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Executive Summary................................................. 2What is early stage impact investing? .................. 3Why is early stage impact investing poised forgrowth?..................................................................... 6How do early stage investors engage?................ 8Recommendations and Conclusions....................12

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Early stage impact investing is investing in forprofit businesses that have the specific ob-

jective of creating positive social and envi-ronmental impact, in the way the business isconducted and/or the products are realised.

The market is very young and is still in a diverseand nascent stage, which makes measurement of

its size difficult. Eurosif, which has been collect-ing data on this market since 2007, predicts thatthe share of impact investing of high net worthindividuals portfolio will grow from 11% to 15% by2013. EBAN will publish its first data on this sectorin 2011.

EBAN believes that early stage Impact Investingshould and is poised for growth since:

There is growing evidence that investors can dowell and do good at the same time. This is at-

tracting the interest of younger generations ofinvestors, women and family offices. This willgrow the business angel investing sector as awhole.There is an increasing need for sustainablebusiness and consumer behaviour. This is cre-ating new opportunities for impact entrepre-neurs which will require financing, especiallyfrom the private sector as government supportdiminishes.Other public and private players in the ecosys-tem are becoming active in this area, creatingopportunities and needs for collaboration.

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Impact investing: investing in for-profit busi-nesses that have the specific objective of creatingpositive social and environmental impact.

Key characteristics:Capital may take the form of equity, convert-ible debt or debt.Impact may be delivered through HOW the

business is run, for example in terms of gov-ernance, operations and processes employed,and/or WHAT the business does, for examplethe target population served, the products andservices produced.Return of impact investments can range fromproducing a return of principal capital to offer-ing market-rate or even market-beating finan-cial returns1.

What are the potential impacts?

EconomicEnvironmentalProducts and ServicesProduct ResponsibilityGovernanceLabor PracticesHuman RightsSocietal2

1 Based on Impact Investments an emerging asset class,JPMorgan Global Research, 20102 Based on Sustainability Reporting Guidelines, GRI, 2010

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consider environmental impact. Although they arebecoming profit oriented, unlike impact investing,many are not geared to give above market or evenmarket returns.Philanthropy: Philanthropy has traditionally fo-cused on gifts made by individuals and organisa-

tions to benefit society and the environment. Im-pact investing, with its requirement of a minimumreturn of principal, is distinct from grant making orsubsidy activities.Micro financing: Micro financing is a part of im-pact investing; however early stage impact invest-ing usually involves larger amounts of investmentcompared to microcredits, investment is in start-ups rather than projects, and usually equity basedrather than debt based.

*Please note that the spectrum of these defini-tions is subject to change in the long term, sincethe concepts are emerging.

Who are the early stage impact investors?

They can be classified into three key categories:Financial first investors: seeking to optimisefinancial return with an attention to social orenvironmental impact.Impact first investors: seek to optimise social

or environmental impact with a view to make afinancial return.Ying-Yang deals: Deals that combine impactfirst and financial first investors, and some-times philanthropic investors as well1.

The following types of investors have been identi-fied as active in the impact investment sector.

1 Based on Investing for Social & Environmental Impact,Monitor Institute, 2009

What is the current European market situation? Isearly stage impact investing a growing trend?

Currently, the impact investing market is still in itsbuilding phase, which means that centres of spe-cialised activity and interest are beginning to de-

velop and infrastructure is being built around thesector. Yet it is still in a diverse and nascent stage,which makes the precise measurement of the sizeof the market difficult.

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We at EBAN have been collecting data on the busi-ness angel market since 1999 and have started tocollect data on this sector this year. We will pub-lish our first findings in our 2011 Statistics Com-pendium. Other organisations, such as Eurosif,collect European data on impact investment and

EVCA on private equity and venture capital in-vestments in the CleanTech sector. In the US, theKaufmann foundation and GIIRS collect industrydata. Support to market research on Europeanearly stage impact investing would greatly con-tribute to increasing the awareness and informa-tion for potential investors.

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Frank van Beuningen, founder, PYMWYMIC (PutYour Money Where Your Mouth Is Company)

Although EBAN does not yet monitor early stageimpact investments, according to our annual sur-vey of activities undertaken by members of busi-ness angel networks in 2009, 13% of deals doneand 14% of the amount invested concerned theenergy/environment and healthcare sectors,which can be considered close to impact invest-ments. EBAN estimates that early stage impactinvestments will account for around 5% of early-stage investments in the near future.

Eurosif has been conducting research on Sustain-able investments since 2007. They have foundthat, even though total European high net worthindividuals (HNWI) financial wealth decreasedsince 2007, the share of sustainable investmentis growing. Eurosif predicts that the share of sus-tainable investments in European HNWIs portfo-lios will grow from 11% to 15% by 2013, just below1.2 trillion.


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There is growing evidence that investors canmake money and do good at the same time.While some of the do good elements of start-ups may increase costs vs. traditional way ofdoing business, they can also have a net posi-tive economic impact, such as customer loyalty,employee recruitment, etc. There are more andmore success stories in various sectors and

seasoned entrepreneurs in this space. The lossof confidence in traditional financial marketscontinues to increase interest in investing inbusinesses that have a purpose beyond justmaking money.Established world needs: People have becomeaware that the planet cannot survive undercurrent business and consumer behavior. En-trepreneurs are the key and critical playersto kick-start and drive the changes the worldneeds and require financial support.

Impact investing is attracting the interest of acertain typology of business angels the onesthat could grow the business angel-investingsector. Eurosifs study on HNWI and sustain-able investment shows that younger genera-tions of wealth managers are more tempted toinvest in sustainable sectors. At the same time,women as key decision-makers, play a signifi-cant role in introducing and supporting sustain-able investing in their ecosystem. These couldbe new groups of investors and new entrantsto the early stage investment market.

What are the other drivers of this sector?

Government regulation in most EU27 countriescurrently encourages investment that servesother gains besides financial, especially furtherto the economic and financial crisis of 2008.

Several private banks are developing impact-investment products for their HNWI clients, in-cluding fund-of-funds models.Technologies are being developed to mitigatemany of the world challenges particularly forless developed markets.Foundations and investment consultanciesshow interest in the market (e.g. the Kelloggs,Gates, Rockefellers, and Cambridge AssociatesMission Investing Unit).Universities are offering concentrations in so-cial entrepreneurship and establishing centresdedicated to the topic (e.g. Duke University,Columbia University, Harvard, Said BusinessSchool, Skoll, INSEAD, ISEA, Heidelberg, Eras-mus).Major corporations have begun to explorewhether investment should be one option fortheir corporate social responsibility programs.(e.g. The Shell Foundation, ChevronTexaco).

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Drivers for Sustainable Investment Demand Over Time

Source: High Net Worth Individuals & Sustainable Investment, EUROSIFReport 2010

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2009

In this chart the most significant conclusion isthat in 2008, over 20% of HNWIs were still motivat-ed by philanthropic considerations when choosingsustainable investments. In 2010, less than 10% of

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HNWIs believe they are filling a philanthropic needwhen investing sustainably. This is a good sign forthe impact investing market since it shows thatHNWIs distinguish between the social or envi-ronmental returns and the financial return, thusthey do not see impact investing as an alternative

to philanthropy. People increasingly believe thatphilanthropy cannot reach the scale that impactinvesting could reach in providing solutions to en-vironmental and/or social challenges.

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Anna Czekaj, Early stage impact investor, Go Be-

yond

What are the challenges for early stage impact in-vestors?

Impact investing is a sector with little data andmetrics i.e. low transparency and clarity of ac-tion to ensure return. There is a danger for thissector to be perceived as a trend or a bubble,or to be damaged by a few visible investmentswith little impact.Pursuing social/environmental return objec-tives and financial objectives at the same time.Possible mismatch between the expectations ofinvestors in the same investment, between theweight they put on financial vs. people/planetimpact. This could put unnecessary pressureon the entrepreneur and divert attention awayfrom building the business.Finding follow-on investors and acquirers whowill equally value the triple bottom line aspects

of the startup as much as the early stage in-vestors and continue the momentum.

Investing in start-ups whose target marketsare developing countries without the knowl-edge of key success factors in those marketsand without local like-minded co-investors.Current early stage investors have limited ex-perience in doing this.


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To engage in early stage impact investing, here aresome of the differences in deal flow sourcing, duediligence, negotiation, investment managementand exit:

cf. Table 1 (page 13)

A major difference amongst the two investment

processes lies in the key evaluation criteria of aninvestment option, expected progression overtime (milestones) and ways to measure/bench-mark:

cf. Table 2 (page 14)

Examples of Early Stage Impact Investing Casestudies

Eko-Logic: Winner of Impact Investing of the year

award at 6th Annual EBAN Awards Competition1The idea of Eko-Logics business model is to en-courage compliance with the Kyoto Protocol whileallowing individual investors to enter into sectorshitherto reserved for corporations. New regula-tions enabled the technology using dispersedgeneration to be implemented. This improves theefficiency of the system, provides higher qualityenergy to the costumer, increases the reliability ofthe power supply, and plays a part in the environ-ment policy. Regarding the impact; first and fore-most, the business model implemented by Eko-Logic, enables the provision of electricity to the

1 Case is directly taken from the pitches the companieshave provided for the competition.

inhabitants of the so-called last mile. Thus, formany people in remote villages on Polish territory,it becomes possible to start a business - which inthe absence of sufficient power was not possible.Second, the major customer is Czerneckich Educa-tional Foundation, for which Eko-Logic performs

close to 200 MW (100 turbines). All profits fromwind farms will be allocated to the statutory ob-

jectives of the Foundation. The Foundation aimsto help gifted students to develop their passionsand interests, regardless of their distance fromthe main centers of science, and to give them bet-ter future prospects. It is important to break thebarrier separating the students from rural areasand show them the possibilities, unfortunately,they usually do not have access to.

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Susan Dark, Director Ashberg MFO

IKAWAOver 2.25 billion cups of coffee are consumed in theworld every day, the majority of these by drinkersin industrialised economies. In contrast, some 25million small holders in developing countries growover 90% of the worlds coffee. IKAWA is servingan alternative approach to the coffee trade that ismore equitable and tastes better. The IKAWA ap-

proach enables a coffee supply chain where grow-ers are able to supply drinkers directly with un-roasted coffee beans. By simplifying the supplychain the IKAWA allows farmers to capture more

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of the money paid by coffee drinkers. For coffeedrinkers, IKAWA has designed an experience thatallows them to turn un-roasted coffee beans intocoffee they can drink. This experience offers bet-ter tasting coffee and increased sense of connec-tion with the grower.

Prakti DesignToday half the worlds population relies on bio-mass for their cooking needs. The biomass stovesor fires they cook on produce toxic fumes thatkill almost 2 million people a year. These firesalso consume over twice the necessary fuel andcontribute to global warming and deforestation.Prakti Design is a for-profit company that designs

and disseminates fuel-efficient, clean-burningcookstoves for the base of the pyramid. They ad-vocate a human-centered design tailored to re-gional cooking practices and received good feed-back to date. The whole community is impacted bya wide range of stoves, micro-financing schemes,and distribution (both by existing networks andtrained salespersons), thus promoting local eco-nomic development. Following successful pilotsthat have improved the lives of 25,000 people inSouth India and Nepal, Prakti plans its first full-

commercial distribution to roll-out from this Julyin India.


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Table 1To engage in early stage impact investing, here are some of the differences in deal flow sourcing, duediligence, negotiation, investment management and exit:

General Early Stage InvestmentProcess

Early Stage Impact InvestmentProcess

Deal origination:The investor becomes aware of the

opportunity

Mainstream methods: businessangel networks, incubators, uni-versities, intermediaries, referralfrom business associates or otherindividuals or organisations in theirnetwork, or personal search.

Follow the traditional methods viaspecialised sources including not-for-profit organisations such as

Ashoka for social entrepreneurs.

Due diligence Key decision criteria:TeamPotential for financial returnPotential to achieve scaleMarket need and innovation

Personal investment criteria

Key decision criteria:TeamPotential for significant socialand/or environmental impactPotential for financial return

Potential to achieve scaleMarket need and innovationPersonal investment criteria

Negotiation and execution:Negotiations with the entrepreneur

over valuation & deal terms

Main factors are valuation, dealterms, follow-on investors and exitopportunities.

Define people/planet impact goalsand how they will be measured.Negotiate valuation, terms includ-ing governance with sustainableapproach.

Manage investment and follow-onrounds

Investor is likely to become involvedwith the business, including throughadvice and mentoring, networking,

functional input and member ofboard.

Importance of mentoring and advis-ing is more significant in early stageimpact investing since the market is

still developing; there is a shortageof available best practices, impacttracking & benchmarks.

Exit investment Investors often exit from success-ful investments by means of a tradesale.

Exit strategy options and best prac-tices are being developed.


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Table 2A major difference amongst the two investment processes lies in the key evaluation criteria of aninvestment option, expected progression over time (milestones) and ways to measure/benchmark:

General Early Stage InvestmentProcess

Early Stage Impact InvestmentProcess

Business plan Potential for financial sustainability Potential for financial sustainabilityPotential for significant social and/or environmental impact

Processes: core business activities,value chain

EconomicProduct Responsibility

EnvironmentHuman RightsLaborSociety

Adhering to specific standards ISOSA

ISOSAGRI

Management Superior management with a proventrack record, entrepreneurial teamand/or capacity to take on boardadviceReputation

Superior management with a proventrack record, entrepreneurial teamand/or capacity to take on boardadviceManagement team with positiveethicsReputation

Governance Relationship between sharehold-ers, management and the Board ofDirectors

Relationship between shareholders,management, the Board of Directorsand the other stakeholders


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What are EBANs recommendations as a Euro-pean trade association to stimulate this sector?

The market needs to recognise that this is afull-fledged sector of early stage investing.All aspects of the ecosystem need to be en-couraged and developed in a coordinated wayin order to ensure sustainable growth of the

market.The EU should continue to include social andimpact innovation as part of its discussions onaccess to finance and the development of en-trepreneurship across Europe.

To facilitate the successful growth of ear-ly stage impact investing, for Business An-gel Networks (BAN), seed funds and nation-al BAN Federations, EBAN will integrate thefollowing actions into its five strategic pillars:

Professional standardsIntegrate impact investment aspects in our

professional standards strategy, which couldinclude certifying impact measurement tools.

BenchmarkingContinue to refine the definitions of early stageimpact investing. Measure and report on theestimated size of the early stage impact in-vesting market.Facilitate impact investing seed funds to net-work and collaborate with BANs whose mem-bers do early stage impact investments.

Capacity buildingSupport the building of the early stage impactinvesting ecosystem.Support the capacity building of business angelnetwork fund managers in this sector by pro-viding training through its EBAN Institute.

LobbyingBuild awareness for this sector, in collaborationwith the EU.Lobby with the EU for securities regulations,which are suited for the specificities of seedfunds including (especially) for those doing ear-ly stage impact investing.

Support cross-border collaboration

Extend the EBAN Shared Deals programme toimpact investments.

These actions will increase the number of Euro-pean early stage impact investors/BANs/funds,who will in turn provide valuable assistance tothe entrepreneurs and ensure this sector growsrapidly and successfully thus contributing to thedevelopment of a sustainable world. EBAN willproactively reach out to players in this sector to

integrate them into the EBAN membership.

Conclusions

The impact investing market is in its nascent stageand is growing.

However, a clear ecosystem is not yet defined andtherefore there is room for new entrants and newpractices.

In our view, impact values will and should be inte-grated over time into all early stage investments,therefore EBAN as the trade association for earlystage investors will support its growth, formalisa-tion and integration into this asset class.

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www.eban.org

Rue Vautier 54 |1050 Brussels | T: +32 2 626 20 62 | F: +32 2 626 20 69 | [email protected]

EBAN is the European Trade Association for business angels, seed funds and other early stagemarket players.

Our mission is to support the growth and professionalisation of the early stage investing sector, froma 3 billion Euros to a 10 billion Euros asset class in the near future, up from 1 billion Euros 5 years

ago.

The full and updated list of EBAN members can be found at :www.eban.org/membership/directory

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