For the past ten years I have worked with impact focused companies and fund managers at every stage - from those just starting to those raising money for expansion to those looking for an exit that preserves the impact they have worked so hard to create. At every step, almost every one of these people, most of whom had deep domain expertise, had no idea what they were doing. They were chronically under-advised.
This shouldn’t be that surprising. Impact investing and social entrepreneurship are still relatively new domains. So, at best, I meet people who have been successful entrepreneurs or fund managers in other fields looking to move their talents into the impact space. More often, I meet people who know their sector well but have never raised money for anything. In both cases, there are networks and knowledge that these people don’t have, many of which are common to impact transactions that would be better held and re-used by an advisory firm than re-learned from scratch every time someone wants to get something funded. The key questions include:
- What is the right structure for the enterprise? This is everything from simple questions like “Should I be a B Corp” to more complex questions around the right legal structures to preserve mission while attracting capital. People often need more than advice, they need someone to work on the specific details of the structures, and the time to get straight these questions is before you hit the fundraising trail.
- Who will actually invest in this? I have seen people waste literally years talking to the wrong kind of investors - talking to VCs when they should be talking to foundations. A bank that can make qualified introductions to investors who have already done similar investments would help both sides.
- When should I talk each investor? This is as important as who you talk to and, again, it’s one where first timers waste a lot of time (and waste a lot of investor time) Spending too much time with someone when you are too early for them to invest can diminish your chances down the road.
- What should be funded with grants? with debt? with equity? Most people need a mix of financing, and most for-profits don’t think about which activities should and could be funded with grants. Understanding the optimal capital stack is important for any business but is especially important for impact businesses because the diversity of available capital is greater and the different funding groups are less familiar with each other.
- Impact mergers and acquisitions - This probably deserves its own post, but those attempting to partially or fully exit their business while preserving impact need specialized advice. Whether it is helping find like-minded acquirers, structuring acquisitions to preserve certain characteristics of the business or converting to employee ownership, this is specialized advice that can make or break years of work.
So that’s what companies and funds need from their investment bank. I think there is enough activity in the market to justify a few different firms providing this kind of service. But there are rational reasons it hasn’t happened yet
- Regulation - Providing this kind of service makes you subject to a variety of different regulatory bodies, and obtaining and maintaining the appropriate licenses and certifications is non-trivial, both in terms of time and expense
- Profitability - At current deal size and cadence, you are not going to get rich as an impact investment bank. There is plenty of work to be done, but given the relatively small size of the transactions and the amount of work to get them done, it may not be profitable for several years, and it may or may not be feasible to ever recoup the considerable start up costs ($5 million, $10 million?) of getting a credible investment bank up and running. As a result, I think a considerable portion of the early years may need to be grant-supported and that is going to take a funder with long term vision, and appetite for risk and strong interest in impact investing.
- Number and diversity of investors - a traditional investment bank with a good deal can do its job because there are literally hundreds of potentially interested investors to show it to. In impact investing, it’s still a fairly limited bench of investors, especially if you start segmenting by sector interest. I have advised more than one company, “Here are your four potential investors, and if none of them bite, you’re boot strapping.” I think this will get better over time, but in a perfect world, that same group that is grant funding the investment bank itself would commit to partially fund the first few deals until the investor list can be grown. Even better if the bank had discretionary funds to commit to deals to demonstrate their own faith in their work.
One last thing, I do think these need to be new entities. I don't think traditional investment banks can do this work. There isn't nearly enough money in it for one. For another, I don't think they mesh culturally with either investors in this space or entrepreneurs. I do think, though, that this type of firm could selectively poach talent out of investment banks.
So my hour is up, that’s the idea for today. Impact investment-focused banks could greatly accelerate the introduction of a whole host of impact focused companies and products. The next step is to identify some projects that are closer to investability that could use the services I listed above and figure out specifically what they need. If you know someone with $10m to capitalize a new bank, leave a comment.