17/06/2011

You Can’t Ignore it Because it’s Now on Everyone’s Agenda!

By Modwenna Rees-Mogg, founder CEO of AngelNews

Why Impact Investing is the new strategy that clever angel investors are adopting…

Impact investing the new name for social enterprise investing is becoming bigger and bigger news at the moment, but what is it and why is it becoming so big?

We all know that red blooded capitalism which ravages the world’s resources, including humanity, isn’t a very appealing way of making money for most of us. By adding to the monetary rewards the knowledge that some good is simultaneously being done for suppliers, employees or any grouping that appreciates some support is something everybody appreciates. This good needs to be achieved in the right way; performed with a genuine altruistic motive and not cynically simply to improve profits (as many large corporates in recent years have found to their cost).

Companies like Innocent Drinks and Divine Chocolate have led the way in this new type of caring capitalism and, of course, by having the right motives, have found that instead of acting as a drag on their business’s profitability, their actions have actually added brand value and increased sales!

For many years, traditional capitalists, including investors, and the “tree-huggers” found it challenging to engage with one another. But now, at last, everyone is moving into the same camp. From what I can see, some of the biggest challenges have been in the languages each camp has used — just think of how business looked for profits and “the others” looked for “a surplus.” No wonder there were challenges if they did not even speak the same language.

One of the most interesting aspects of impact investing is that the gender mix is much more balanced than in traditional angel investing or even entrepreneurialism. The numbers are more like 50:50 than 90:10 in favour of men. This is also a great world to find examples of the metrosexual man. And the bias is also towards younger generations than elsewhere, which is exciting. Another attractive theme is that impact investors are very happy about the reasons why they are there — often driven into the fold because they have first-hand experience of how a social enterprise helped friends or family. It’s not trite to say this is a really nice world to hang out in.

At a recent lunch I chaired for UnLtd, which included both social investors and apparently red blooded business angels, it became blatantly clear that the underlying motives of both groups were the same when it came to getting involved in an enterprise with which they were previously unconnected. In order they want to:

1. Give something back;
2. Make the enterprise work long term; and
3. Get something out of it, especially personal satisfaction, and ideally financial reward

The main difference seemed to be that traditional investors look for 10x their money or 15%+ IRRs whilst the social gang were happy with returns around 6%.

I wonder if you can see, like me, the irony of things that do good, as well as making money, should be less ambitious in terms of financial reward than their selfish counterparts?! This is certainly a very good place to start the debate if you have not yet done so already.

I know that many of you would say to me that you do things for charity or help out others. Maybe you are a trustee of a charity or a school or maybe you sleep out at night once a year to raise money for the homeless. Loads of you attempt what I would never dare — running in Marathons, climbing the Himalayas and more, so you might ask “why do I need to bring that side of your life into my investing world?

Of course you don’t, and the last thing I would suggest is that you should forsake these activities to do so, but remember more and more clever people from the City and from the angel world have seen the light that impact investing (at the very least as a small part of the mix) really is where you find that 1+1=3. I think also that those already in are enjoying being part of the gang that is both walking the walk and debating the issues which will decide the long term outcome of what impact investing really means. To be honest if you are a bit bored with plain old angel investing and are beginning to see one deal or networking meeting as very much like another, you need to join this gang.

Take Jonathan Jenkins of OFEX (now PLUS Markets) fame. It was Jonathan and his father who created the first competitor to the London Stock Exchange in decades. Jonathan clearly has entrepreneurial blood in his veins and has proved it. These days Jonathan is passionate about impact investing, and he is now leading the charge at UnLtd. (see box). He is particularly keen to use his knowledge of financial markets, fundraising and how external capital can enable a business to leapfrog through its business plan, to help enterprises which may have started out with a social motive, but have by default created a business with real commercial potential.

As he said to me the other day, “social enterprises can be really cool”. We know that, as will those of you who have attended Pitching for Management events this year, where you may have seen Moodscope, Tim Han Cosmetics, Rackety’s or Rhubarb Farm. We’re not the only ones who think it’s cool though. Earlier this month, I heard Moodscope’s founder, Jon Cousins, speaking to Libby Purves on Radio 4’s MidWeek. A social entrepreneur on prime time radio no less! Of course, those of you in the cosmetics world will probably know all about Tim Han and his sustainable, ultra cool, cosmetics business. Beware if you don’t, as the likes of Gucci and Burberry certainly do.

Jonathan is currently absorbed with getting the Big Venture Challenge away. It’s a Big Lottery England funded competition to get funding into the 25 most exciting social enterprises in England and in doing so to create 25 super social business angels. The competition has three phases. The first round winners (the 25) will get a £25k grant from UnLtd to pursue their plans. The 10 from this group who reach the 2nd round, who come back with an additional £50k loan or offer of equity investment for their plan will get it matched with a £50k grant and the final 2 who make it to the 3rd and final round with offers of a further £100k of funding on the table, will get that money matched a further £100k grant. In other words, the winners will get £175k in matched funding from UnLtd if they can raise the same amount from angel investors!

He kindly gave me the inside track on what the judges will be looking for:

1. The winners must be helping disadvantaged communities in England, but are welcome to show how they are helping such communities elsewhere in the UK or overseas. Just employing a lot of people in a disadvantaged area will not be enough

2. A plan that seeks to end a major challenge for disadvantaged communities, e.g enabling the longterm unemployed or those with disabilities to participate socially and economically

3. Social media solutions are cool as long as they can clearly show the social impact they are having

4. The public benefit from the plan should outweigh the private gain for the plans owners

5. Don’t bother if you just want working capital to keep yourself going, but definitely bother if, for example, you need the money to hire an FD who will help you put the financial goals in place to deliver the plan

6. Think how your plan will help remove the need for the public sector to intervene with tax payers money in the future or meet a need which the public sector has already walked away from. So plans which serve disadvantaged communities that would otherwise be dependent on, for example, the NHS, social services, the justice system and education will be of great interest. That being said, its still ok to have a plan where a public sector body is the main customer, though make sure you understand the difference between the customer and the client in this context

7. The idea needs to be scalable so think big! And make sure you can prove both market demand and that the opportunity is sizeable

8. Don’t worry about the legal status of the entrant. Charities are welcome as much as for profit enterprises, but do your homework on whether you can for example legally take equity or loans. Companies limited by guarantee for example cannot raise equity but they can borrow

9. Give evidence of both your personal ambition and your commitment for the plan, especially if you are not the founder

10. Remember it’s a big competition so you will be up against some serious challengers for the crown, so think big

11. Remember your co-investment cannot be money from yourself, your friends & family, a grant or a loan secured on an asset such as a property

12. Take into account the fact that the grants will be paid out in a phased way, so don’t present a plan that is dependent on getting all the money in on day one. (And bear in mind that if you do win you will have to report back — so make sure you explain how you will do this!)

In terms of the applications process, competitors will need to submit the online application and a financial spreadsheet. UnLtd may then conduct a phone interview for further due diligence and lastly they will have to pass the face to face interview of the Big Venture Challenge judges which will include entrepreneurs, investors and UnLtd trustees. So it’s not going to be a doddle to get your hands on the money!

UnLtd trustees. So it’s not going to be a doddle to get your hands on the money!

I love competitions like these because they raise the game for all entrepreneurs and even by applying for one, helps any entrepreneur to focus better on the future of their business — social enterprise or not.

What will the winners be like though? Jonathan told me that they will be really, really inspirational. He is looking for the competition to deliver him a “pack of playing cards” that can be pulled out to showcase the best of what impact investing can deliver for investors, for the businesses and for society as a whole. And he really does mean a pack of cards - the details of the 25 winners will be printed onto a physical pack of cards (apparently they will look a bit like Top Trumps) to be circulated far and wide and especially to the press.

They will push the boundaries in every direction, not just tweak a bit. In doing so, they will change the world for the better and will inspire dozens if not hundreds of others to follow suit.

I’ve known Jonathan for years and years and I like this step he has taken. It feels right. And I like the people I am meeting through him, especially the social investors who by having that extra dimension to their strategies are seeing around corners and proving there are ways down blind alleys.

I think that all businesses (which by definition includes their investors) need to rethink their relationship with their narrow and wide communities on a regular basis if they are to survive and if we can create a world where making a social impact (internal or external to the business) becomes our core part of the thought process rather than something which only the main board, “the CSR” team and the PR department bother about, the world really will become a better place now and for future generations.

So AngelNews will be supporting the Big Venture Challenge and I will treat my role as one of the judges in September with the honour it deserves. And I can’t wait to see the names of many of the angels I know, as well as many of those I don’t, in the application forms of the thousands of bidders I am sure will flood into the competition in the next few weeks!

Jonathan told me that the competition is not just for start-ups, it’s also for social enterprises that want to take a big step forward or which want to get into a new area. So do tell all those social enterprises you know or help to apply here as soon as possible. Visit Big Venture Challenge to find out more. The closing date is 30th June 2011.

We are now nearing the end of our Spring/Summer series of Pitching for Management™ events. Our June events include Camberley and London. Book your tickets online at AngelNews Eventbrite.

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