The growth in the social-fintech sphere is encouraging, with many of our members combining their ingenuity and financial acumen with cutting edge technology to make a positive impact on people’s lives across a number of markets. So how do our members make their dreams a reality? In this article we will not only walk you through the traditional route of raising capital, but also talk about the funding options available to start-ups with a social agenda.
When estimating the amount of capital raised per funding stage it is important to take into account the difference between the American and European VC ecosystems. KPMG recently published their global analysis venture funding; ‘Venture Pulse Q1 2018’ in which we can see the difference in scale between the volume and size of VC deals. For example in the first quarter of 2018, US VC backed companies raised $28.2bn over 1,693 deals compared to Europe’s $5.2bn raised over 548 deals. The mean average comparison per deal $ between the USA and Europe stands at $16,656,822 to $9489,051.
Friends, family and fools (Angel Investors)
- Colloquially referred to as friends, family and fools, or the 3 Fs, this stage consists of raising capital via personal connections, either though friends or fellow entrepreneurs who believe in your venture, or family who feel obligated to support you.
- Only 1% of start-ups raise VC funding so this stage is extremely important for the vast majority of start-ups, as this capital injection acts as the bridge between a self-funded operation and a business in need of real venture capital funding.
- It is also not uncommon, depending on their situation, for start-ups to take out bank loans as a way of developing their business model to make it more attractive to VC firms for Seed stage investment.
- The amount usually invested in this stage is between $150,000 and $1.5 million.
- This the first stage of venture capital financing and typically range from $250,000 to $1 million.
- A seed-stage start-up has not usually realised commercial operations, and this capital injection is used to build a management team, conduct market research and product development
- This stage provides a company which has begun operations, but have not reached the point of commercial manufacturing and sales with the opportunity to level-up their capabilities.
- The funding supports product development and initial marketing for companies which have started to create revenue but are yet to produce profit
- The capital provided is often used to initiate commercial manufacturing
- Throughout this stage, funding is usually used for expansion; whether it be marketing, product development and market or operational expansion.
- Companies eligible for this round of financing are established and showing high capital growth and profitability.
- Mezzanine or bridge financing is also included in the later stage. This finances the step of going public and bridges the gap between expansion and the company’s IPO
So now we have provided a brief summary of the journey from the traditional journey ‘plan to plc.’ which is the route the lucky few start-ups follow; let us now move on to alternative sources of financing exclusively available to social investment opportunities. The rise of Socially Responsible Investing is positive and is prompting growth in a number of markets/industries, which without SRI may not have achieved success. The Investment Industry’s attempt to shake its avaricious reputation has led to Economic, Social, Governance (ESG) becoming more and more important a metric for investors when choosing a venture. The term ESG emerged in 2006 after the UN Global Compact, in collaboration with the International Finance Corporation and the Swiss Federal Department of Foreign Affairs published “Who Cares Wins”. The same year the UNEP/Fi published the “Freshfield Report” in which they demonstrated that ESG measurements are relevant for financial valuation. These two reports acted as the main pieces of evidence for the release of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006 and the launch of the Sustainable Stock Exchange Initiative (SSEI) in 2007.
Qualifying as an (SRI) an impact investment will aim to generate competitive returns whilst simultaneously creating a positive impact. The impact-investing sector roughly doubled last year, bringing the AUM up to an estimated $228 billion (up $114 from mid-2017), and is expected to continue to grow. The number of Impact Investment funds is growing which creates more opportunities for social start-ups to gain access to funding. Institutional investors are not the start-ups only option; through crowd funding websites companies can connect with individual investors and exchange capital for equity.
A market valued at the start of the year at around $50bn, and estimated to double within the next three to four years, Blended Finance is the “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets “ by which both investors and communities reap the rewards. The ‘blended’ capital is comprised of foundations, DFI’s and other ‘impact first’ investors and ‘finance first’ investors which both play different roles. The phlanthropic, in case of default are assigned to take the first loss, this decreases the risk for finance first investors as they are less likely to lose all their capital. For an investment to qualify for blended finance funding it has to have a financial return and to address SDG (sustainable development goal) or key development issues, the philanthropic capital has to also act as a catalyst for finance first investors. Blended finance is becoming more and more available as the idea gains traction all around the world.
Social Impact Bonds
A fairly recent innovation in the impact investing sphere, a Social Impact Bond or SIB is a contract between the public sector or governing body and the investor by which the funds invested are put to work in areas in need of improvement. The investors ROI is dependent on the savings made by the public sector. SIBs are a possible avenue for social fin-tech start-ups who can apply for government funding, and in the coming years it is more than likely that private organisations will also begin to issue SIBs.
The increase in success stories of social entrepreneurs realising their ambitions is driving the social investment sector forward. From SIBs to blended finance operations, the different ways in which social entrepreneurs and investors, whether they be finance or impact first orientated are growing in size, efficiency and popularity. These are exciting times for the entrepreneur looking to make a difference, things are looking up.