Impact first investments aim to prioritize social or environmental impact over financial returns. However, financial sustainability is still important for the growth and scalability of impact first organizations. This article will discuss how investors and entrepreneurs achieve a balance between pursuing mission and generating returns in impact first investments.
understanding the spectrum of impact investments
The impact investment field covers a spectrum from purely philanthropic grants on one end to market-rate-seeking investments on the other. Impact first investors anchor themselves on the philanthropic end, accepting below-market financial returns to maximize social impact. However, they still need to consider financial sustainability to scale their initiatives. Meanwhile, market-rate-seeking investors target risk-adjusted market returns with social impact as a byproduct. Most impact investors fall somewhere in between. Categorizing different investor types helpsillustrate that social and financial objectives are not a zero-sum game. With innovative deal structures and patient capital, it’s possible to optimize both.
setting realistic return expectations for impact first deals
Impact first investors should set clear expectations about financial returns upfront with entrepreneurs and hold each other accountable. Below-market returns do not mean accepting losses or unclear targets. Impact first investors may benchmark around 2-5% returns, lower than the 10-15% sought by commercial investors but still positive. Entrepreneurs should present realistic projections and highlight growth opportunities. With aligned expectations, investors and entrepreneurs can focus on executing the social mission while ensuring basic financial viability.
using blended finance and innovative structures
Blended finance refers to combining different types of capital to support a project. Impact first investors can provide philanthropic and below-market-rate debt or equity. Additional layers of market-rate capital can be added while keeping impact integrity. Creative combinations of grants, loans and equity can help balance cashflows for maximum impact. Many impact investors also use revenue-based financing, allowing for flexible repayments based on an enterprise’s sales. Structuring blended capital facilities that share risks and returns allows impact first investors to still participate while reducing potential losses.
focusing on capacity building and operational support
Beyond providing capital, impact investors add value by actively supporting capacity building for entrepreneurs. Impact first investors often have in-house experts or networks to advise on technology, marketing, talent recruitment, impact measurement and other areas. Hands-on support drives business model refinement and growth. Investors may also connect enterprises to potential corporate partners, public sector relationships and follow-on funding. An engaged investor-entrepreneur relationship creates the foundation for successfully balancing impact and sustainability.
With patient flexible capital, blended structures, capacity building and aligned expectations, impact first investments can optimize social returns without compromising on basic financial viability. Achieving this balance requires collaboration between investors and social entrepreneurs across the full investment lifecycle.