An interesting alternative to classical capital is trust-based funding. That is flexible and patient growth money, based on trust and relationships. “People with money who let entrepreneurs do all kinds of things from an ivory tower and have them prove it, that is an old-fashioned attitude,” says Idriss Nor, director of impact investments at Doen Participaties.
‘What we ask of impact entrepreneurs is no more than what gives us confidence. We don’t ask for too many reports and evidence.’
‘We also don’t want to give the impression that we know better than they do. That is why the financial instruments we make available follow the needs of the entrepreneur. We give grants and we invest capital, and everything in between.”
Challenging classic investors
Doen Participaties has been active in the Netherlands and abroad for 25 years. Its portfolio includes Fairphone, MUD Jeans and Wear. Nor recently sat on a panel with two other experienced investors at the Social Enterprise World Forum in Amsterdam.
Gael Drummond, CEO of The Firstport Group from Scotland, wholeheartedly agrees. Since 2007, this group has helped thousands of entrepreneurs with this friendly way of financing. “You cannot ask entrepreneurs at such an early stage where they will be in five or ten years,” she says.
‘They are really ambitious, they have growth and scaling up in mind. We must help those entrepreneurs in their initial phase to flourish. But the investment landscape is not responding to their needs. We challenge big money on their values and behavior. Investors have to do things differently.’
Also read: These are the options for financing your social enterprise
Flexible funds
The Firstport Group, for example, has developed two funds that are based on flexibility. A fund provides loans with an interest rate of zero percent. If the startup does well, the entrepreneur can start paying back.
‘If the business is not running well or fails, the loan is converted into a grant. That money does not have to be paid back. With this flexibility we build the confidence of the entrepreneur.’
The other fund moves with the turnover of the business itself. The loan repayment fluctuates every month based on success. ‘That is also a super flexible model, a sympathetic and patient way of investing.’
Is growth capital ethical?
Social entrepreneurs sometimes doubt whether external start-up or growth capital is ethically suitable for their company. If they have an investor in mind, it is important to see what other companies they support.
Nor: ‘Speak to those entrepreneurs themselves about what that investment has brought them. You really have to be careful before you sell part of your house, because that is… equity.’ So caution pays off, but at the same time don’t forget to make an agreement in which you can protect the mission.
For example, think of steward ownershipwhere shareholders have no say over the company’s direction or mission.
Also read: 6 misunderstandings about steward ownership
Ask investors tough questions
Also present on the panel is Kenneth Kwok, founder and CEO of Global Citizen Capital. Since 2017, he has been a Wall Street convert. Its mission now is to ‘connect capital to truly sustainable solutions’ for people and planet.
‘Thirty percent of the startups we invest in were founded by people under the age of 25. We listen, we understand the frustration and we want to do something about it.’
He has recently started doing this not only in Asia, but also in Europe. The company has just opened a branch in Geneva. He recommends asking investors the ‘tough questions’. Even if you are on the same page with them.
‘Are you sure you don’t want to see return x in five years? How do you see your own exit from my company? This way you find out how investors want to maximize the impact of their investment. Is that with scaling up, is that with future profits, and so on.’
Building business experience
At The Firstport Group, in addition to investing, a lot of time is spent building up business experience, says Drummond. ‘We are dealing with very driven entrepreneurs. But that focus and motivation should not be at the expense of running a business.’
At Global Citizen Capital, one or two experts are added to each new ‘family member’, for finance, marketing and the like. They support the company part-time in expanding the business. ‘Because you don’t have a dream team in-house from day one,’ Kwok knows.
Eleven companies in its portfolio are working to reduce their carbon footprint. What he noticed is that ‘six of these eleven are competing among themselves, for the same customers.’
‘Then there is a good chance that you will not get funding, because you are in competition with each other. If you want to have more impact, look at the competitive landscape and identify where the gaps are in the solutions.”
More impact with collaboration
‘Can you as a company fill that gap so that you no longer compete? Can you build bridges, connect with other startups for your solutions?’ He wants to move towards a mindset that promotes collaboration. Since last year he has also focused on this when putting together the portfolio.
‘We are increasingly bringing our startups around the table. For example, our end goal is to reduce emissions from the aviation industry. Who can pivot or collaborate for this? In this way we work on five solutions from A to Z, instead of one final outcome.’
Nor also sees it happen quite often: entrepreneurs who remain stuck in their ‘self-created bubble’, focused on that ‘one thing’. ‘This creates a strange kind of competition, which really shouldn’t be a competition.’
Look at the bigger picture
‘When you are working on sustainable energy, you are also working on social cohesion, or regeneration.’ That connection with the bigger picture can give your business a boost, he knows. ‘You don’t have to panic because you will lose your invention. Our experience is that it gets better when you share.’
Kwok: ‘Before we invest in a startup, we first let the companies in our portfolio respond. You can almost call it voting. Can they benefit from that new expertise, products or technology? Can they work together?’
‘For example, we have a new AI tool that one of our logistics startups and two of our health companies are affiliated with. In this way we really help our companies to make more impact.’
With open source towards a movement
Kwok thinks such an adaptable platform or tool for different sectors is an interesting business model for the future. When it comes to technology, he swears by open source anyway.
‘We have 17 tech tools that are suitable for 80 percent of all sectors. With open source you allow other social entrepreneurs to benefit in the world. This way you make an impact and also ensure more inclusion. That doesn’t make your startup a company, but a movement.’
Also read: Entrepreneurs are crazy, social entrepreneurs are crazy