What Impact Investors Look for in Startups

Published Jun. 20, 2018

By Frank Eleanya for Business Day

About Powering Agriculture

Powering Agriculture: An Energy Grand Challenge for Development supports the development and deployment of clean energy innovations that increase agriculture productivity and stimulate low carbon economic growth in the agriculture sector of developing countries to help end extreme poverty and extreme hunger.

The Annual Impact Investor Survey 2018 released in June showed that the sector (impact investing) doubled by $114 billion year on year.

The report which was prepared by the Global Impact Investing Network (GIIN) captured investment assets from 226 respondents in developed and emerging markets. It noted that a total of $228.1 billion in impact investing assets under management (AUM) were realised in 2017.

Interestingly, the report highlighted what some of the impact investors targets in businesses they invest in.

“Nearly two-thirds of respondents target risk-adjusted, market-rate returns (64%),” the report revealed. “The remainder seek below-market-rate returns that are either closer to market-rate returns (20%) or closer to capital preservation (16%).

An impact investor, according to GIIN, is a person who invests in companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.

The United Nations Development Project (UNDP) highlights three characteristics of impact investors. First, they expect to earn financial benefits from the capital invested, below the prevailing market rate, at the market rate or even above it. In other words, they are different from ordinary philanthropists. Inasmuch as they expect return on investment, impact investors also are attracted to businesses or solutions that address social or environmental challenges. In essence, their goal for investing is to achieve a positive impact on society and the environment. Finally, they commit to measure performance using standardised metrics.

Impact investors are not limited by to specific asset class or sector. Areas they can be found include fixed income, venture capital, private equity and social and development impact bonds.

The GIIN report noted that over half of respondents target both social and environmental objectives. An additional 40 percent primarily target social objectives, and 6 percent primarily environmental objectives. To achieve these objectives, the majority of respondents (76%) set impact targets for some or all of their investments.

“Respondents that set targets cited a number of reasons to do so, including to drive social and environmental impact management, to inform investment decisions, to hold investees accountable, and to hold their own teams accountable to impact,” the report stated.

An innovative tech startup can actually attract investment from impact investors. Impact investors often – but not exclusively – invest in innovative businesses and enterprises in sectors such as sustainable agriculture, affordable housing, healthcare, energy, clean technology, and financial services for the poor.

Examples of impact investors, according to the UNDP, include high net worth individuals, foundations (e.g) Bill & Melinda Gates Foundation, Ford Foundation, Dangote Foundation), pension funds, institutional investors (e.g. JP Morgan, AfDB, South Africa PIC) and retail investors that invest capital directly in social enterprises or in impact investment funds (e.g. Acumen Fund, Bridges Ventures, Elevar Equity, Ariya Capital) and instruments (e.g. Social Impact Bonds).

Impact investment in emerging markets like Nigeria is on the rise. The GIIN report showed that out of the 226 respondents, 103 of them allocate 75 percent of their current impact investment assets under management (AUM) to emerging markets, while the rest 97 allocate to developed markets.

Despite allocating over half of total AUM to emerging markets (56%), only about ten percent of the respondents (25) say they allocate 75 percent of AUM to sub-Saharan Africa region.

Some of the challenges highlighted by impact investors include lack of professionals with relevant skill sets in impact investing (90%), sophistication of impact measurement practice (88%), lack of high quality investment opportunities (86%) and research and data (85%).

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