Impact investing is often the center of attention these days at conferences focused on philanthropy and social impact. Recent articles in the Financial Times, the Wall Street Journal, Barron's, and Inside Philanthropy all explore how impact investing is gaining steam. It's becoming a mainstream strategy for foundations, fund managers, and individual investors.
In my role as vice president of development at TechSoup, I've been thinking a lot about the implications of impact investing. What could it mean for TechSoup as a nonprofit social enterprise, and for the nonprofit civil society organizations in TechSoup's network? How should nonprofit social enterprises like TechSoup be thinking about this influx of new capital from impact investors?
Many nonprofit social enterprises struggle to raise the growth capital we need to scale. Nonprofits have the opportunity to raise grant funding to develop new programs, but it's often difficult to raise capital in sufficient quantity from grants alone to increase capacity.
Does the mainstreaming of impact investment represent an opportunity for nonprofit social enterprises (PDF) to overcome this growth capital gap?
Impact Investing: A Closer Look
The Global Impact Investing Network (GIIN) defines impact investments as "investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return." (In addition to the GIIN, there are several excellent organizations that provide strong background information about impact investing, including Toniic, SOCAP, and Mission Investors Exchange.)
I'm struck by the diversity of investing strategies that get lumped together in this category, and by the enormous volume of the financial assets they encompass.
- Socially responsible investing — screening out companies like tobacco or weapons manufacturers from an investor's portfolio
- Environmental, social, and governance integration — selecting and managing investments to promote sustainable and ethical practices in corporations
- Mission-related investing — a foundation's strategy to invest its assets in alignment with its mission
- Direct impact investing — making direct investments in mission-driven companies and organizations
One recent survey found $228 billion in assets committed to impact and community investing, with 146 percent growth over the last four years. Another found $23 trillion in assets invested in sustainable strategies broadly defined, with 25 percent growth in the last two years.
What These Trends Mean for Nonprofits in 2018
What does all this mean for nonprofits like TechSoup? Is this huge pool of capital that's seeding social and environmental impact an opportunity to overcome the growth capital gap facing nonprofit social enterprises?
Most of the assets invested in socially responsible investments are going to funds of publicly traded securities and to impact investments in for-profit social impact businesses. But some is being invested as debt financing for nonprofits. Debt financing for nonprofits is particularly prevalent for nonprofit social enterprises with earned revenues that enable them to repay a loan by using their earned revenues to generate cash flow.
Here's a quick survey of some of the ways that nonprofits can access impact investment capital.
- Some charitable foundations make program-related investments (PRIs) in the form of loans to nonprofits at below-market rates. Mission Investors Exchange is a network of foundations that make PRIs as part of their programmatic strategies. Its website is an excellent resource for nonprofits interested in learning more.
- Some organizations have loan funds that focus on providing debt financing to nonprofits, including Nonprofit Finance Fund and FJC.
- ImpactAssets provides donor advised funds that enable individual and corporate donors to make impact investments through their donor advised accounts. This process works in much the same way that a foundation can lend to a nonprofit from its assets as a PRI.
- Calvert Impact Capital and RSF Social Finance make investments in nonprofit social enterprises through their social investment funds. They also make it easy for individual investors to participate in social impact funds.
- An article in Stanford Social Innovation Review describes how community development financial institutions (CDFIs), many of which are nonprofits, are tapping into the impact investment market.
There are also new securities structures that make it possible for nonprofit social enterprises that generate earned revenue to raise capital from their communities. Cutting Edge Capital specializes in helping social enterprises raise capital by setting up direct public offerings of securities. These direct public offerings are made to social enterprises' communities of stakeholders: not just wealthy investors, but also supporters who can consider only smaller investments.
What This Shift Means for TechSoup
TechSoup is planning to raise the growth capital we need over the next three years to execute our strategic planning through an impact investing campaign. The campaign leverages this influx of investment that's seeking social impact in addition to financial return.
One component of the growth capital campaign is our planned debt securities offering, our direct public offering or DPO. The DPO is a community investment campaign embodying our belief that TechSoup should be financed by people and entities of all economic backgrounds. These are people and organizations who want to support our mission and help create an innovative, sustainable, and community-funded approach to TechSoup's next level of growth.
The DPO will engage both philanthropic funders and TechSoup's global community of stakeholders, including the nonprofits we support and the technology companies we serve.
The DPO enables us to offer debt as an impact investment not just to institutional funders. It also enables us to offer an impact investment to U.S.-based individuals and smaller organizations in our community with investment minimums as low as $50.
There are several different regulatory pathways for DPOs. We will be doing a Regulation A+ Tier 2 offering, which requires filings with the Securities and Exchange Commission (SEC). We have chosen this approach because it enables us to reach out to our stakeholders in multiple states without having to get approval at a state level.
In addition to the DPO, we anticipate that a large portion of the growth capital campaign will be loans from institutions that specialize in lending to nonprofit organizations. These loans are based on better terms than are typically available from commercial lenders. Plus, we anticipate that a large portion of the campaign will be loans from foundations that lend money to nonprofits as PRIs.
As our campaign progresses and we learn from our experiences as a nonprofit social enterprise trying to raise investment capital from impact investors, we are committed to sharing our learning. We want others in the sector to benefit from it. Please stay tuned here for more about our experiences and lessons learned.