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Impact Investing Africa

Impact Investing in Africa: How to get impact investors to invest in your social business Part 1

Let's face it: at some point you wished you get could impact investors to invest in your social business. The problem? You are not sure how to access their capital.

The good news is that there is an abundance of finance available for the RIGHT investment opportunities. Now you are probably asking yourself: What is the RIGHT kind of investment opportunity? 

Tony Elumelu Tweet WEFAfrica 2016

That is an important question. There is no one size fits all answer. Impact Investing is starting to mature yet criteria and process will differ from investors and industries. But there are some guidelines and criteria that point you in the right direction. 

Many private and institutional investors want to invest their available capital into impact businesses that generate a financial and social/environmental return. 

According to the Global Impact Investing Network (GIIN) there are 107 organizations that are investing in Southern Africa alone. Development Finance Institutions (DFI) like the Industrial Development Corporation have disbursed close to $25 billion across 7,500 deals to South African companies regionally. This is not even taking into account other countries in Africa and other types of impact investing organizations.  

In fact, as Rachel Keeler has argued recently in the Stanford Social Innovation Review, the number of "high-impact" companies in Africa are not growing at the same pace as the number of impact investment funds. In other words, there are more impact investment funds than there are investable social businesses.

That is why a major challenge remains one of deal flow. In fact, the second biggest challenge preventing the further growth of the Impact Investing industry is the lack of high-quality investment opportunities with track record. What does that mean for you?

To answer this question let us adopt the investors perspective. Understanding the investor and what drives him or her will be crucial in how you prepare your impact business to get ready for investment.

Understanding the investor & what drives him or her will be crucial in how u prepare ur impact business to get ready for #impinv. 

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The main objective for any impact investor is to invest capital into a business that has the capability to:

  1. ​generate a financial return on the investment within a given period
  2. realize the stated impact objectives in its field of operations

In order to achieve this objective, any investor will want to minimize the risk of the investment. Putting money into a business is one of the riskiest ways to invest capital. Especially, if that business is in the start-up phase and has not yet achieved product/market fit.

There are many different types of investors including Impact Investing Funds, Development Finance Institutions, Family Offices, High Net Worth Individuals  and others. All of these will have differing drivers and terms based on which they make their investments. Some will be more stringent than others.

Wherever you are planning to get your investment from, make sure you research the investment criteria and conditions of your financing partner.

If you need support in accessing impact investment have a look at the services of the Africa Impact Group. While they will not directly invest in your organization they will assist you in identifying capital and other resources and connect you. They offer the following services for social entrepreneurs:

Impact Investing Africa

Africa impact Group Services for Social Entrepreneurs

Whatever path you choose, you must know that in order to maximize the potential success of the investment, investors will ask a few important questions before making an investment decision.

1) What problem are you addressing?

For many investors this is a fundamental question. Are you providing a solution to overcome water shortage? Are you providing a solution that reduces financial exclusion of those living in extreme poverty? Are you providing a solution that curbs deforestation? There are tons of challenges that need to be solved.

Many investors have clearly defined focus areas where they leverage their areas of expertise. For example, Responsability Investments invest in the following 5 areas: 

Responsability Investments

If your impact business does not touch any of these areas, it is unlikely that you will get any investment from Responsability. Same goes for other investment companies. If your organization does not fall within their area of focus, you will have a hard(er) time to convince them to invest in you.

That is why it is important that in your research you look for organizations that invest in your area of operations

​As part of this question, some investors will also examine your company's mission statement. In other words, what are you seeking to achieve and what are your impact goals?

For Bamboo Finance, this is the first question they ask as part of their impact framework. A company's mission statement is usually closely linked to the problem it seeks to address. This reveals a lot about your company's determination and ambition.

As many investors are also expecting some form of financial return (except if you are getting a grant) they will want to ensure that the problem you are addressing has a sustainable commercial potential to generate expected financial return. 

If your social enterprise has a solution that will make life easier for 1000 people with a very rare disease you will need to look either for a charitable foundation to give you a grant or an investment company that offers smaller investments.

For many investors who have commercial expectations, this kind of problem is too insignificant. They want to invest in solutions where many thousands if not millions of people can be positively impacted. Tackling big challenges also offers the potential for bigger financial returns.

What is your theory of change?

The theory of change is an articulation of the results an organization must achieve to be successful and how it intends to achieve them. According to the Stanford Social Innovation Review a good theory of change should answer 6 questions:

  1. Who are you seeking to influence or benefit (target population)?
  2. What benefits are you seeking to achieve?
  3. When will you achieve them? (Time period)
  4. How will you and others make this happen? (activities, strategies, resources)
  5. Where and under what circumstances will you do your work? (context)
  6. Why do you believe that your theory of change will prevail? (assumptions)

Having a theory of change is important for a number of reasons. Firstly, it shows how your organization is planning to create positive impact in the problem area you have identified. Secondly, it is important for potential investors to use in evaluating your impact.  So make sure you have one.

Establishing a theory of change will also be useful for internal purposes. It clarifies your long-term goals of what impact you would like to achieve and lays out the necessary steps you need to take to get there. It highlights interlinkages between different steps and separated those steps into short, middle and long-term objectives.

For more information on Theory of Change and how to construct one we recommend that you study Theory of Change: The beginning of making a difference which you can download for free from New Philanthropy Capital.

2) How strong is your leadership?

Good leaders do not fall from the sky. As one of Africa's leading social innovators, Fred Swaniker, argues great leaders are not born. They are made. Africa needs many worldclass leaders running businesses, government and public institutions to make the continent prosperous and peaceful.

Great leaders do not fall from the sky. They are made. #africaninnovation #socialchange #tech4good

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In most cases, the state of an organization speaks volumes about the quality of its leadership. The leadership element has an exponential influence on the performance of your business. 

If leadership is weak it will have a negative effect on every area of your business including morale, finances, processes and achievement of impact objectives. 

As a result, it will be  more challenging to achieve an investor's objective both from a financial as well as social/environmental point of view.

Obviously, weak leadership poses a great risk and investors usually like to find ways to reduce risk. Make sure you have strong leadership capability within your organization. This does not mean that you need all the necessary skills yourself. Just make sure you have strong leadership team with complementary skills.

If investors think that the leadership is weak or inadequate for the task at hand, this will usually be a deal-breaker. The risk will just be too high.

A few years ago, the Harvard Business Review run an interesting article on "Why Entrepreneurs don't scale." The author John Hamm argued that entrepreneurs often show their inability to lead surprisingly early in the development of a business. There are many different skill sets that are needed to successfully scale business operations. There are just as many pitfalls that prevent us from maximizing the impact we can have.

Good Leadership can be learned

Africa has a history of great leaders. Nothing should stop you from being the next one.

Loyalty to our vision, our principles and our people who helped us to get where are can turn into a major weakness under challenging circumstances. Many social innovators tend to be very principled with high morals. Mostly, that is a good thing.

Yet when our organizations reach a point where it is time to scale this involves making some tough decisions. We may realize that the people who helped us to build our organization may not be the ones that will enable us to grow to the next level. 

What do we do in such a situation? After all, it may involve changing some of our people in key positions, switching loyal partners and changing our organizational culture. Do we have what it takes to make the best decision in the interest of our social business and the vision it serves? Even if it means we may have to revise some of our deeply held principles that we hold dear?

These are tough questions. They make us uncomfortable. Yet impact investors who entrust us with their capital want to ensure that we will make the right decisions to maximize our social impact and to safeguard the return of their capital.

Investors want to invest in companies with strong organizational capacity and capabilities. If your company is applying for an investment of $5 million then you need to have the necessary organizational capacity and processes in place to manage such an investment.

All of this again boils down to leadership. The quality of the leadership determines the quality of organizational capacity and the quality of organizational capacity influences what kind of investment you will get, if at all.

3) How does your business model look like? Is it scalable?

Your business model is critical to the success and impact your social business can have. The definition of what constitutes a business model is challenging according to the Harvard Business Review. The meaning varies according to whom one asks and for what purpose it is being used.

In our case, we like to think of a business model in terms of how we are going to achieve impact and revenue to sustain our business. A good starting point would be the Social Lean Canvas below with the example of Toms. This should give you a good idea of what goes into a business model.

Social Business Model Toms shoes

Social Business Model Example Toms shoes

(Image source: SocialLeanCanvas.org)

There are many different business models that you can choose from with a famous one being Toms one-for-one business models. Innov8social has compiled a list of business models for social enterprises.

Whatever business model you design for your social business know that impact investors will thoroughly examine it. For impact investors, one of the questions that will be at the top of their mind when evaluating your business model will be whether your business is scalable.

Scalability refers to how easy it is to expand your business model and grow its revenue as well as its impact significantly without equally increasing its cost base. Service businesses that rely on staff are often not considered to be scalable, because if you want to expand your business you need to hire more staff which increases your costs.

In contrast, Ushaidi the Kenyan open-software platform which was co-founded by Juliana Rotich with the objective of crowdsourcing information about crisis areas and collating it into live online maps is considered a scalable business model. The reason why this is a scalable business model is because it being a software it can easily be scaled to serve exponentially more people without the costs increasing exponentially.

Most investors are interested in businesses that can scale their impact and the number of customers they can serve. This will increase the likelihood that their return on investment will increase too.

Impact Investors Africa

Impact Investors are interested in return on investment as much as they are interested in social & environmental impact.

(Image source: freepik)

According to African social innovator extraordinaire Saran Kaba Jones starting a business is the easy part but scaling it while staying true to your mission is extremely hard. Here the quality of your leadership and business will be exposed so make sure you are prepared to convince potential investors.

There are a few highly valuable and free online courses that will help you think through potential scaling challenges. Here are 3 that we can recommend:

The scalability of your social business is really very important in the view of potential investors. So make sure you take it seriously too. You can see below that even a foundation like the Mulago Foundation (who presumably are not as strict on the financial return of investment as impact investors) insist on the scalability element.

Impact Investing Africa Mulago

Scalability is a requirement to get funding from the Mulago Foundation

When looking to access capital from impact investors make sure you can address any questions they might have around your business model and your capacity to scale it. It is one of the critical factors most investors will look for before making the investment decision.

4) Impact

As social enterprises our reason for existence is to have impact of some sort in a chosen field. This is what drives us and guides our vision.

Impact Investors, on the other hand, want to achieve a positive impact in addition to a financial return on their investment. Preferably, your impact is big and reaches thousands if not millions of people.

One of the big challenges in social innovation, however, is how to measure impact. In the past, there has been a huge difference in the way organizations evaluated their impact. Some did not even measure their impact at all.

Within the last two decades, a number of different approaches for measuring social impact have been developed. We look at two of the most well-known approaches to measuring impact.

IRIS

According to the Global Impact Investing Network (GIIN) IRIS is " the catalog of generally accepted performance metrics that leading impact investors use to measure social, environmental, and financial success." It is used by impact investors to assess the performance of an impact business.

Below you can see a variety of different metrics that are part of IRIS:

Impact Investing Africa performance evaluation

As mentioned earlier, there is no one-size-fits-all approach. That is why the IRIS framework is used as a catalog from which the most appropriate metrics can be chosen according to your sector of operations.

Impact Investing Africa

Impact Investing in Africa is on the rise. This is great news for social entrepreneurs.

While IRIS has been developed mostly for impact investors you as a social entrepreneur should familiarize yourself with impact evaluation metrics that are common in your industry to give yourself a better chance to receive investment.

When you can provide information on the impact that your business is creating you are making life easier for a potential investor to decide whether or not your organization merits an investment. The investor can then use this information to compare it to IRIS metrics to use as a benchmark.

For you, it is important to know that IRIS allows for easy comparison of impact data by taking out the guesswork for the investors of finding or creating performance metrics.

In case you want to dive a bit deeper into these metrics, you can visit the GIIN homepage and view the IRIS metrics catalog as shown below. 

Social innovation impact evaluation metrics

Here you can see a randomly chosen metric that could be selected by an impact investor to assess your organization's performance if your impact objective includes serving the very poor in some way.

IRIS metrics

The IRIS metric catalog will give you an overview over the metrics used in different sectors and different aspects of your business. If you want to prepare thoroughly before meeting with investors we would highly recommend that you check this out. If you are a member you can also download the full catalogue.

To give you an example, how relevant this is, have a look at Bamboo Finance' Impact Framework. You will quickly see that their metrics are closely aligned with the IRIS metrics. You can be sure that with the impact investing industry evolving that other impact investors will have similar standards.

Bamboo Finance Impact Framework

GIIRS

GIIRS impact investing Africa

The GIIRS ratings are the second approach which has been developed to assess impact investments. The philosophy and intention behind GIIRS are similar to IRIS. It is to provide an independent third-party impact ratings product that is comparable, transparent, and easy to use.

According to GIIRS it "is uniquely positioned because its focus is on the impact performance of private companies; it uses a cross-industry and cross-geographic methodology; and it provides transparent, independent, and verified data."

One of the good things about GIIRS is that it is dynamic. This means that every two years it releases and updated version of the ratings system in order to keep up with emerging best practices. It is also very comprehensive in that it recognizes over 13 different social enterprise models.

Have a look at the GIIRS ratings system. If it assists you in tracking your impact and is required by your desired impact investors it is advisable to familiarize yourself with GIIRS.

Additional tips

Measuring and understanding our impact as social innovators is clearly important. So it makes sense to want to learn as much as possible about impact evaluation.

If you or somebody dedicated to impact measurement in your business is interested in diving even deeper then we would recommend that you visit Better Evaluation. It is a very informative website with highly valuable resources such as the Rainbow Framework. The resources are available for download in different languages.

The content and information are very well presented and structured. This helps to get a good understanding relatively fast.

Remember that the impact investing field is still relatively new and is still developing. The above frameworks provide technical coherence and common practices which ins informed by a broad and shared vision. According to the Rockefeller Foundation impact evaluation measures should be informed by either the IRIS or GIIRS metrics. Any social entrepreneur seeking impact investing would do well to familiarize him or herself with these.

Online Learning Courses have shot to prominence over the last 5 years. There are many valuable courses you can take to maximize your impact. They can help you in monitoring and evaluating your impact. Here are a few examples:

Remember that the internet is vast and there is a lot of information out there. In case you do not find what you need here, then ask your friend Google to help you out:-). 

Conclusion

Impact Investing in Africa is clearly on the rise. This is good news for all social innovators. Now it is up to us to make sure we build businesses that are investable so that we can access the available capital.

It is important to remember that there is no one size fits all guidelines on how to access impact investment for your organization. That is why it is important to thoroughly research potential capital partners.

The points that we have discussed so far should give you a good starting point when asking yourself how to get impact investors to invest in your social enterprise.

In Part 2 we will continue our discussion on how you can access capital. You will learn about other important considerations that impact investors have. These include your financials, your operations, your corporate governance, your legalities and possible risks. All of them are important and understanding them will give you a better chance of receiving impact investment.

If you want to learn more about social innovation in Africa, useful content and valuable resources then sign up to our monthly newsletter to keep up to date. This way, you will also be the first to find out when Part 2 of how to get impact investors to invest in your social business is available.

About the Author Rise Africa Rise

Rise Africa Rise is your online guide to tech entrepreneurship and (social) innovation for African entrepreneurs, startups and businesses. Our aim is to provide you with valuable digital strategies, tools and insights to support you in building a world-class and competitive business in the 21st century.

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