Jan 17 2019

Introducing the Integrated Impact Finance Vehicle (IIFV)

Originally published on Linked In. Photo by Michael Longmire on Unsplash

Everybody loves a success story. Entrepreneurship is built on them, even if they only happen less than 10% of the time.

Let me tell you the story of a successful impact enterprise. The company’s founder started with the seed of a great, disruptive idea (yes, it came in the shower between the shampoo and conditioner) that would significantly impact one of the SDGs (Sustainable Development Goals). The founder took the idea to the local impact hub, where a founding team was organized, a business strategy refined, the market thoroughly analyzed, sales and marketing strategy developed, and business plan, financial model and deck crafted.

The founder then went out to pursue funding, well aware that finding early stage capital for any enterprise was challenging, and even more challenging for companies committed to the triple bottom line. They went seeking funding knowing that 9 out of 10 startups fail (stats range from 80% to 99%), a significant percentage of those because they lack the necessary capital. The founder went seeking funding knowing that their business strategy, which would contribute significantly to one of the world’s massive social needs, was going to take time to mature, because they were going to have to disrupt conventional markets and supply chains and educate their customer base. They expected that there would be a period of experimentation and refinement, when they had little to no revenue, then a period of modest revenue, and then growing revenue. They projected that in five to six, maybe seven or eight years, accounting for the inevitable hiccups, they would hit their stride and become quite profitable and would be able to scale their products and services in a way that no nonprofit ever could. An exit of some kind with reasonable if not very attractive multiples was quite likely after eight to ten years, maybe longer.

As you might expect, when the founder went to traditional capital sources it did not go very well. Too long to profitability and exit, too many assumptions stretched out over too long a period, etc. Too long.

Too long.

So the founder went to several foundations that funded the area of social need that the company was addressing. The foundations said they liked the approach very much but were not quite ready to do mission-related investments (MRIs) or program-related investments (PRIs). The founder knew, having read the Foundation Center’s reports, that up to 95% of foundations would have this kind of disheartening reply, slow as their cultures were to embrace impact investing.

Still, the founder persisted and one day came across a blog post about a new kind of impact investment structure. It was called an Integrated Impact Finance Vehicle — an IIFV or “iffy.” The founder laughed when she heard the name — “iffy.” Sounded to her like so much of the feedback she had received from the VCs she had spoken to. The men in those rooms had been very pleasant, but she had the distinct feeling that she and her company weren’t really welcome. She and her company were definitely too iffy.

In the blog post, the founder read that the first iffy had recently been created by an eccentric, Silicon Valley tech multimillionaire who lived amid the redwoods with his labradoodle, Toby. This multimillionaire was an avid scuba diver who had had a spiritual awakening when diving amid the Great Barrier Reef. Bleached, barren coral and rainbow-colored currents of plastic refuse pierced by shards of sunlight had illuminated his consciousness as to the idiocies of conventional capitalism. He became then and there an impact investor.

The founder submitted her business plan to the iffy. A few days later, she heard back. Could she come to the redwoods for a meeting?

“I like what you are doing. I want to fund you.”

“Thank you.”

“My iffy includes a donor advised fund. I am going to start you off with a grant. No need to pay it back. Come back when you have some revenue.”

8 months later.

“Nice work. You have developed a supply chain. Got your first contracts. Have a little revenue. Your team seems competent. My iffy can give you a loan. Let’s start with something concessionary. How about 2-3% interest?”

16 months later.

“Well done! Building your market successfully. Getting recognition. Revenues looking stronger. My iffy can now give you a long term, market rate loan since your balance sheet can afford the payment scheme.”

“Thank you. I very much appreciate your approach. Shall we make it a convertible note?”

“Only if you are comfortable with that.”

2 years later.

“Congratulations, you successfully navigated your market challenges plus a downturn in the economy. Your revenue is strong and your path to scale is very clear now. I think we have enough data in hand to settle on a fair valuation for a private equity investment through my iffy, if you are so inclined.”

“I really value the approach you have taken with my company, and feel that we have built up a strong understanding over time. You showed early faith in my idea with a grant, where you expected nothing in return beyond measurable progress toward our objectives. You then demonstrated sensitivity to our financial state by providing different types of debt that did not overburden us. I have developed trust in you based on these experiences. I believe our visions are aligned. Having you as a part owner in my business would be very comfortable for me and the team. You and your iffy have made our vision possible.”

That is the story. It is a fiction because this kind of story hasn’t happened yet, or if it has happened it surely hasn’t been well publicized. Hopefully soon, however, this will become the norm. I have come across innovators like Boston Impact Initiative and RSF Social Finance that are experimenting in very interesting ways with integrated finance. Rockefeller Philanthropy and Skoll are working hard to unlock this puzzle, as is Chan Zuckerberg.

The iffy is my contribution.

Integrated Impact Finance Vehicles (IIFV), in my opinion, would create a fundamentally different, healthier and infinitely more impact entrepreneur-friendly funding continuum. I am working with advisors toward the optimal legal structure for an iffy, and the current idea is to create a Special Purpose Vehicle (SPV) with a donor advised fund inside it (if you can propose a better structure please suggest it).

Last summer, at the Opal Family Office Conference in Newport, RI, as part of a panel on philanthropy and impact investing, I proposed the IIFV approach as a way to engage family offices ($1+ trillion) as well as foundations (approx. $1 trillion) in entrepreneur-friendly impact investing. This would require a different brain chemistry and process. Grant-making and investments are usually done by different teams. Thinking of them under the same umbrella, with an enlightened intent to build an “impact economy” full of social and environmental innovation businesses, creates the possibility for investing both philanthropic and investment capital through a single vehicle, the iffy, that has a number of financial instruments available to it, and those instruments can be employed situationally as illustrated above.

Long live the impact entrepreneur!! Long live the iffy!

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