Category: social-impact

Blended Capital: The Future of Social Impact Investing

By Stephen Forte,

Over the past year there has been a lot of focus in the financial services community on social impact investing. Investors who have not traditionally been in the social impact space are now making changes to their investment charter to include mission driven, for profit companies. Venture Capital and Private Equity firms that have been ignoring social impact have jumped in as well.

The presence of the PE/VC crowd is changing the ecosystem and some traditional social impact investors are now taking a different approach. NGOs, foundations, and banks have always been in the game, but are starting to behave differently as well. Each of these players think that they have the right blueprint for social impact investing: They are all wrong.

Blended Capital

Social impact companies and investors can benefit greatly from something called Blended Capital. Blended Capital is the mix of government or non-profit grants, equity investments, and bank loans put into a startup. The salient point is how the capital is sequenced:

  1. Foundations, governments, and NGOs go in first and grant non-equity taking, non debt capital to a social entrepreneur with an idea. This gets the founder out of the garage and gives them the ability to hire a small team, build a product, and attract initial customers. This de-risks the investment for the next stage, but adds a lot of impact, accomplishing the foundation’s goal.
  2. Next VCs and Social Impact funds come in and make equity investments, typically getting the company past the initial stages of product-market fit and into a growth mode. This helps the company scale in ways a grant would not allow and de-risks the investment for the next stage.
  3. A lot of times the company will need to finance inventory, equipment, or the expansion into a new market. This makes more sense to finance by bank loans rather than dilutive capital. The banks get to lend to the company at commercial rates as the company has been de-risked by the previous two sources of capital.

Blended capital only works if all three parties (non-profit grant agencies, equity investors, and lenders) work together. A blended capital deal does not make sense to any one player if the other two are not involved, creating more opportunities for social entrepreneurs. For example most foundations “spend $1 to buy $1 of impact, but that $1 goes away forever.” Now those foundations, governments, and NGOs can get a better return on that $1 if they work with equity and bank finances on deals, creating sustainable, lasting companies that not only provide a return on investment for their investors, but a longer return on impact for their grant-givers. Now a foundation can spend $1 and get $10 or more of impact.

In the past these players worked independent of each other, creating misalignment and inefficiency, reducing the amount of impact and opportunity. For example, I watched a social entrepreneur try to finance inventory of their portable solar lights to send to Puerto Rico after the hurricane. No bank would finance the operation, despite several customers (in need!) lined up.

If that company had been allowed to take advantage of blended capital, the sequencing of the grants and equity financing first would have made the startup attractive to market/commercial lending rates for any bank. Because blended capital was not available at the time, the founder had to turn to expensive equity financing for that inventory. (VCs typically don’t finance inventory.) Because of dilution and the expense, only a fraction of the original inventory was financed, bringing the company far less revenue (and profit) and impacting far less people in need.

An alliance of philanthropic and for profit investors is needed to solve some of the world’s most pressing problems. Experts estimate that the opportunity is measured in the multi-trillion dollar range. Its time for all the social impact players to stop working in silos and work together.

Blended Capital: The Future of Social Impact Investing was originally published in Fusion by Fresco Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Why We’ve Doubled Down on our Mission

By Fusion by Fresco Capital,

Fresco’s Evolution: A New Look, The Same Mission

The evolution of our brand reflects our evolution as a fund, a startup, and a platform.

When Fresco Capital first started investing in early 2012, one of the least impressive things about us was our website. To be blunt, it sucked. We know, because Tytus hand coded it himself in HTML. We also know because people told us.

However, as our entrepreneurial roots suggest, Fresco is not just a VC fund. We are a startup, too. And just like the companies we invest in, we are constantly evolving.

In 2017, we launched our third fund, we welcomed our 50th founder team to our portfolio, and we added our fifth Venture Partner to our growing network of local teams. We soon realized we had outgrown previous skin and it was time to embrace our own evolution; a time to refresh our brand, our website, and our messaging. So, we worked with one of our close partners, Rival Schools, to do just that. Given the team has world class expertise on localizing user experience, branding, and messaging to suit a global audience, we knew we were in safe hands.

We wanted a design that reflected our global team, our partnership based approach, as well as our belief that our team is greater as a whole than as a sum of its parts. We were aiming to visually represent the simplicity of our mission, but the complexity of our approach. Here is how we look now:

Our mission: Building global ecosystems

Although our shape may have a changed a little on the outside, Fresco remains the same on the inside. In fact, our growth has only strengthened our commitment and our excitement about our core mission:

You’ll notice our mission isn’t just about being the best at investing in technology companies. Just like our logo, the idea of “building global ecosystems” may seem simple, but it is an approach that embraces the complex.

An ecosystem can be defined as a complex network or interconnected system. Whether we’re working with founders, our LPs, or our partners, we believe the most effective investment strategy is to look beyond just us, and instead focus on empowering others. That is the only way to truly enable exponential change. One person, one product, one platform, one investor, one country, can only do so much. If we are able to build ecosystems filled with individuals, startups, and investors that are passionate about solving big problems, then the impact will be unimaginable in scale. And, if that’s not what we’re striving for, then why even be here?

Our approach: Thinking global, acting local

Our portfolio companies are leveraging technology to solve the world’s biggest problems in the future of work, education, and healthcare. These problems are global in scale, but implementing any solution requires a deep understanding and appreciation for local challenges.

It would be impossible for any one person to understand or appreciate the nuances of doing business in every local market, so we have focused on building a diverse team of specialists. Each with their own unique network, set of experiences, point of view, and passion. In our new website, we put a bigger spotlight on some of our favourite local partners, with whom we have worked with closely over the years and trust to be the absolute best at what they do.

Our motivation: Why we’re global

Though we are strongly motivated by our mission, we must also admit we’re not simply building global ecosystems out of the goodness of our hearts. There is a clear and direct connection between helping our portfolio companies scale globally and higher returns for our fund investors.

Global companies are worth more money — they have more revenue, less concentrated risk, and higher valuations. They can extend runway by optimizing their operations, increasing access to later stage capital, and diversifying their relationships with potential acquirers. We’ve seen this play out across our existing portfolio, which now spans 54 companies, 12 countries, 7 exits, and a total market value of US$1.6 billion.

We talk to and work with founders all day, every day, about how to build a company that scales and endures over time. Indeed, successful business models have mission, values, and financial incentives aligned by design. So it’s natural for us to apply the same approach in building our own business.

Our bottom line: We can’t do it alone

Given all of the chaos endured in the past year, we believe that now is the time to double down our mission. The world is faced with an unprecedented level of uncertainty, inequality, and risk, and it is our responsibility to work together globally to source, build, and scale the world’s most promising technology solutions to our most critical challenges in the future of work, education, and healthcare.

We look forward to hearing from you and working together toward as we grow and evolve as a firm, and as an ecosystem in and of ourselves.

Why We’ve Doubled Down on our Mission was originally published in Fusion by Fresco Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.