Social impact beyond the investment exit period

posted in: Social innovation | 0

Since the inception of the impact investing field the focus of practitioners and academics has primarily been on showing the rest of the world that so-called triple bottom line returns are in fact feasible and measurable in the long-term and that impact investments are in fact able to generate market-comparable financial returns.

Social impact beyond the investment exit period.

An ‘avalanche of innovation’

Felix Claus
Felix Claus

There has been an avalanche of new and innovative financing structures, impact measurement tools, amended company forms and generic strategies to best “blend” social impact with day-to-day business operations, all with the one goal to push the field to scale and prove the viability of social impact operations in businesses.

With all these efforts and drastic developments going on, one aspect has been and continues to be entirely overlooked, and that is the answer to the question “But what happens to the firm’s social impact after its investment exit?”.

Paradoxically, this might be the crucial part of scaling social impact in the long-term, as naturally, a significantly higher impact potential is unfolded, once the firm has reached scale, i.e. after its investment exit.

It would be unfair to say that the post-investment exit phase has been entirely ignored, as many impact investors and entrepreneurs actually did recognise the value in it and consequently have built provisory structures to protect social impact creation in the long-term. Such structures come in forms such as preferred shares with veto rights, board seats, or even sophisticated corporate control structures, such as the one found in Ben & Jerry’s prior to their “unwanted” acquisition by Unilever.

Unfortunately, most of these structures are rather short-term-oriented, cost-intensive in terms of both time and money, and generally pose as rather inflexible features of the business’ ability to scale its operations.

What needs to change?

Three key aspects, which need to be solidified during the investment period can form a general framework to ensure sustainment and maximisation of social impact creation in the post-investment exit phase.

  1. Understanding
    Perhaps the single biggest factor for the failure of structures trying to promote long-term social impact creation within a company lies in inadequately understanding the enterprise’s relationship between its main profitable and social impact activities, as well as the distinct motivations behind these activities. This leads to making inefficient decisions in long-term strategy planning, exit strategies, and choice of corporate structure, ultimately compromising on the total potential of both social impact or profitability.
  2. Management
    A lot of current structures are focused on rigidly enforcing, rather than to protect and encourage social impact creation in the long-term. Instead, changing environments and business developments need to be taken into consideration, and social impact goals and planning need to be continuously reviewed and updated by management and external “enforcers”.
  3. Legal structure
    The distinct legal structure of an impact enterprise may allow for, protect, or even enforce social impact creation in the long-term. However, when chosen poorly, it may lead to significant limitations and drawbacks to that very same goal. Before jumping towards incorporating the business as a Benefit Corporation, CIC, or a hybrid structure consisting of a non-profit and for-profit part, the distinct advantages and disadvantages need to be clearly understood and taken into consideration. This refers particularly in regards to scaling the business and operations in the long-term.

The impact investing and impact entrepreneurship field needs to start moving towards a more long-term oriented and flexible approach of planning and supervising tangible social impact generation within companies. If it does not, the biggest social impact potential of successful ventures will be wasted, as they will face crossroad-decision situations and difficulties to align both social impact and profitable activities, once scale is reached.

Felix Claus is a Financial Consultant at Village Inc. Africa, a MSc in Corporate Finance student at Cass Business School, founder & president of Cass Impact Investing & Entrepreneurship Society and co-founder of I2E Advisors.

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