Private Investors as Stewards for Growth and Impact
In the most recent edition of our four-part series on Sustainable Investment in 2020, we discussed the hidden potential of private investors to make great changes through impact investments. Given their freedom from the influence from corporate shareholders or the investment criteria of financial institutions which may or may not be aligned with their personal impact agenda, the private investor who is committed to a cause is uniquely positioned to achieve maximum impact while still maintaining appreciable returns. In this third instalment of the series, we are diving deeper into a related impact driver: the mutual benefit, for both firms and private investors, of active investor involvement in the impact space nowadays known as “active capital”.
Historically, private investors have largely employed an investment approach characterized by a hands-off, passive attitude towards their investments, meaning that there is little to no investor involvement beyond the initial investment decision and heavy involvement of middle money-managers for actual deployment of capital and curation of the portfolio. For institutional investors however, the concept of “stewardship” is not new; it refers to the practice of engaging with portfolio companies to promote positive corporate governance practices that are in line with long-term value creation for shareholders. What is new however is the sophistication of much more agile and smaller money managers today which, empowered by technology, are able to operate with much of the same stewardship capabilities as large, incumbent financial institutions. As this capability to be active stewards of portfolio ventures becomes cheaper and democratized, active capital investors have risen to leverage this capability in ever increasing numbers.
Given the dual mandate of impact capital looking at both returns and sustainability of investments, both companies and investors can benefit substantially from a more hands-on, active capital approach, learning from large asset managers’ stewardship practices.
The smart startup, impact or not, will recognize that beyond capital, investors can bring a wealth of experience, powerful network, and strategic-commercial mindset that is of enormous value to growing companies. The benefits of active capital investors are well-documented, with numerous studies highlighting the positive role that investors can play in driving the success of young, innovative companies. A study published in the Journal of Business Venturing found that opportunities exist for private investors to add value regardless of venture stages and experience of the team [1]. The same study also determined that high innovation ventures benefit most from liaising with private investors, a finding that is particularly pertinent to the impact space, as many impact-driven firms develop novel, leading-edge solutions to address pressing challenges in their societies and environment. Specific topics on which entrepreneurs tend to desire higher investor involvement are crisis management activities, serving as a sounding board for new ideas, and developing professional support groups [2].
From an investor’s perspective, active capital addresses the biggest decision metric of all: confidence. All stages of the capital raising process are about the company seeking the investment trying to give the sufficient degree of confidence to a potential investor that the market opportunity, business solution, and management capabilities are all sufficiently aligned to create value. How does a startup create confidence? Traditionally the only answer has been to “be a better business”, in every sense of the phrase. More and more today however, startups choose to demonstrate radical transparency and build the opportunity together with your active investor. By being fully transparent with investors that the solution presented today will not necessarily 1-for-1 be the market-success, but by engaging them in the solutioning process, experience is leveraged, unity of purpose is created, and follow-on investments are much more likely to be secured. The smart startup that is raising capital today recognizes what retailers started to recognize in the early 2000s: the customer (or investor) experience around a purchase is often more important to the decision than even the product or service itself.
Given the dual mandate of impact capital looking at both returns and sustainability of investments, both companies and investors can benefit substantially from a more hands-on, active capital approach, learning from large asset managers’ stewardship practices. Impact investment funds are a powerful tool to establish these connections, and act as an intermediary to source, vet, and present viable triple-bottom-line opportunities to the investors that want to make a difference.
[2] Ehrlich, S. et. al. - Journal of Business Venturing: After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms
[3] Bank of America, Private Bank - The 2018 U.S. Trust Study of High Net-Worth Philanthropy