Impact Investing How To Get A Return While Doing Good

By Marianne Hudson - Forbes
Friday, 1st May 2015
Filed under: Year2015

Imagine your investments generate both financial returns and measurable social and/or environmental impact. That’s the premise behind “impact investing,” an area that’s quickly gaining traction among angel investors, writes Marianne Hudson, Executive Director of the Angel Capital Association (ACA).

It’s not a discrete sector or asset class, but instead is an approach to investing. Right now it’s a $50 billion market, according to Liquidnet Holdings, a global institutional trading network. And it’s growing. J.P. Morgan & Global Impact Investing Network, in studies conducted in 2011 through 2014, found that investors are increasingly satisfied with impact investing and plan to invest more money in the future.

The Angel Capital Association (ACA) recently held a webinar on the topic of impact investing featuring Bonnie Moellenbrock, executive director of Investors Circle, H. Kenneth Merritt, Jr., managing director of North Country Angels in Burlington, Vt., and Michael “Luni” Libes, founder and managing director of Fledge – three passionate impact investors.

Moellenbrock notes that angels make impact investments in many areas, including community and economic development, impact software and media, education, energy and energy efficiency, environment and sustainability, global health, sustainable consumer products. Some are also led by women or minorities. These can include well-established national brands like Zipcar and Numi Organic Tea, as well as emerging brands. Last year Investors Circle invested $8.5 million in 32 impact enterprises, up from under $2 million invested in 2008.

Sometimes impact enterprises are hard to distinguish from organizations with a charitable emphasis. For example, although popular firms like Ben & Jerry’s Ice Cream and TOMS shoes may look like impact enterprises, they really aren’t because their business doesn’t depend on the charity they provide. Ben & Jerry’s donates a percent of profits to charity and TOMS gives shoes to developing nations. Although generous and worthy, these charitable contributions are choices the companies make.

Conversely, true impact enterprises incorporate their mission into their business model. Zipcar represents a more traditional impact enterprise because its service is imbedded with its mission to help the environment by providing an alternative to car ownership. The key difference is that the mission is an inherent component of the company and a driver of financial growth. If the company isn’t able to stay in business, it won’t generate a positive impact.

Impact investing is certainly appealing, but what should angels consider before engaging in it? Not surprisingly, many of the fundamentals of angel investing are the same. Impact investing just adds more criteria. Look for potential return commensurate with risk, appropriate pre-money valuation, ability to raise subsequent rounds of capital, and the opportunity for liquidity at an appropriate juncture.

Finding impact investments can take more work because there is no one sector to look at. Also, investors should be prepared for more financing rounds than other angel investments because many impact enterprises are establishing markets, and some are pushing the envelope with their business plans. Because of that, they may have a longer time to liquidity, so patience is key.

Investors should also take steps to avoid becoming overly excited about a charismatic entrepreneur with a meaningful mission.  Make sure to do appropriate due diligence around the business model and leadership team to ensure the plan can be executed. “Impact investing requires using your heart as well as your head,” says Moellenbrock.

As with all angel investments some may lead to a liquidity event or exit, but not all will. For example, Libes has built his socially conscious accelerator Fledge around a plan that doesn’t count on exits. To back these companies – and still get a healthy rate of return, Libes and Fledge give money to entrepreneurs and get a certain percent of top-line revenues, coming in quarterly, monthly, or annually, until they get a multiple of their investment back. So far it’s working. Fledge has done 39 deals, with on-paper returns of over 35 percent. “I’m expecting this to be a great way to do investing, not only angel investing, but impact investing as well,” Libes says.

While impact investing is still a small part of the overall investor pool, it’s clear from talking to the players in this space that it’s here to stay. If you’re interested in learning more about impact investing, visit ACA and download the free webinar titled, “Money is Local; Impact is Global“.

If you are interesting in learning more about business angel investing get in contact with HBAN today on 01 669 8525.

This article was first published by Forbes and was written by Marianne Hudson.
"I am an angel investor and Executive Director of the Angel Capital Association (ACA), the world’s leading professional association for angel investors. ACA is focused on fuelling the success of accredited angel investors who support high-growth, early-stage ventures, and has more than 12,000 member angels across North America. I know one thing for sure: there is a method to the madness. In shaping ACA professional development programs and public policy advocacy, I have the opportunity to hear firsthand from experienced angels and the ecosystem at large—what works, what doesn’t work, and strategies to consider for everything from getting started as an investor, to finding great deals, to supporting the companies you invest in to growth and exit. I know about trends and impacts of angels and innovative startups too. Earlier in my career I ran the angel initiative at the Kauffman Foundation, which led to ACA and the Angel Resource Institute, and where I also oversaw entrepreneurial education and mentoring progra designed to ensure that more entrepreneurs develop sustainable, innovative businesses. I love entrepreneurship and have worked in supporting fields for more years than I will admit. I am a member of two angel groups in Kansas City and also connect with several accredited platforms."