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September 16, 2014

Serving and Building the Impact Investing Market

As noted in the introductory post in this series, intermediaries can play important roles in bridging capital and opportunity. It is a classic ‘chicken and egg’ challenge though – do you work with investors to ensure that they signal their willingness and ability to (and actually do!) make capital available for prospective investees, or do you work to cultivate a pipeline of ‘investment ready’ opportunities (including social enterprises as well as products such as impact funds) that show clear potential to scale their business models and social impact with an infusion of capital?

The answer – as you may have imagined – is that you need both, working on the ‘demand side’ and the ‘supply side’. In a market that is still being developed, where the costs of linking capital and opportunities are still high, simply focusing on one side of the equation does not provide a foundation for success. In this post, I will describe how Purpose Capital has evolved to respond to the challenges and opportunities of the Canadian market, and how we are working to serve the needs of the market while helping to build it.

What side of the equation should we focus on?  

Almost four years ago, I co-founded Venture Deli with 2 other partners, Norm Tasevski and Assaf Weisz. All 3 of us were working with social entrepreneurs (via advising, teaching, networks, consulting, etc.), and knew that the range of supports for early-stage entrepreneurs – many of whom had tremendous energy and potential with their emerging business models – was lacking. We formed the company to provide a ‘menu of options’ for them to build and validate their business models using the Business Model Canvas approach, and get them to “their first customer”. We met over 400 entrepreneurs in our first 18 months, and got a good sense of the ‘demand side’ ecosystem in Canada.

At this stage, we realized a few things: a) we had to be very selective around who we worked with; b) the time and effort to find, cultivate and grow even the most promising business models were very high; c) the economics of working with early-stage entrepreneurs were extremely challenging to build an intermediary firm around; and d) scaling this venture would be quite challenging. At the same time, we had begun to engage and advise investors who were seeking ‘deal flow’ in this area – we were seeing many promising models, and they were willing to pay us to find, vet and work with them. At this point, it occurred to us that we could benefit from shifting our model to serve the full ecosystem.

We launched Purpose Capital, initially as a complementary presence to Venture Deli, but quickly shifted all of our work into the new structure, while expanding our service offerings via new practice areas. It offered us the chance to work with a range of investors – foundations, high net worth individuals, banks and credit unions, and governments – while also exploring a broader range of opportunities to build the pipeline of opportunities from impact products and growth-stage social enterprises. This shift corresponded with the increasing sophistication of the impact investing ecosystem in Canada, and allowed us to leverage our capabilities across the team to take on a range of compelling projects.

How can we help build an ecosystem, while also servicing it?

Our founding motivation was never just to create an organization that responded to the needs of the market; it was to help influence, shape and construct it. This was baked into our founding ethos as a firm, and as individuals since all of us were actively engaged in this way prior to forming the company. This market-building mandate is not unusual in new markets, where you combine the first mover benefits (e.g. lack of competition, high visibility) as well as disadvantage (e.g. market outlook uncertainty, pricing and value creation ambiguity).

This market-building mandate has included both formal and informal roles. Our research publications are perhaps the most visible sign of this commitment – we recently published a comprehensive assessment of the Canadian impact investing ecosystem, and previously authored reports on impact measurement use among Canadian investors and financial sector awareness of social finance. Our portfolio includes many opportunities that are considered ‘pioneering’ in Canada, and we continue to push the boundaries. Our team actively presents and speaks on our work in impact investing – including careers/opportunities, disseminating research to new audiences, and disseminating best practices across sectors – and while maintaining strong partnerships with other like-minded organizations in this sector.

Servicing this market remains a core facet of what we do, and we have been pleased to work with leading Canadian and international organizations to help them link capital and opportunity – whether it is advising a foundation on how to build and operationalize an impact investment approach across their portfolio, helping to refine the business and financial models for co-working spaces, design an entity to enable the construction of affordable housing, inform a leading Canadian bank on the opportunities for impact investing across asset classes and client segments, or evaluate the impact of an innovative grantmaking program for youth social entrepreneurs. At the same time, however, we are co-creating new initiatives with partners who are keen to design and implement ‘game changing’ initiatives in this sector. A recent example is our work with the McConnell Foundation on RECODE, an ambitious initiative to enable ecosystems around social entrepreneurship/finance on university campuses. Again, we are moving beyond an either/or approach, to one that seeks to both serve a market well, and to also help influence and build it.

Looking Ahead

In over 3 ½ years as an impact investing intermediary in Canada, we have seen this market evolve in ways that we predicted, as well as in ways that were unexpected. We would expect that this market will look very different in the next 3-5 years, with specialized intermediaries operating in specific sectors and regions. At the same time, it will be imperative for the broader ecosystem to calibrate our individual and collective activity, so that we can balance the ‘investment readiness’ of both investors and investees, in order for capital and opportunity to connect through a set of appropriate products.

Our experience to date can be instructive to existing or potential intermediaries, and I offer the following advice:

  • Understand your existing market i.e. define your target customers, their pain points, how you will meet their needs, and that are able and wiling to pay for the products and services you will provide;
  • Collaborate with partners in imagining, designing and building initiatives that build the ‘plumbing’ for this ecosystem e.g. physical social innovation spaces, virtual platforms that reduce costs to find opportunities, etc.
  • Contribute your expertise and insights via public good knowledge products – not only are they important; for the development of the sector, but can help you build credibility and aid with marketing; and
  • Seek to work closely with your peers from within your regions as well as outside, as this is about growing the ‘size of the pie’ and ‘mainstreaming impact investing’ will take a lot of collective action and effort.

Intermediaries perform important roles in the development of impact investing, and it may not be a stretch to say that the strength of a specific market can be judged by the sophistication, track record and ambition of the intermediaries that serve it. As such, we continue to see our role as service providers to the market across a range of areas – strategic advisory, opportunity identification, product development, impact measurement – while also contributing to the development of the market via knowledge products and ‘game changing’ that we co-construct with other partners.

We look forward to hearing from our colleagues from Europe and around the world who are keen to learn from us, collaborate on compelling initiatives, and collectively contribute efforts to the development of impact investing globally.

 

This post originally appeared at the Forum for Social Innovation Sweden website, as part of a series on impact investing intermediaries in Canada, and has been cross-posted with permission. Visit their website for the introductory post on the importance and roles of intermediaries and the second post on the experience of Social Capital Partners.