Part 1 of 3
Social ventures, including social enterprises and social purpose businesses, strive to provide both attractive returns to investors/funders and market-based solutions to social and/or environmental issues. These ventures provide an investment opportunity that blends the value of social impact with financial gain. The social-financial return continuum in Figure 1 shows the social and financial return that can be expected from both types of social ventures.
The financial instruments typically available along the continuum in Figure 1 and the corresponding exit expectations of funders and investors include:
- Grants: a form of capital investment that supports the creation of social value with no expectation of repayment of either principal or interest
- A recoverable grant: capital with no interest, but the expectation of principal return
- A program-related investment: a loan typically provided by a foundation which requires principal return and interest payment, but carries a below-market interest rate (these types of investors are rarely found in Canada, but are common in the US and UK markets)
- A loan or equity investment from a social investor (such as a socially-screened venture capital fund or an angel investor)– solid financial returns along with social and environmental returns expected
- A market-rate loan or equity investment from a mainstream capital market player–a strong financial exit is the only goal
Figure 1—Social and Financial Return Continuum
These articles detail the typical financing options available to social enterprises and “Financing Options for Social-Purpose Businesses (for-profit)”.
For social ventures the term “exit strategy” has a very different meaning than for traditional venture-backed companies. The exit strategy will depend on the type of venture, the capital available to you and the return expectation of your funders or investors, (which includes varying degrees of social, environmental and financial returns).
Considerations regarding exit strategy as you’re starting your venture:
- You do not really have any control over when your company will exit. Focus on building a great organization that is meeting its social, environmental and financial objectives.
- Building a venture that delivers blended value defined as an integration of social and financial returns is challenging. Make sure you are working with an investor or funder who fundamentally understands this and provides capital to your organization in a way that meets both of your objectives.
- For SPBs that are likely to generate a financial rate of return that is below market rates, it may be difficult to achieve a financial exit through the typical methods of an acquisition or public offering. If you suspect that this may be the case for your venture, communicate this fact to your investors early in the funding process. That way, the investment can be structured with an alternative potential financial exit in mind. For example, it might make more sense for the investor to make a loan with interest and potentially a royalty component to your organization to provide that investor an equity-like upside return potential, rather than making an equity investment in your SPB that may never generate a liquid return through a traditional exit method.
Investors in SPBs and social entrepreneurs find it challenging to define what constitutes a socially responsible exit. How can a venture retain its social mission through a traditional financial exit—an acquisition or public offering? One way could be by including social covenants and mission-focused shareholders’ agreements early on in the financing of the venture. One approach on how you might ensure the social mission is embedded in your organization is through registering your SPB as a B Corporation. Other organizations have provided founders and other key social stakeholders with special voting rights on their shares with respect to the ultimate sale of the business, to enable them to consider both the social and financial returns to stakeholders as a result of the exit event.
- One of your business partners may well become your acquirer. Think about this when you are partnering with other companies. If you are looking at potential partnerships, ask yourself whether they would be a good candidate to acquire your venture later.
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MaRS Social Entrepreneurship. (2009). Part 1: Social Venture Financing, Spring 2009. [white paper]
Alter, K., Shoemaker, P., Tuan, M. & Emerson, J (2001). When is it Time to Say Goodbye? Exit Strategies and Venture Philanthropy Funds. Retrieved November 10, 2009 from www.virtueventures.com/resources/exit-strategies