Discover the essential criteria impact investors look for when considering funding opportunities for social enterprises

Understanding Impact Investing

The investment landscape has undergone changes over the years with more investors being intentional about making a positive change with their investments. This category of investors are committed to making a difference in the world while seeking financial gains. They prioritise sustainable business models that demonstrate social and environmental impact in their mission. The business models they consider address the world’s most pressing challenges such as poverty, inequality, climate change, access to quality education, food, clean water and healthcare just to mention a few.

To appeal to impact investors, social enterprises need to understand the fundamentals of impact investing and how it aligns with their business goals. This includes being aware of the various impact themes and sectors investors are interested in, such as climate adaptation, renewable energy, sustainable agriculture, education, healthcare, and more.

Key Business Structures for Impact Investment

When it comes to impact investment, several business structures are particularly attractive to investors. Entrepreneurs should consider structuring their businesses in a way that aligns with these models to attract impact investors.

These include:

• Social enterprises: These are businesses with a social or environmental mission at their core. They aim to generate both social impact and financial returns.

• Inclusive businesses: These are commercially-viable business lines deliberately designed to achieve social impact among the base of the pyramid. Such companies are typically highly innovative, highly productive, achieve good returns and are mostly medium to large-sized firms.

• B Corps: B Corps are for-profit companies that are certified to meet rigorous standards of social and environmental performance, accountability, and transparency.

• Non-profit organisations: While impact investing is often associated with for-profit ventures, non-profit organisations can also benefit from impact investment funding. They need to demonstrate a sustainable business model and a clear path to creating social impact.

Meeting Social and Environmental Criteria

One of the key criteria impact investors look for is a strong commitment to social and environmental impact. Entrepreneurs need to have a clear business model that demonstrates the intention to address critical social or environmental challenges. It is also important to have a business plan that explains the business objective, the change it aims to create and plans for generating revenue.

This includes having a well-defined mission statement that articulates the social and/or environmental problem the business aims to solve, as well as measurable goals and impact metrics. Entrepreneurs should also consider how their businesses can contribute to the United Nations Sustainable Development Goals (SDGs). For instance, Eja-Ice is addressing the poor cold chain infrastructure in Africa’s food systems caused by inconsistent power supply from the national grid by producing solar-powered refrigeration and cold chain services. This is solving the cold chain problem, for families, retailers, food producers and corporations in Africa while meeting that SDG 7 – Affordable and Clean Energy, Goal 13 – Climate Action, and Goal 3 – Good Health and Well-being.

Furthermore, impact investors often prioritise businesses with a strong track record of stakeholder engagement, diversity and inclusion, and ethical practices. Entrepreneurs need to showcase their commitment to these values. One way HelpMum, a social enterprise in Nigeria, is showcasing its commitment to these values is by addressing high maternal and infant mortality rates in remote rural areas in Nigeria by deploying innovation that bridges the healthcare knowledge gaps, improve immunisation of children by 45%, helped 15,417 pregnant women have safe delivery and equipped 2,165 birth attendants and health workers with e-learning tools  while working with the relevant stakeholders and the government.

Financial Performance Considerations

While impact investors are driven by the desire to create positive change, they also expect a  financial return on their investments. Enterprises should demonstrate that their businesses have solid financial performance and growth potential.

This includes providing a clear business plan, financial projections, and evidence of revenue generation. They should also demonstrate how their businesses can achieve financial sustainability without relying solely on impact investment funding. They should note that impact investors’ expected returns range from below market or concessionary rates to risk-adjusted market rates.

Developing an Impact Measurement Methodology

Additionally, impact investors appreciate businesses that have a robust impact measurement, management and reporting system in place.  Entrepreneurs must be able to monitor and report to investors on the social and environmental outcomes of their companies. This captures the actual changes that stakeholders are experiencing, going beyond typical indicators. Accurate impact measurement and management provides valuable information that can guide strategic decisions.  High-quality data is necessary for accurate impact measurement and management. Key actions to be taken include putting in place reliable data collection techniques and routinely assessing the quality of the data.

Reporting Social and Environmental Performance and Progress

Traditional methods focus on numbers such as the number of stakeholders reached or the percentage improvement in stakeholder behaviour but fail to capture the voices and experiences of stakeholders. Both qualitative and quantitative reporting are crucial for impact reporting. Examples of qualitative data may be case studies, interviews, and testimonies that give a story behind the data and show the actual changes that stakeholders have gone through.

When the influence of the business is communicated effectively, it guarantees that all parties involved comprehend and appreciate the impact, opening up opportunities for continuous support and collaboration.

Building Relationships with Impact Investors

Building strong relationships with impact investors is crucial for enterprises  seeking funding. It is important to understand the investor’s values and impact priorities and tailor the business pitch accordingly. A resource that identifies impact funders in healthcare, agriculture, education in Nigeria, such as this IIF report, may be helpful as you fundraise to scale your social enterprise.

Entrepreneurs should engage with impact investors through networking events, conferences, and online platforms. They should also leverage their existing networks and seek introductions to impact investors through mentors, advisors, and industry associations. An industry gathering such as the Annual Convening for Impact Investment and the West Africa Deal Summit 2024 is a platform to establish these connections and foster relationships with local and international investors.

In conclusion, businesses that are able to meet these fundamental requirements would be better positioned to attract impact capital and can start their fundraising efforts by signing up to the Deal Source Africa, a  platform where they can connect to potential investors.