Monday
June 6
2011

Paula Cardenau

Social Entrepreneurs, Co-Designers of the Investment Blueprint

How to create financial tools that are actually relevant to attend the specific needs of a mission driven, community impact social enterprise has been subject of very insightful discussions recently. A couple of examples worth mentioning are the Community Impact Development Group gathering Ashoka and Siemens Stiftung convened in October in Munich, or the recent discussion hosted in Social Edge “Reclaiming the Investment Dialogue for Social Entrepreneurs.”

One essential element that came out of these discussions was the fact that social entrepreneurs need to be more proactive in the negotiation of the deals, bringing into the conversation new insights that can help the potential investor better understand the particular features of a social enterprise, as well as the specific challenges they are facing as they are creating new markets to serve underprivileged communities. Social entrepreneurs need to become “co-designers” of the investment instrument.

As an example of this strategy, I would like to share the story behind a deal between Gustavo Gennuso (Ashoka Fellow, who funded ETV, a social enterprise that distributes technology such as water pumps, to disadvantaged rural communities) and Equitas Ventures. Equitas is an investment and management firm based in Argentina that funds, manages and promotes both for-profit and not-for-profit initiatives that will make a positive social and environmental impact.

When Gennuso first met with Equitas Ventures, it was pretty clear their investment approach was very similar to other social investors he had been talking with in his efforts to raise patient capital for ETV.

“Even though they were keen to innovate, the truth is that they had a traditional approach: they expected a 20 percent of return on investment; they wanted to make an equity investment, which was useless to me because ETV will never distribute profits. And, their proposed exit strategy was the typical sale of the company, which is not something I have in mind for ETV,” Gennuso said.

To their credit, Equitas however was open to developing new approaches, and six months later, both sides had closed an agreement that was completely tailor-made to fit ETV’s social enterprise financial needs. The deal included a USD$120,000 loan without collateral, with a repayment structure based on a fixed percentage (5 percent) of gross sales, starting a year after receiving the first payment.

How did this change happen? Which is the story behind it? There were several key elements that, combined, enabled both investor and investee to find a mutually acceptable outcome. One of these elements was the fact that Gennuso made them a counterproposal to shift from an equity investment into a risk loan, offering himself as a co-creator of the financial tool and proactively providing very specific knowledge and insights, rather than having a passive attitude during the whole process.

Which are the main lessons from this successful process that Gennuso can share with us?

  • Step into investors’ shoes: it is key that, when negotiating with the potential investor, at some point you step into their shoes a bit and try to understand their limitations. “In the case of Equitas, I understood that even though they were honestly willing to provide the best deal possible for ETV and bend the conditions as much as possible, they still had to charge an interest rate for two reasons: the inflationary context in Argentina, and the fact that they needed to cover their costs”.
  • Be proactive, provide specific input on your own needs, but at the same time, have a disposition to listen and learn: “Ours was a collaborative process in whose building both parts contributed until we reached a win win situation.” Gennuso made it clear that ETV was unable to offer traditional equity, but was able to offer a financial instrument that could provide a 30 percent nominal return (equivalent to about 5 percent real return after adjusting for inflation) with repayment linked to sales – a flexible but fair structure that was satisfactory to both sides.
  • Build trust “In the end, the two parties are willing to take the risk, not just me. It is a shared risk, and this makes all the difference. Particularly because it is the first time we took a loan of this size, and having a social background, we are very much used to grants or subsidies. This type of financing has a higher risk and implicates a strong commitment, for several years, and sets us growth milestones that put us a different kind of pressure on us. That is why it is so important to know we are not alone”
  • Be open and transparent “Even though Equitas is not part of our board – as it would have been if they had done an equity investment-, we still had to open all our financial information, they have access to it all. We built our business plan together, they even influenced in some of our hypothesis.”

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    Categories
    Entrepreneurship
    Tags
    impact investing, social entrepreneur