for-profit company.
• If you want to create a social enterprise with a
mission, you cannot do this in a for-profit
company.
• For-profit companies are incompatible with a
social mission.
www.social-impact.org
Hypothesis
• Define mission of social enterprise first, then
implement best legal structure to support the
mission, not the other way around.
• Many times a hybrid legal structure will be
advantageous.
www.social-impact.org
Social Enterprise Definition
• A social enterprise is a for-profit
venture, a not-for-profit venture, or a
hybrid venture that combines the
passion of a social mission with the
discipline, innovation, and determination
commonly associated with the for-profit
businesses.
www.social-impact.org
Hybrid Business Model
Hybrid Social Enterprise
In-Kind Equity
Consulting
Brand
Intellectual Property
R&D
For-Profit Entity
Not-For-Profit Entity
R&D
Consulting
Profit Sharing
Liquidity Events
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Hybrid Business Model
• Why?
– To attract / leverage different types of
capital / investors
– To partially subsidize services / products
– To prepare immature markets
– To invest in basic research
– To leverage both legal structures, while not
being boxed into only one
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Hybrid Lifecycle
High
Not-For-Profit
Entity
Not-For-Profit
Entity
Investment
Risk
For-Profit
Entity
Not-For-Profit
Entity
For-Profit
Entity
Not-For-Profit
Entity
For-Profit Entity
Low
Seed
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Start-Up
Early Expansion
Late Expansion
Case Study: Biomass Electrification in
Rural Sri Lanka
www.social-impact.org
Case Study: Biomass Electrification in
Rural Sri Lanka
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Case Study: Biomass Electrification
Village Societies:
• Organizational Development
• Training
Reforestation Program:
• Training
• Management
Partial subsidy of tariffs
Biomass:
• Project Management
• Project Planning
• Installation
• Training
• Maintenance
In-Kind Equity
Consulting
Flowing Currents Ltd.
Aspira
Profit Sharing
Liquidity Events
www.social-impact.org
Case Study: Biomass Electrification
• Environmental Return:
– Carbon dioxide and green house gas emission
neutral
– Sustainable bio-mass generation and harvesting
– Fertilizer cost savings
– Re-forestation impacts
– Cutting dependency on fossil fuels
– Beauty
• Social Return:
– Increase employment and earnings potential
– Financially empower villagers and village societies
– Increase skills and education
www.social-impact.org
Case Study: Biomass Electrification
Investors
Local Bank: Commercial Loan
Social Investors: Equity
Aspira: In-kind equity
Social Venture Fund: Social Loan
Social Investors: Grants
Foundations: Grants
Flowing Currents
Aspira
Entities
Hybrid Social Enterprise
www.social-impact.org
Case Study: Biomass Electrification
• Deal Characteristics:
– Provide financing for 2 years to scale biomass
electrification from 2 villages to 25 villages
• Deal Structure:
– Equity (for initial liquidity of Flowing Currents):
$30K
– Social Loan: $250K
– Commercial Line of Credit: Up to $100K
– Grants (to Aspira): $300K
www.social-impact.org
Case Study: Biomass Electrification
• Flowing Currents Equity:
– Total Not-for-profit: 69%
• Aspira: 69%
– Total For-Profit: 31%
• KD Dominus LP: 8%
• Lalith Seneviratne: 15%
• Greg Rossel: 2%
• Employee stock options and partners: 6%
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Case Study: Biomass Electrification
• Flowing Currents Social Loan:
– Acumen Fund (Social Venture Fund)
• Flowing Currents Commercial Loan:
– LOFC (Local Bank)
• Aspira Grants:
– Diakonie (German Foundation)
– KL Felicitas Foundation (US Family Foundation)
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Conclusion
• Watch out for
– Governance and leadership issues
– Clear value proposition for different types
of investors / donors
– Maintaining control
www.social-impact.org
Conclusion
• Re-visit Myths:
– If you want to do good, you have to create
a not-for-profit company.
– If you want to create a social enterprise
with a mission, you cannot do this in a forprofit company.
– For-profit companies are incompatible with
a social mission.
www.social-impact.org