Fair play: why sustainable impact needs a more flexible approach to investment

Photo by David Clarke on Unsplash

Edward Evans, CEO, Social Tech Trust

When Saka’s penalty was excruciatingly saved by the Italian keeper, Donnarumma, in England’s Euro 2020 final defeat, the torrent of online racist abuse was quick to follow. What wasn’t so quick, was the response of the tech platforms that play host to such abhorrent views. With plenty of time to prepare, they haven’t just failed to score with their response, they’ve barely kicked the ball.

What realistic chance is there that these platforms are going to accept some accountability and forge new ways to tackle hate speech and racism? How different would it be if they had a social purpose — if equality, inclusion and empowerment were genuinely at the heart of their model and in lock step with their business aims?

As we enter a new phase of the pandemic and seek answers for how we build back better to create a fairer and more sustainable future for us all, these questions are more pertinent than ever. Technology will be key, yet how we chose to apply it, what business models we adopt and who makes the calls on which companies access the finance and support they need to thrive, will shape our future. We shouldn’t be fooled into thinking that existing paradigms are going to deliver something substantially different, or better. There are important decisions to be made.

At Social Tech Trust, we’ve invested in over 300 early stage, purpose driven tech ventures and seen first-hand that alternative models can succeed. Whilst the likes of Facebook and Twitter work hard to monetise their users (yes, you are the product), mission led start-up, WeFarm, has taken a different approach to build their global platform. Focusing on independent farmers, WeFarm has created a peer-to-peer community where their users are participants, sharing their collective expertise and resources to create the platform’s ultimate products: more sustainable livelihoods for farmers and rewired supply chains that work for producers. Available for free, and accessible to those without access to the internet, WeFarm has connected over 2.4 million farmers and successfully raised more than $32m to expand their impact.

Are we about to see the rise of impact unicorns? Perhaps, but let’s not forget that less than 1% of companies actually manage to raise venture capital investment and only 1% of these go on to be valued at over $1billion. Whilst most venture capital firms pursue investment strategies centred on the hunt for these near-mythical unicorns, what is happening to all the other companies that don’t clearly fit into that model?

Several of the companies we’ve backed have, like WeFarm, gone on to raise significant venture capital funding, but many struggle to access the capital they need to fuel their growth and scale their impact. As one founder, told us: “What’s off-putting about institutional VC is that it’s a total boom or bust. There’s no space to build a medium-sized (e.g. £20m-£100m valuation) company.”

With a focus on markets that often include vulnerable or marginalised members of society, or users who have limited means to pay (such as homeless people), many social tech ventures find it impossible to raise equity investment. At the same time, conventional debt products are often out of reach or lack the flexible repayment terms that ventures seek.

Whilst 62% of social ventures do not have the right amount of finance in place, social tech ventures face additional barriers as most social investors are unfamiliar with making tech investments. With a lack of choice, and limited awareness of alternatives, many ventures are left trying to shoehorn their business models into investor strategies that simply don’t fit.

It can be a frustrating journey, as one founder who attempted to navigate this challenge explained: “the experience we had was that institutional funding seemed to be structured as either debt, that is predictable debt with a fixed interest rate, or equity for early stage. Whereas we wanted an equity-like debt instrument.”

With capital markets failing to adapt quickly enough to meet the financing needs of diverse, technically astute, founders, there is an opportunity to provide an alternative that helps these ventures realise their growth objectives. That’s why we’re taking a different approach.

We focus on ambitious founders who are seeking to grow sustainable impact businesses. Our view is that increased revenues, rather than increased valuations, form the backbone of a sustainable company. Revenues create leverage for founders to choose the path that is right for the company and the impact they are working to achieve, whether it’s to grow through reinvestment of revenues, scale by raising external capital or to exit by selling the company.

With returns generated through a share of revenues across an entire portfolio, there is less reliance on just a few big exits to yield investor returns. This enables investments to be made through a different lens and in ways that meet the needs of a much broader range of social tech companies. Our offer is flexible and patient, with repayments mirroring company performance rather than being fixed.

Crucially, our approach is designed to be enabling, not prescriptive. At an early stage, most ventures don’t know what their growth path will look like. Getting into bed with a VC can often force this decision and set a venture on a single trajectory. We value optionality and include a mechanism for our investment to convert to equity if that is the right path for the venture to achieve their ambitions. It’s a position that’s not lost on the ventures we’ve tested it with: “All we want is an investor that agrees to act in the company’s best interest, not solely in the best interest of the investor.”

This type of “flexible VC” combines key elements of revenue-based investment and venture capital. As these models gain traction in the US, we’re proud to be introducing our distinct approach in the UK. Our first investment is in Xploro, a platform designed to reduce anxiety for young people being treated for serious illnesses.

Image courtesy of Xploro

Xploro’s clinically validated solution has significant growth potential, but as with many organisations operating in the health sector, it has to contend with long sales cycles that are particularly challenging at an early stage. Our instrument is a strong fit, enabling Xploro to focus on growing their revenues and demonstrating the value to children, their families and healthcare teams. This in turn, creates more options for Xploro to grow through increased revenue or to raise future equity. Unlike most VC investors, we don’t require them to make this call now and will support them on the path that is right for their sustainability, growth and impact.

According to Dom Raban, the founder and CEO of Xploro, “this kind of capital is ideally suited to our current fundraising. It will enable us to deliver the next stage of our plans and build our revenues, so we are in a stronger position to determine the right growth path for Xploro”.

The augmented reality and artificial intelligence powering Xploro is impressive, but what sets Xploro apart is the drive for transformative change. As Dom explains, “medical interventions are often scary, particularly for children. With Xploro, we aim to empower patients so that they can access the information they need and want in a way that is accessible. We need a healthcare system where people are included in decisions about their health and Xploro provides a platform to improve communication, understanding and health outcomes”.

As we reflect on what we’ve learnt from the pandemic and how to shape our collective future, we need to look to how the pursuit of equality, inclusion and empowerment can create a better, fairer society for all. This means challenging the systems and beliefs that aren’t delivering and embracing alternatives that can support change. As people pour onto the streets in defiance of the graffiti daubed images of Marcus Rashford, another England penalty taker, we see the true spirit that unites us and offers hope. Let’s put that at the core of our decisions on technology, business models and investments and see what it really means to build back better.

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