Posted by Rebecca Marx, Capital Advisory Analyst
Maybe it is about the money – but it’s not just about the money. In an interview for a new report released by Enclude and Echoing Green, Echoing Green Portfolio Segmentation Report, co-founder Domenico Centrone of EggPlant, a company reusing wastewater to produce bioplastics, shared that he declined offers of investment because the prospective source either did not have clean-tech expertise, or proposed terms for
funding that would have oriented the company away from its vision. As EggPlant continues to test its product and business model, the leadership team is determined to find a patient lead investor with expertise in their sector that does not have unrealistic return-on-investment timeline expectations.
As 2015 Echoing Green Climate Fellows, EggPlant co-founders Domenico and Paulo Stufano received a $80,000 recoverable grant, two years of leadership development support, and lifetime access to a vibrant community of leaders. Echoing Green launched its impact investing program to support the growing number of applicants to the Fellowship program electing hybrid or for-profit legal structures.
For the first time, Enclude segmented Echoing Green’s portfolio of for-profit and hybrid Fellows in to “Capital Readiness Segments” where “capital readiness” refers to the preparedness of an enterprise to take on new capital, whether in the form of grants, debt, equity, or another alternative. The delineation of segments considered financial performance as well as the enterprises’ abilities to effectively absorb capital. Non-financial criteria such as whether the enterprise had a full-time financial professional or an independent board to support the management of new capital from more sophisticated sources contributed to assessing capital readiness.
The survey upon which our report’s findings were based elicited responses from 49 entrepreneurs running for-profit and hybrid enterprises. We asked them about the capital they sought, barriers to accessing funding, and their need for support in raising capital. The most commonly cited support need was strategic introductions to funders, while help developing a targeted outreach plan was also highly desired. That being said, the support needed by entrepreneurs goes well beyond who to talk to. How and when to talk to potential investors were key topics for many of the Fellows who took part in focus group discussions and interviews.
Domenico shared that it took six months of mentorship from a business executive with experience in the venture capital world for him to acquire the skills he needed for effective fundraising activities. Rustam Sengupta, the founder of Boond Engineering & Development Ltd., an enterprise providing clean, affordable energy access to the poor in rural India, commented that speaking the “investment language” can be a
challenge, especially considering that, while investors “talk this language through and through”, some entrepreneurs may only undertake a capital raise once or twice in their lives. In fact, Rustam wrote a book based on his experience, Demystifying Impact Investing, to support social entrepreneurs going through the capital raising process.
Fellows reported that capital advisory professionals, sector experts, and successful entrepreneurs could be valuable mentors, and many agreed that transaction intermediation in the impact investing sector is necessary. Rustam noted that, beyond introductions, professional support in due diligence, negotiation, and closing processes will certainly be needed for his upcoming funding round.
The need to fill the gap in intermediation services is not new to Enclude, which has seen the impact investing industry constrained for both would-be investors and impact enterprises by:
- A lack of ready and well-structured transaction flow; and
- A shortage of creative solutions to address missing alignment of return, risk, time horizons, and deal size expectations between impact investors and investees.
As a specialist capital advisory intermediary, Enclude is dedicated to converting interest in impact investing into capital flows. The Echoing Green Portfolio Segmentation Report corroborates the need for support to accelerate capital to early-stage entrepreneurs in the face of barriers including misalignment of risk expectations, geographic and sector interests, and impact expectations. It builds on Enclude’s past learnings from analyzing investments in early-stage enterprises, such as those included in the 2015 report from The Lemelson Foundation, Catalyzing Capital for Invention: Spotlight on India.
As further demonstrated by the case of EggPlant, the Catalyzing Capital report asserts that there is a short supply of funding for young companies—specifically invention-based companies—developing, testing, and proving their business models, as well as a lack of support for high-potential businesses in the investment pipeline to make it to the “investment-readiness” stage. The EggPlant case study echoes the Catalyzing Capital report finding that “most investors chase financial returns that far exceed what most impact investors—especially invention-based enterprises—believe is realistic”.
Among other actions, the Catalyzing Capital report recommended establishing a fund to finance intermediary services, such as investment preparation and capital-raising support to expand access to capital for early stage entrepreneurs. Similarly, in a 2017 workshop discussing the findings from the Echoing Green segmentation results, a group of impact investing experts (including Managing Directors of The MacArthur Foundation and The Kresge Foundation, who funded the research) grappled with the possibility of establishing industry-level facilities to increase the flow of impact capital to social entrepreneurs. One idea was creation of a specialized merchant bank for impact investment.
The concept of a facility that would subsidize capital advisory services was supported by Echoing Green Fellows in focus group discussions not only for the investment expertise that it would harness, but also because it is difficult to both maintain day-to-day operations and spend the amount of time focused on a capital raise that is necessary. Michael Wilkerson, founder of Tugende, a company that leases motorcycles to motorcycle taxi drivers in Uganda, commented, “…You have to block out the time to systematically line up prospects, build your pitch materials, and follow up with them.” This almost always takes a great deal more time and focus than most entrepreneurs initially assume. Michael’s raise, for example, took approximately 12 months, while he expected it to take only 6.
While Echoing Green expresses enthusiasm for industry-level efforts to accelerate capital to early-stage social entrepreneurs, the nonprofit continues to build on its 30 years of supporting visionaries and leaders by expanding and enhancing its direct support to entrepreneurs. Echoing Green plans to play a role in the capital acceleration effort by focusing on developing three impact investing program activities:
- Investing in Echoing Green’s infrastructure: Deepening the support it provides to Fellows and investing additionally in its research and data capabilities to better inform and improve the impact investing field
- Creating an Investor Advisory Group: Building a community of experts in impact investing who can create groups and individualized resources for Fellows and provide expert guidance to portfolio managers
- Piloting Investor Cohorts: Providing experiential learning opportunities to a diverse group of novices in impact investing who are interested in making early-stage investments
Together Enclude and Echoing Green seek to identify points of leverage among organizations supporting innovative social entrepreneurs responding to the Sustainable Development Goals and other global social and environmental challenges. Enclude looks forward to supporting Echoing Green in the expansion of its programs, continuing to support industry-level efforts to fill investment intermediation gaps, and, of course, to being part of the constant chorus singing: “It’s not just about the money”.