Impact Investing 101: A Beginner’s Guide to Making a Difference
More and more people today want their investments to impact the world positively. Impact investing lets you do just that. It means obtaining funding or putting money into companies and organizations that generate social and environmental impact and financial returns.
You may have heard about impact investing but need help figuring out where to start. This beginner’s guide will walk you through the basics so you can immediately begin investing for impact. We’ll explore impact investing, how it works, the options available, and how to build an impact portfolio that matches your financial and social goals.
What is Impact Investing?
Unlike traditional investing, where the goal is purely financial gain, impact investing seeks to make a difference. Impact investing firms support causes like renewable energy, healthcare, education, and economic development. The companies and projects these funds invest in are creating innovative solutions to issues like poverty, lack of access to resources, inequality, and environmental degradation.
Currently, the top 5 impact investing firms according to the value of their assets under management are Blue Orchard Finance S. A., Triodos Investment Management, Community Reinvestment Fund, The Reinvestment Fund USA, and Vital Capital.
There are a few common ways to obtain impact investing funds:
· Community investments help build wealth and opportunity right where people live. They fund projects like affordable housing, small businesses, and community services. Many credit unions offer community investment options.
· Debt financing lends money to social enterprises, usually with the expectation of repayment with interest. Unlike traditional debt financing, it focuses on supporting ventures that generate positive social or environmental outcomes alongside financial returns.
· Equity financing, as an impact investing type, refers to raising capital for social or environmental projects or enterprises by selling ownership stakes, or equity, to investors. In this context, equity financing aligns with the principles of impact investing, which seeks to generate positive and measurable social or environmental impact alongside financial returns.
· Microfinance involves small loans to mostly impoverished borrowers in developing nations who need access to traditional banking. Interest rates on the loans are usually higher than average to offset risk but still provide affordable capital for the borrowers to start or expand businesses.
· Social impact funds focus on generating positive social and environmental outcomes alongside financial returns. These funds pool together capital from various investors, such as individuals, foundations, and institutional investors, specifically intending to address social and environmental challenges.
The options for making a difference with your dollars are growing every day. With some research, you can find an impact investing firm that matches your financial and social goals. Together, we have the power to create a better future for everyone.
Main Criteria to Get Impact Investing Funding
Impact investing firms typically have specific requirements for the loans and investments they provide. Some key things they will evaluate include:
Environmental or Social Mission: The company or project must have a clearly defined environmental or social goal and be able to demonstrate how they will achieve and measure impact. Things like improving education, healthcare, economic opportunity, and environmental sustainability are common impact areas.
Experienced Management Team: A funding candidate’s management team needs relevant experience and a proven track record of success. Impact investors want to see that the company can execute its vision and business plan.
Financial Viability: While the impact is essential, the company must demonstrate the ability to generate returns for investors. A solid business model, revenue model, and financial projections are necessary. A realistic exit path must exist, such as an acquisition or IPO. For debt financing, there must be a plan to repay the loan.
Measurable Metrics: Clear metrics and KPIs must be in place to track social impact and financial performance. Impact investors will want to know precisely how the funds will be used and the timeline for deployment. Funds should be used to scale operations, not cover basic operating costs. They will want to see quantitative and qualitative ways of measuring outcomes.
By understanding these requirements, social entrepreneurs can better determine if impact investing is right for them and how to position themselves for investment.
When to Consider Funding from Impact Investors
If you started your company to make a difference in the world, impact investing could help fund your vision. Impact investors seek businesses that aim to solve social or environmental problems, not just maximize profits. They provide capital to scale your operations and increase your impact.
Don’t give up hope if you’ve struck out with traditional funding sources. Impact investing opens up a new pool of investors interested in more than just the bottom line. They evaluate businesses based on the potential positive impact in addition to financial returns. While impact investors still want a viable business model and path to profitability, they may be willing to take on more risk or accept lower returns to support a meaningful mission.
Impact investors need a well-developed business & financial plan demonstrating how your company will achieve financial sustainability and scale its impact. Be prepared to show realistic financial projections, key milestones, risks, and how you’ll mitigate them. Impact investors want their money to fund growth, not just keep the lights on. Clearly envision how their capital will help expand your operations and social impact.
Impact investing often involves close collaboration between the investor and investee to maximize impact. Be open to input on your business model and theory of change. They frequently take board seats or observer roles to support your work actively. If you want passive, hands-off investors, there may be better choices than impact investing.
The opportunity to secure funding from impact investors who share your vision for change can be life-altering for mission-driven companies. But go in with realistic expectations about the level of partnership and commitment involved to make the most of this impact investing relationship. With open communication and shared goals, impact investing can be a powerful way to scale your business and its impact.
Summary
So, there you have it, a quick primer on impact investing. Now that you understand the basics, you can explore the top 5 impact investing firms more. They can provide ideas if you’ve been interested in the topic but need help determining where to begin. They show how to match your finances with your ideals through their many impact areas and investing approaches.
You can also use Excel financial modeling templates to obtain impact investing funding. They can provide a clear and comprehensive analysis of your financial projections and the potential impact of your investment. eFinancialModels offer industry-specific Excel financial modeling templates incorporating relevant financial and impact metrics to instill confidence among impact investors. Make a difference today!
