Financing Options Hyderabad January 26, 2007 Charly Kleissner, Co-founder

Introduction Objectives: –Understand investment types, e.g., equity, debt, social loans, etc. –Understand investors, e.g., motivation, risk/return expectations, value proposition, etc. –Understand relationship between scaling a social enterprise and financing options

Introduction Methodology: –Set context with definitions –Use case study to explain definitions and trade-offs –Discuss your own opportunities / challenges

Introduction: Enterprise Life Cycle Invest- ment Risk Enterprise Life Cycle High Low Seed Start-Up Early Expansion Late Expansion Type of Investor Risk/return expectations Exit strategies Type of Investment Size of Investment

Investment Types Equity: Ownership of a company which is sold in order to provide cash for a growing company. Equity appreciates and depreciates based on the company’s value. Equity defers all payment to the investors until the time of sale. Debt: Loans or bonds – usually require full repayment plus interest. Loan institution dictates terms like timeframe, collateral, interest rate, and default risk management. Grant: Donation without repayment expectation. Grantor expects social / environmental returns.

Investment Types Social Loan: Debt structure below market, e.g., longer term, interest only, low interest rate, etc. In-kind equity: Non-monetary contribution of founders, employees, business partners to equity financing round, e.g., intellectual property, consulting hours, facilities, services, etc. Program Related Investment: Social investments from within US based Foundations (usually social loans).

Investor Types Entrepreneurs: In-kind equity, equity Family and Friends: equity, debt, grants Individual Investors (angels or social investors): equity, grants, debt Foundations: Grants, Program Related Investments (PRI’s) Venture Funds: Equity Social Venture Capital: Equity, debt Banks: Debt, equity Corporations: Equity, debt Corporate Business Partners: Warrants, equity, debt Government: Grants

Investment Strategies Invest- ment Risk Enterprise Life Cycle High Low SeedStart-UpEarly ExpansionLate Expansion Grants Social Loans Grants Social Loans Commercial Loans Grants Social Loans Commercial Loans Government Loans Equity Commercial Loans Government Loans Equity Social Investors Foundations Social Investors Foundations Social Venture Funds Banks Social Investors Foundations Social Venture Funds Banks Governments Corporations Banks Governments Corporations Etc.

Investment Definitions Double bottom line investing: Focuses on financing vehicles with explicit social and economic return expectations. Social venture capital and program related investments are types of double bottom line investing. Triple bottom line investing: Focuses on economic, environmental, and social value. Blended value: Focuses on idea that the value of an organization is fundamentally indivisible, i.e., economic, social, and environmental value are simply part of one essential value. Builds upon and transcends double and triple bottom line investing.

Investment Definitions Venture Capital: Refers to equity investments in new or young companies. Venture Capital is a subset of private equity, often included in the term ‘alternative investments’ by institutional investors such as foundation endowment managers. Social Venture Capital: A financing vehicle (equity or debt) that invests in for-profit and not-for-profit companies in a wide range of sectors with explicit social and financial return expectations.

Investment Definitions Venture Philanthropy: A model for charitable giving that arose in the 1990’s based on the application of venture capital investment principles to social investments. Funders ‘invest’ not just money but energy and expertise in the organizations they support. Venture philanthropists manage a ‘portfolio’ of organizations and seek to increase its social impact by providing management support and expecting results and accountability from organizations they fund.

Debt Definitions Loan Guarantee: –Investor assures the repayment of a loan made by a third party by pledging his financial resources as collateral. –Investor increases the amount of credit available to the third party by assuming all or part of the third-party lender’s risk. –Loan guarantees increase third party’s access to credit.

Debt Definitions Insured Deposits (includes certificates of deposits): –Funds placed in a depository institution (typically a Community Development Financial Institution), typically earning interest and insured by governmental agencies. Linked Deposits: –Through a linked deposit, a funder might agree to deposit funds in the bank for a specified period of time and agree to accept a below-market rate of interest, in effect subsidizing the loan. The funder would link the loan to an agreement by the bank to pass the subsidy along through a loan to a particular borrowing organization

Debt Definitions Senior Loan: –Holds higher priority for repayment than subordinated loans. Subordinated Loan: –In the event of the debtor’s bankruptcy, has a lesser claim to the assets of the debtor than other classes of debt. Line of credit: –Short-term loan used to fill temporary cash needs. –Typically, funds are advanced as a percentage of outstanding contracts or receivables.

Debt Definitions Asset purchase: –Real estate, equipment, or other assets are purchased by a foundation for the benefit of one or more charitable purposes. –The foundation retains ownership of the assets and arranges for its use. Convertible Loan: –Option to convert loan to equity (e.g., when company is acquired for stock).

Debt Definitions Social Loan: –Loan below market (longer term, lower interest rated, etc.) Recoverable Grant: –Provide for the return of capital under certain circumstances.

Myths If you want to do good, you have to create a not-for-profit company. If you want to create a social enterprise with a mission, you cannot do this in a for-profit company. For-profit companies are incompatible with a social mission.

Hypothesis Define mission of social enterprise first, then implement best legal structure to support the mission, not the other way around. Many times a hybrid legal structure will be advantageous.

Social Enterprise Definition A social enterprise is a for-profit venture, a not-for-profit venture, or a hybrid venture that combines the passion of a social mission with the discipline, innovation, and determination commonly associated with the for-profit businesses.

Hybrid Business Model For-Profit Entity Hybrid Social Enterprise Not-For-Profit Entity In-Kind Equity Consulting Brand Intellectual Property R&D Consulting Profit Sharing Liquidity Events

Hybrid Business Model Why? –To attract / leverage different types of capital / investors –To partially subsidize services / products –To prepare immature markets –To invest in basic research –To leverage both legal structures, while not being boxed into only one

Hybrid Lifecycle Invest- ment Risk High Low SeedStart-UpEarly ExpansionLate Expansion For-Profit Entity Not-For-Profit Entity For-Profit Entity Not-For-Profit Entity Not-For-Profit Entity For-Profit Entity Not-For-Profit Entity

Case Study: Biomass Electrification in Rural Sri Lanka

Case Study: Biomass Electrification in Rural Sri Lanka

Case Study: Biomass Electrification Flowing Currents Ltd. Aspira In-Kind Equity Consulting Profit Sharing Liquidity Events Biomass: Project Management Project Planning Installation Training Maintenance Village Societies: Organizational Development Training Reforestation Program: Training Management Partial subsidy of tariffs

Case Study: Biomass Electrification Environmental Return: –Carbon dioxide and green house gas emission neutral –Sustainable bio-mass generation and harvesting –Fertilizer cost savings –Re-forestation impacts –Cutting dependency on fossil fuels –Beauty Social Return: –Increase employment and earnings potential –Financially empower villagers and village societies –Increase skills and education

Case Study: Biomass Electrification Aspira Investors Entities Flowing Currents Hybrid Social Enterprise Social Investors: Grants Foundations: Grants Local Bank: Commercial Loan Social Investors: Equity Aspira: In-kind equity Social Venture Fund: Social Loan

Case Study: Biomass Electrification Deal Characteristics: –Provide financing for 2 years to scale biomass electrification from 2 villages to 25 villages Deal Structure: –Equity (for initial liquidity of Flowing Currents): $30K –Social Loan: $250K –Commercial Line of Credit: Up to $100K –Grants (to Aspira): $300K

Case Study: Biomass Electrification Flowing Currents Equity: –Total Not-for-profit: 69% Aspira: 69% –Total For-Profit: 31% KD Dominus LP: 8% Lalith Seneviratne: 15% Greg Rossel: 2% Employee stock options and partners: 6%

Case Study: Biomass Electrification Flowing Currents Social Loan: –Acumen Fund (Social Venture Fund) Flowing Currents Commercial Loan: –LOFC (Local Bank) Aspira Grants: –Diakonie (German Foundation) –KL Felicitas Foundation (US Family Foundation)

Conclusion Watch out for –Governance and leadership issues –Clear value proposition for different types of investors / donors –Maintaining control

Conclusion Re-visit Myths: –If you want to do good, you have to create a not-for-profit company. –If you want to create a social enterprise with a mission, you cannot do this in a for- profit company. –For-profit companies are incompatible with a social mission.