Innovation Opportunities in Seed Stage Impact Investing – by Tim Freundlich

Tim Fruendlich is President of ImpactAssets

Tim Fruendlich is President of ImpactAssets

Interest in impact investing has invigorated the flow of capital to social enterprises, tapping into investment capital where there are market-based opportunities to create positive change.  ImpactAssets was founded to increase the flow of capital to high impact social and environmental enterprises by making impact investing more accessible to investors, philanthropists and their wealth advisors. As the market for impact investing has grown, however, seed stage impact investing remains underdeveloped, consequently limiting the deal pipeline for the field overall.

Compounding these issues, there is a lack of transparency and data about funds, investors, ventures, and deals in the seed stage landscape which causes uncertainty and reluctance to invest.

We have been taking a closer look at the barriers to seed stage investing by interviewing various players in the ecosystem, all of whom acknowledge a gap in impact investing at the seed stage. For the purposes of our research, we consider seed stage to be a venture that is raising a round of capital less than $500,000 with little to no revenue recognition. There is both solid supply and demand for early stage capital, but the two don’t come together effectively yet.  This gap provides opportunities for innovation across the field.  Some believe that social entrepreneurs need capacity building support to make their ventures investment-ready and point to accelerators or incubators as a solution. Others, who see that same need for venture development, advocate for philanthropic dollars to enable early ventures to test their products and establish a customer base.

On the capital side, many interpret the seed stage gap as an investor issue; the economics of investing $50,000 or less in an early stage social venture just don’t make sense considering the extensive due diligence, term sheet negotiation, and ongoing monitoring of such an investment. Also, it can be very difficult to generate deal flow that matches an investor’s financial and impact expectations in addition to their geographic or issue area focus.

Compounding these issues, there is a lack of transparency and data about funds, investors, ventures, and deals in the seed stage landscape which causes uncertainty and reluctance to invest. All of these factors contribute to the frustration that both investors and entrepreneurs feel in trying to flow funding between impact investors and promising social entrepreneurs.

There are a multitude of sound reasons why many investors have not pursued seed stage investing in the impact space:

  • Risk Return Profile
  • Investment Size and the Realities of Allocation
  • Expense to Source, Analyze, and Monitor Deals
  • Lack of Information
  • Investment Readiness
  • Lack of Scalability

It is clear that this is an area ripe for creative approaches. There is not one solution to the seed stage investing gap; many activities must be pursued simultaneously to effectively connect the dots. Introducing new intermediaries and platforms with innovative products and services, as well as the continued development of existing intermediaries such as accelerators and seed funds, will free up the flow of capital from investors to seed stage social ventures. There are unexplored areas of improvement that could reveal powerful solutions in sourcing, vetting, monitoring, mapping, reporting, networking, entrepreneur capacity-building, investor training, and many other areas of this ecosystem.

Identifying and developing those solutions will strengthen deal flow and close the seed stage investing gap. As an organization focused on building the field of impact investing, ImpactAssets is going to take the full learnings from our research, to be released in an upcoming Issue Brief, and use our role as an intermediary to provide a more efficient way for promising social ventures to move from concept to market.

Tim Freundlich will speak at Social Enterprise Summit ’13. 

See Tim’s Speaking Schedule View the Summit Program Register for the Summit

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