Loans & Equity

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Overview

Under this financing scheme, enterprises, generally private sector, finance themselves primarily with debt and equity investments. A few enterprises have received market rate loans or equity investments, but more have received softer loans or equity requiring less of a return. While some of the private enterprises interviewed have the potential for large returns, they are generally operating in areas which non-socially oriented capital finds too risky to fund (one reason they are underserved in the first place). Many are also looking for investments too small (under $5m) for traditional funds to be interested in them.

Some non-profit funds or foundations specifically exist to make investments in social enterprises that would otherwise have difficulty accessing capital. Well known funds in this space include Acumen Fund,  E+Co., and Good Energies. Equity investments are often seen as less demanding than debt investments, since the investor is more accepting of the possibility of losing their money. Some enterprises get ‘ringfenced’ debt investments, which are only for a specific project or shipment. For example, Green Power, in Vanuatu, gets loans to finance individual containers of lights from the microfinance bank that distributes its products.

Pros

These enterprises generate, or intend to generate, a profit from operations. Generally they are more focused on number of people reached than on community development, as the latter is more challenging to make profitable. This means that they will be focused on reaching as many people as possible. Accessing private capital, assuming it works, has a much higher potential for scaling than relying on donor money. If a model can be proven profitable, it will always be in someone’s interest to fund it. Finally, private funding creates less market distortion.

Cons

Many models require less profitable activities to achieve their desired impact, and cannot access this type of funding. Sometimes seeking private funding can drive enterprises away from some socially beneficial activities, or away from the populations who really need help, toward higher end markets who someone else would probably serve.

Case Studies

Promethean Power Systems has developed a rapid-cooling milk chiller that in 30 seconds cools milk to 10°C,  at which temperature it cannot be spoiled by bacteria.

The chiller is inexpensive and small enough to be placed at milk collection stations in rural India, which means that a greater percentage of milk goes unspoiled, and can therefore sell for more money. Furthermore, the dairy processor picking up the milk has less trips to make per day to each collection point.  This not only benefits small farmers, who get more money for unspoiled milk, but creates value for large players in a major industry in India, where US$33 billion worth of agricultural produce spoils every year. Because it offers a relatively simple product clearly providing monetary value to entities with the money to pay for it, Promethean’s model makes sense as a good bet for equity investment. They have received venture capital funding and are currently seeking a second round.

Enterprises