Social entrepreneurs and investors often need alternative investment structures to match their needs, but it’s not always easy to understand the options available. Toniic’s John Berger digs into revenue-based financing, steward ownership and blended finance as potential solutions – and explains how the Impact Terms Project, a free library of innovative deal structures, can help.
Imagine a young food company with a commitment to fair-trade ingredients and to paying a living wage for all employees. It’s enjoying rapid success: retailers and customers are snapping up its products. On the other hand, it’s sinking capital into sustainable ingredients and timely payments to producers months before revenue arrives. And in order to preserve its mission-first ethos, it wants to hold on to board seats.
Entrepreneurs often complain that early-stage venture capital—which can provide above-average returns to investors—leaves them strapped. Yet a common complaint from early-stage investors is that they take all the risk, only to get punished when later rounds of capital come in. The structure of business-as-usual deals reinforces these patterns.
Conventional debt or equity financing often isn’t a good fit for social ventures that don’t want to squeeze their suppliers to ease cash flow or are unlikely to reach an exit point in the near term (or ever). But what is? As the social venture space grows, entrepreneurs and investors are looking to alternative investment structures that allow ventures to scale while advancing their environmental or social mission and providing a return.
Impact terms ease the way for alternative investments
Traditional deal structures based on debt or equity are well-defined but not suitable for many impact-focused ventures. These ventures face a dilemma: like other startups, they can’t access debt without predictable cash flow; at the same time, they don’t fit the parameters of most private equity deals. They may have to build out infrastructure, resulting in relatively high upfront costs and slower scaling; they may have a hybrid business model that doesn’t fit the mould; and their social and environmental mission may not match well with fast growth or even an exit.
Alternative structures can balance the needs of investors and social entrepreneurs, but both parties need practical guidance about the options, while their lawyers and advisors need documentation to get comfortable with unfamiliar term sheets. This is why Toniic maintains the Impact Terms Project (ITP)—a library of innovative deal structures designed for impact entrepreneurs and the people who invest in them. Created in 2015, it’s a free, publicly accessible portal with ready-to-use frameworks, definitions, term sheets and case studies created by investing and legal experts. It can be adapted for funding deals around the world, including emerging markets.