As has been concluded in publications from Monitor Group, the UK Government and recently in Harvard Business Review, the early-stage impact investing sector requires new and innovative approaches to structuring investments that meld both social and financial return considerations in capitalizing high-growth social ventures. In responding to this need, Echoing Green has developed a novel instrument termed the Recoverable Grant.
The Recoverable Grant is essentially a convertible note, with no time expiration and no liquidation payback rights, where the conversion occurs only at valuations greater than a given threshold. It’s designed specifically for very early-stage investment, where entrepreneurs need risk tolerant and inexpensive capital. The objective of the Grant is to enable recycling of investment capital from successful ventures back into the Echoing Green Fellowship model and support the future generations of social entrepreneurs. In that respect, it equitably integrates a modest financial return with focus on social value creation as part of the overall Fellowship program. There are three core components to the Grant:
- Minimal transaction cost. Making social investments more economically feasible at transaction time is a critical step in increasing capital flow into the sector.
- Zero downside protection. We recognize the crucial and continued importance that ‘cheap’ capital plays for the entrepreneur and Echoing Green’s desire is to enable the entrepreneur to invest the capital in whichever way they wish to create growth without needing to assess payback risks in the event things don’t work out.
- Reasonable upside benefits. The Grant is not an aggressive investment tool – the greater the dilutive power of a particular instrument, the more costly it is over the lifetime of the company for all parties. Our Recoverable Grant converts only when the resulting dilutive impact on the organization is around 1% or less and prior to conversion accrues interest at a low rate.
- Blended social and financial return. Implemented as a core element of our Fellowship program, the Grant enables the entrepreneur to continue their focus on social impact strategy.
Building on the heritage of such major innovations as the Calvert Community Investment note and radical in comparison to more traditional implementations of convertible notes, we at Echoing Green believe the Recoverable Grant represents the kind of game-changing, innovative thinking that is required to help support social entrepreneurs and catalyze additional investment capital into the sector.
What innovative mechanisms for financing social enterprises have you seen?