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Early or Late Stage Impact Investing? When to Get on the Bandwagon

At what stage should you start looking at impact investing projects? Does it matter whether you get your foot in on the ground floor or wait until most of the floors are built? -And if it does matter, where does it matter?
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At what stage should you start looking at impact investing projects? Does it matter whether you get your foot in on the ground floor or wait until most of the floors are built? -And if it does matter, where does it matter?

This article will address those questions, outlining the differences between early and late state impact investing – for the impact investor and for the project.

Early Stage Impact Investing 

Early stage funding for any startup company is a challenge in and of itself. But for impact investments such as for-profit social enterprises, getting early stage investment capital is even harder. While trying to solve problems in industries like health care, energy, food security, sustainability, and sanitation, they’re struggling to get the necessary funding. In fact, 86 percent of the surveyed social enterprises in this recent study claimed that investments and financial backing was one of their top challenges. 

For the company, early stage investments are a dream come true. For investors, the risks and rewards are night and day.

The earlier stage the company is, the less certain the success of the company. Therefore, the riskier the investment. However, if that company makes it big, the early investors get rewarded big-time monetarily. They also have the bragging rights that they did something good for the world on top of it all. 

Though there is not much data on the number of active early stage impact investors, the number is growing as major banks begin taking impact investments more seriously

Late Stage Impact Investing 

Late stage companies are those that have surpassed the startup stage, and have a product or service producing revenue and achieving its end. It is much easier to attract impact investors at this stage,. Late stage companies have proven traction and growth, mitigating risk for investors.

Of course, the flip side is that investors will likely be investing in a higher valuation. This makes their investment per share a lot more costly than if they had invested earlier on. 

Unlike the early stage, the challenge for late stage impact investing is with the for-profit social enterprises, or companies that fall under the category of “impact.” At later stages, they’ll be expected to prove that they are indeed making an impact, or have made an impact thus far.

There is no governing body at the moment that measures “impact,” so the company itself is responsible for keeping track of their impact measurements. The upside is that since impact investing is becoming more mainstream, sources like GIIN offer guidelines on how to do this. 

Early Stage Impact Investors 

Although receiving financing for early stage impact projects is a huge challenge, it’s not impossible. Here is a list of financing resources for early stage impact companies: 

REPOSITORY OF ALTERNATIVE FINANCING STRUCTURES FOR EARLY-STAGE IMPACT INVESTING

If you’re an investor interested in early stage impact investments, do your research to see what other early stage investors have done and how they manage their investments. Companies like Acumen will often go into detail about how they choose projects and support their portfolio companies with patient capital. 

Late Stage Impact Investors 

It’s not uncommon for large institutional investors to be taking impact investing seriously. However, the return on investment is typically their number one concern. This means it’s more likely that these types of investors will only partake in ESG related investments, or later stage impact investments. 

The issue is that ESG, or Environmental Social Governance, is often confused with impact investing. So let’s clear that up now. 

Investopedia’s definition of ESG vs. SRI vs. Impact Investing is as follows:

ESG looks at the company’s environmental, social and governance practices, alongside more traditional financial measures.

Socially responsible investing involves actively removing or choosing investments based on specific ethical guidelines.

Impact investing looks to help a business or organization complete a project or develop a program or do something positive to benefit society.“

So when talking about impact investing, we’re talking about creating something new. Be it a program, project, building infrastructure, etc., that something wasn’t there before. Now that it is, its purpose is to benefit the surrounding community and society. 

Should You Invest in Early Stage or Late Stage Impact Investments?

Impact investing is on the rise, and if you’re ready to get on the bandwagon, think about whether you want to invest in early stage projects, later stage projects, or both. 

Early stage impact investments are in desperate need of more investors. You have the real potential to make a huge difference in the world, while also making a profit. That is, if you invest smartly in early stage impact investments. 

Later stage impact investments will have slightly more barriers to entry as more investors flood the space, but there is still a huge need for investors here. Investing in later stage projects is a good way to test out the impact investing market with less of a risk than early stage. However, the lower the risk, the lower the potential reward. 

Think about the type of investor you are, or would like to be, do your research, and choose projects you believe in. 

If you’re not sure and are looking for an impact investment advisor, reach out to Transformation Holdings. We help organizations whose clients are interested in impact investing: investment managers, family offices, foundations, funds, and more. Let us help you change the world.

August 5, 2020

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