The Eur opean Trade Association for Business Angels,                  Seed F unds, and other Early Stage Mark et Playe rsE...
2
Table ofcontentsExecutive Summary................................................. 5What is early stage impact investing? ...
4
EBAN is delighted to be pub-                                                                     lishing this white paper ...
How does impact investing differ from other                                                            forms of investing:...
consider environmental impact. Although they are          What is the current European market situation? Isbecoming profit...
We at EBAN have been collecting data on the busi-    ness angel market since 1999 and have started to    collect data on t...
What are the other drivers of this sector?                                                             Government regulati...
HNWIs believe they are filling a philanthropic need   Investing in start-ups whose target markets     when investing susta...
inhabitants of the so-called “last mile”. Thus, for                                                       many people in r...
of the money paid by coffee drinkers. For coffee     drinkers, IKAWA has designed an experience that     allows them to tu...
Table 1To engage in early stage impact investing, here are some of the differences in deal flow sourcing, duediligence, ne...
Table 2     A major difference amongst the two investment processes lies on the key evaluation criteria of an     investme...
Capacity building                                                       Support the building of the early stage impact    ...
Acknowledgements: EBAN would like to warmly thank the following individuals for     their contribution to this White Paper...
17
www.eban.org   EBAN is the European Trade Association for business angels, seed funds and other early stage               ...
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Eban impactinvesting final200711_light[1]

  1. 1. The Eur opean Trade Association for Business Angels, Seed F unds, and other Early Stage Mark et Playe rsEUROPEAN EUROPEANEARLY STAGE EARLY STAGE IMPACT INVESTINGIMPACT INVE EBAN White Paper June 2011
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  3. 3. Table ofcontentsExecutive Summary................................................. 5What is early stage impact investing? .................. 6Why is early stage impact investing poised forgrowth?..................................................................... 9How do early stage investors engage?................ 11Recommendations and Conclusions....................15 3
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  5. 5. EBAN is delighted to be pub- lishing this white paper to encourage more early stage investors to invest in triple bottom line, People, Planet, vital for the sustainable devel- opment of our economies and to address major social and environment challenges - ”Executive pact start-ups and enjoy doing well while doing goodSummary Brigitte Baumann, President, EBANEarly stage impact investing is investing in for Early stage impact investing is not significantly dif-profit businesses that have the specific ob- ferent from traditional investing. However, threejective of creating positive social and envi- aspects that do differ are: measurement parame-ronmental impact, in the way the business is ters, diversity of co-investors, and exit opportunities.conducted and/or the products are realised. To facilitate the successful growth and integra-The market is very young and it still in a diverse tion of impact investing in the early stage in-and nascent stage, which makes measurement of vestment asset class, EBAN will integrate itsits size difficult. Eurosif, which has been collect- specificity in its five strategic pillars of activity:ing data on this market since 2007, predicts that Professional standardsthe share of impact investing of high net worth Benchmarking (research and events)individuals’ portfolio will grow from 11% to 15% by Capacity building2013. EBAN will publish its first data on this sector Lobbyingin 2011. Support to cross-border collaboration including co-investment.EBAN believes that early stage Impact Investingshould and is poised for growth since: There is growing evidence that investors can do well and do good at the same time. This is at- tracting the interest of younger generations of investors, women and family offices. This will grow the business angel investing sector as a whole. There is an increasing need for sustainable business and consumer behaviour. This is cre- ating new opportunities for impact entrepre- neurs which will require financing, especially from the private sector as government support diminishes. Other public and private players in the ecosys- tem are becoming active in this area, creating opportunities and needs for collaboration. 5
  6. 6. How does impact investing differ from other forms of investing: What is early stage impact investing? Impact investing: investing in for-profit busi- nesses that have the specific objective of creating positive social and environmental impact. Glossary of terms and references: Key characteristics: Capital may take the form of equity, convertible Traditional early stage investing: The key differ- debt or debt. ence between traditional early stage investing Impact may be delivered through HOW the busi- and early stage impact investing is that the for- ness is run, for example in terms of governance, mer essentially focuses on shareholder & finan- operations and processes employed, and/or cial return while the latter takes a stakeholder and WHAT the business does, for example the target triple bottom line – People, Planet, Profit perspec- population served, the products and services pro- tive. Further differences are detailed later in this duced document. Return of impact investments can range from Social responsible investing (SRI): Investing in producing a return of principal capital to offering companies, typically through publicly-traded se- market-rate or even market-beating financial re- curities, that favor strong environmental and so- turns1. cial governance (‘ESG’) policies and avoid invest- ments in businesses involved in industries such as What are the potential impacts? alcohol, tobacco, gambling and weapons, although Economic there can be exemptions to this in some cases of Environmental defense industries. Impact investing and socially Products and Services responsible investing contrast in two points: SRI Product Responsibility does ‘negative screening’ of projects and includes Governance investments in publicly traded companies, where- Labor Practices as early stage impact investors proactively create Human Rights impact and invest in private unquoted startups. Societal2 CleanTech investing: CleanTech companies seek to provide an environmental impact but unlike impact investing, do not necessarily make sure that they create an end-to-end positive impact. In other words, they may solve a problem in one area but create one in another area like food or waste. 1 Based on Impact Investments an emerging asset class, Social Investing: Social investments focus around JPMorgan Global Research, 2010 2 Based on Sustainability Reporting Guidelines, GRI, 2010 an impact on the social line and do not necessarily6
  7. 7. consider environmental impact. Although they are What is the current European market situation? Isbecoming profit oriented, unlike impact investing, early stage impact investing a growing trend?many are not geared to give above market or evenmarket returns. Currently, the impact investing market is still in itsPhilanthropy: Philanthropy has traditionally fo- building phase, which means that centres of spe-cused on gifts made by individuals and organisa- cialised activity and interest are beginning to de-tions to benefit society and the environment. Im- velop and infrastructure is being built around thepact investing, with its requirement of a minimum sector. Yet it is still in a diverse and nascent stage,return of principal, is distinct from grant making or which makes the precise measurement of the sizesubsidy activities. of the market difficult.Micro financing: Micro financing is a part of im-pact investing; however early stage impact invest-ing usually involves larger amounts of investment We are delighted that EBANcompared to microcredit’s, investment is in start- is publishing this White Paperups rather than projects, and usually equity basedrather than debt based. ClearlySo are one of Europe’s*Please note that the spectrum of these defini- largest social business angeltions is subject to change in the long term, since networks (with over 2,000 so-the concepts are emerging. cial entrepreneurs and 200 investors), and we can testify that inter-Who are the early stage impact investors? the number of interested angel investorsThey can be classified into three key categories: growing but the demand from social en- Financial First Investors: seeking to optimise financial return with an attention to social or environmental impact. Europe, privately funded social enterpris- Impact First Investors: seek to optimise social - or environmental impact with a view to make a - financial return. Ying-Yang deals: Deals that combine impact the perfect time for EBAN to use its clout first and financial first investors, and some- and credibility to put its views forward—it ” times philanthropic investors as well1. is high time for the EU to respond to theThe following types of investors have been identi-fied as active in the impact investment sector. Rodney Schwartz, CEO, ClearlySo (London, UK) Source: More than Money, Center for Global Development, 20101 Based on Investing for Social & Environmental Impact,Monitor Institute, 2009 7
  8. 8. We at EBAN have been collecting data on the busi- ness angel market since 1999 and have started to collect data on this sector this year. We will pub- lish our first findings in our 2011 Statistics Com- pendium. Other organisations, such as Eurosif, collect European data on impact investment and EVCA on private equity and venture capital in- vestments in the CleanTech sector. In the US, the Kaufmann foundation and GIIRS collect industry data. Support to market research on European early stage impact investing would greatly con- tribute to increasing the awareness and informa- tion for potential investors. - vides business angels facts, trends, and analysis about the - - ing in a good business mod- el; when it’s a good business ” model also doing good in the world, that is Frank van Beuningen, founder, PYMWYMIC (Put Your Money Where Your Mouth Is Company) Although EBAN does not yet monitor early stage impact investments, according to our annual sur- vey of activities undertaken by members of busi- ness angel networks in 2009, 13% of deals done and 14% of the amount invested concerned the energy/environment and healthcare sectors, which can be considered close to impact invest- ments. EBAN estimates that early stage impact investments will account for around 5% of early- stage investments in the near future. Eurosif has been conducting research on Sustain- able investments since 2007. They have found that, even though total European high net worth individuals (HNWI) financial wealth decreased since 2007, the share of sustainable investment is growing. Eurosif predicts that the share of sus- tainable investments in European HNWI’s portfo- lios will grow from 11% to 15% by 2013, just below €1.2 trillion.8
  9. 9. What are the other drivers of this sector? Government regulation in most EU27 countries currently encourages investment that serves other gains besides financial, especially further to the economic and financial crisis of 2008. Several private banks are developing impact- investment products for their HNWI clients, in- cluding fund-of-funds models. Technologies are being developed to mitigateWhy is Early Stage many of the world challenges particularly for less developed markets. Foundations and investment consultanciesImpact Investing show interest in the market (e.g. The Kelloggs, the Gates’ and the Rockefellers. Cambridge As-Poised for Growth? sociates’ Mission Investing Unit). Universities are offering concentrations in so- cial entrepreneurship and establishing centres dedicated to the topic (e.g. Duke University, There is growing evidence that investors can Columbia University, Harvard, Said Businessmake money and ‘do good’ at the same time. School, Skoll, INSEAD, ISEA, Heidelberg, Eras-While some of the ‘do good’ elements of start- mus).ups may increase costs vs. traditional way of Major corporations have begun to exploredoing business, they can also have a net posi- whether investment should be one option fortive economic impact, such as customer loyalty, their corporate social responsibility programs.employee recruitment, etc. There are more and (e.g. The Shell Foundation, ChevronTexaco).more success stories in various sectors andseasoned entrepreneurs in this space. The loss Drivers for Sustainable Investment Demand Over Timeof confidence in traditional financial markets 35%continues to increase interest in investing in 30%businesses that have a purpose beyond justmaking money. 25%Established world needs: People have becomeaware that the planet cannot survive under 20%current business and consumer behavior. En- 15%trepreneurs are the key and critical playersto kick-start and drive the changes the world 10%needs and require financial support. 5%Impact investing is attracting the interest of acertain typology of business angels – the ones 0%that could grow the business angel-investing y ity l tu r m isk op o un a re g fo lit hr t rt aci nt ive rn t y R bi ensector. Eurosif’s study on HNWI and sustain- bl kin po Fin sa ila at on ph tern na oo ge e spable investment shows that younger genera- L a Al an Op Re m aitions of wealth managers are more tempted to st su 2007invest in sustainable sectors. At the same time, 2009women as key decision-makers, play a signifi-cant role in introducing and supporting sustain- Source: High Net Worth Individuals & Sustainable Investment, EUROSIFable investing in their ecosystem. These could Report 2010be new groups of investors and new entrantsto the early stage investment market. In this chart the most significant conclusion is that in 2008, over 20% of HNWIs were still motivat- ed by philanthropic considerations when choosing sustainable investments. In 2010, less than 10% of 9
  10. 10. HNWIs believe they are filling a philanthropic need Investing in start-ups whose target markets when investing sustainably. This is a good sign for are developing countries without the knowl- the impact investing market since it shows that edge of key success factors in those markets HNWIs distinguish between the social or envi- and without local like-minded co-investors. ronmental returns and the financial return, thus Current early stage investors have limited ex- do not see impact investing as an alternative to perience in doing this. philanthropy. People increasingly believe that philanthropy cannot reach the scale that impact investing could reach in providing solutions to en- vironmental and/or social challenges. Early stage investors more and more often look at a triple bot- - ability with social and environ- new investment sector is critical in estab- lishing consistent industry standards and an important milestone in the creation of a ” common language among investors, entre- Anna Czekaj, Early stage impact Investor, Go Be- yond What are the challenges for early stage impact in- vestors? Impact investing is a sector with little data and metrics i.e. low transparency and clarity of ac- tion to ensure return. There is a danger for this sector to be perceived as a trend or a bubble, or to be damaged by a few visible investments with little impact. Pursuing social/environmental return objec- tives and financial objectives at the same time. Possible mismatch between the expectations of investors in the same investment, between the weight they put on financial vs. people/planet impact. This could put unnecessary pressure on the entrepreneur and divert attention away from building the business. Finding follow-on investors and acquirers who will equally value the triple bottom line aspects of the startup as much as the early stage in- vestors and continue the momentum.10
  11. 11. inhabitants of the so-called “last mile”. Thus, for many people in remote villages on Polish territory, it becomes possible to start a business - which in the absence of sufficient power was not possible. Second, the major customer is Czerneckich Educa- tional Foundation, for which Eko-Logic performs close to 200 MW (100 turbines). All profits from wind farms will be allocated to the statutory ob- jectives of the Foundation. The Foundation aims to help gifted students to develop their passions and interests, regardless of their distance from the main centers of science, and to give them bet-How do early stage ter future prospects. It is important to break the barrier separating the students from rural areas and show them the possibilities, unfortunately,investors engage? they usually do not have access to.To engage in early stage impact investing, here are is delighted to be associatedsome of the differences in deal flow sourcing, due with EBAN who are leadingdiligence, negotiation, investment management the data consolidation andand exit: scene setting of early stagecf. Table 1 (page 13) an excellent reference tool and providesA major difference amongst the two investment clear signposting to investors wanting toprocesses lies on the key evaluation criteria of make a positive social and environmentalan investment option, expected progression overtime (milestones) and ways to measure/bench- and challenges as well as detailing themark: investment process and highlighting suc-cf. Table 2 (page 14) ensure clarity and common understandingExamples of Early Stage Impact Investing – Case We are keen to recommend that other or-studies ” ganisations support the growth of earlyEko-Logic: Winner of Impact Investing of the yearaward at 6th Annual EBAN Awards Competition1 Susan Dark, Director Ashberg MFOThe idea of Eko-Logic’s business model is to en-courage compliance with the Kyoto Protocol while IKAWAallowing individual investors to enter into sectors Over 2.25 billion cups of coffee are consumed in thehitherto reserved for corporations. New regula- world every day, the majority of these by drinkerstions enabled the technology using dispersed in industrialised economies. In contrast, some 25generation to be implemented. This improves the million small holders in developing countries growefficiency of the system, provides higher quality over 90% of the world’s coffee. IKAWA is servingenergy to the costumer, increases the reliability of an alternative approach to the coffee trade that isthe power supply, and plays a part in the environ- more equitable and tastes better. The IKAWA ap-ment policy. Regarding the impact; first and fore- proach enables a coffee supply chain where grow-most, the business model implemented by Eko- ers are able to supply drinkers directly with un-Logic, enables the provision of electricity to the roasted coffee beans. By simplifying the supply1 Case is directly taken from the pitches the companies chain the IKAWA allows farmers to capture morehave provided for the competition. 11
  12. 12. of the money paid by coffee drinkers. For coffee drinkers, IKAWA has designed an experience that allows them to turn un-roasted coffee beans into coffee they can drink. This experience offers bet- ter tasting coffee and increased sense of connec- tion with the grower. Prakti Design Today half the world’s population relies on bio- mass for their cooking needs. The biomass stoves or fires they cook on produce toxic fumes that kill almost 2 million people a year. These fires also consume over twice the necessary fuel and con- tribute to global warming and deforestation. Prak- ti Design is a for-profit company that designs and disseminates fuel-efficient, clean-burning cook- stoves for the base of the pyramid. They advo- cate a human-centered design tailored to regional cooking practices and received good feedback to date. The whole community is impacted with a wide range of stoves, micro-financing schemes, and distribution -both by existing networks and trained salespersons- promoting local economic development. Following successful pilots that have improved the lives of 25,000 people in South India and Nepal, Prakti plans its first full-commer- cial distribution to roll-out from this July in India.12
  13. 13. Table 1To engage in early stage impact investing, here are some of the differences in deal flow sourcing, duediligence, negotiation, investment management and exit: General Early Stage Investment Early Stage Impact Investment Process Process Deal origination: Mainstream methods: business Follow the traditional methods via The investor becomes aware of the angel networks, incubators, uni- specialized sources including not- opportunity versities, intermediaries, referral for-profit organisations such as from business associates or other Ashoka for social entrepreneurs. individuals or organizations in their network, or personal search Due diligence Key decision criteria: Key decision criteria: Team Team Potential for financial return Potential for significant social Potential to achieve scale and/or environmental impact Market need and innovation Potential for financial return Personal investment criteria Potential to achieve scale Market need and innovation Personal investment criteria Negotiation and execution: Main factors are valuation, deal Define people/planet impact goals Negotiations with the entrepreneur terms, follow-on investors and exit and how they will be measured. over valuation & deal terms opportunities Negotiate valuation, terms includ- ing governance with “sustainable” approach. Manage Investment and follow-on Investor is likely to become involved Importance of mentoring and advis- rounds with the business, including through ing is more significant in early stage advice and mentoring, networking, impact investing since the market is functional input and member of still developing; there is a shortage board. of available on best practices, impact tracking & benchmarks. Exit investment Investors often exit from success- Exit strategy options and best prac- ful investments by means of a trade tices are being developed. sale. 13
  14. 14. Table 2 A major difference amongst the two investment processes lies on the key evaluation criteria of an investment option, expected progression over time (milestones) and ways to measure/benchmark: General Early Stage Investment Early Stage Impact Investment Process Process Business plan Potential for financial sustainability Potential for financial sustainability Potential for significant social and/ or environmental impact Processes: core business activities, Economic Environment value chain Product Responsibility Human Rights Labor Society Adhering to specific standards ISO ISO SA SA GRI Management Superior management with a proven Superior management with a proven track record, entrepreneurial team track record, entrepreneurial team and/or capacity to take on board and/or capacity to take on board advice advice Reputation Management team with positive ethics Reputation Governance Relationship between sharehold- Relationship between shareholders, ers, management and the Board of management, the Board of Directors Directors and the other stakeholders14
  15. 15. Capacity building Support the building of the early stage impact investing ecosystem Support the capacity building of business angel network fund managers in this sector by providing training through its EBAN Institute. Lobbying Build awareness for this sector, in collaboration with the EU. Lobby with the EU for securities regulations, which are suited for the specificities of seed fundsRecommendations including (especially) for those doing early stage impact investing.and Conclusions Support to cross-border collaboration Extend the EBAN Shared Deals programme to Impact investments.What are EBAN’s recommendations as a Euro-pean trade association to stimulate this sector? These actions will increase the number of Euro- pean early stage impact investors/BANs/funds, The market needs to recognise that this is who will in turn provide valuable assistance toa full-fledged sector of early stage investing. the entrepreneurs and ensure this sector grows All aspects of the ecosystem need to be encour- rapidly and successfully thus contributing to theaged and developed in a coordinated way in order development of a sustainable world. EBAN willto ensure sustainable growth of the market. proactively reach out to players in this sector to The EU should continue to include social and integrate them into the EBAN membership.impact innovation as part of its discussions onaccess to finance and the development of entre-preneurship across Europe. ConclusionsTo facilitate the successful growth of ear- The impact investing market is in its nascent stagely stage impact investing, for Business An- and is growing.gel Networks (BAN), seed funds and nation-al BAN Federations, EBAN will integrate the However, a clear ecosystem is not yet defined andfollowing actions in its five strategic pillars: therefore there is room for new entrants and new practices.Professional standards Integrate impact investment aspects in our In our view, impact values will and should be inte-professional standards strategy, which could grated over time into all early stage investments,include certifying impact measurement tools. therefore EBAN as the trade association for early stage investors will support its growth, formalisa-Benchmarking tion and integration into this asset class. Continue to refine the definitions of early stageImpact Investing. Measure and report on the es-timated size of the early stage impact investingmarket. Facilitate impact investing seed funds to net-work and collaborate with BANs whose membersdo early stage impact investments. 15
  16. 16. Acknowledgements: EBAN would like to warmly thank the following individuals for their contribution to this White Paper: Brigitte Baumann, Frank van Beuningen, Anna16
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  18. 18. www.eban.org EBAN is the European Trade Association for business angels, seed funds and other early stage market players.Our mission is to support the growth and professionalisation of the early stage investing sector, from a 3 billion Euros to a 10 billion Euros asset class in the near future, up from 1 billion Euros 5 years ago. The full and updated list of EBAN members can be found at : www.eban.org/membership/directory Rue Vautier 54 |1050 Brussels | T: +32 2 626 20 62 | F: +32 2 626 20 69 | info@eban.org

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