Www.social-impact.org Financing Options Hyderabad January 26, 2007 Charly Kleissner, Co-founder

www.social-impact.org

Financing Options

HyderabadJanuary 26, 2007

Charly Kleissner, Co-founder


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


Introduction

• Methodology:– Set context with definitions– Use case study to explain definitions and

trade-offs– Discuss your own opportunities /

challenges


Introduction: Enterprise Life Cycle

Invest-mentRisk

Enterprise Life Cycle

High

Low

Seed

Start-Up

Early Expansion

Late Expansion

• Type of Investor • Risk/return expectations• Exit strategies

• Type of Investment• Size of Investment


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.


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).


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


Investment Strategies

Invest-mentRisk

Enterprise Life Cycle

High

Low

Seed Start-Up Early ExpansionLate Expansion

Grants Social Loans Grants

Social LoansCommercial Loans Grants

Social LoansCommercial LoansGovernment Loans

Equity Commercial LoansGovernment Loans

Equity

• Social Investors• Foundations

• Social Investors• Foundations• Social Venture Funds• Banks

• Social Investors• Foundations• Social Venture Funds• Banks• Governments• Corporations

• Banks• Governments• Corporations• Etc.


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.



• 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.



• 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.


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.


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


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.


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).


Debt Definitions

• Social Loan:– Loan below market (longer term, lower interest

rated, etc.)• Recoverable Grant:

– Provide for the return of capital under certain circumstances.


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.


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.


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.


Hybrid Business Model

For-Profit Entity

Hybrid Social Enterprise

Not-For-Profit Entity

In-Kind EquityConsulting

BrandIntellectual Property

R&D

R&DConsulting

Profit SharingLiquidity Events


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


Hybrid Lifecycle

Invest-mentRisk

High

Low

Seed Start-Up Early Expansion Late Expansion

For-Profit Entity


For-Profit Entity



For-Profit EntityNot-For-Profit Entity


Case Study: Biomass Electrification in Rural Sri Lanka


Case Study: Biomass Electrification in Rural Sri Lanka


Case Study: Biomass Electrification

Flowing Currents Ltd. Aspira

In-Kind EquityConsulting

Profit SharingLiquidity Events

Biomass:• Project Management• Project Planning• Installation• Training• Maintenance

Village Societies:• Organizational Development• TrainingReforestation Program:• Training • ManagementPartial subsidy of tariffs



• 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



Aspira

Investors

Entities Flowing Currents

Hybrid Social Enterprise

Social Investors: GrantsFoundations: Grants

Local Bank: Commercial LoanSocial Investors: EquityAspira: In-kind equitySocial Venture Fund: Social Loan



• 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



• 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%



• 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)


Conclusion

• Watch out for – Governance and leadership issues– Clear value proposition for different types

of investors / donors– Maintaining control


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 for-profit company.

– For-profit companies are incompatible with a social mission.

Documents

Www.social-impact.org Financing Options Hyderabad January 26, 2007 Charly Kleissner, Co-founder