Unlocking Patient Capital for Social Impact

Patient capital is a game-changer for social enterprises that need funding to scale their impact.

Patient capital providers focus on long-term returns, rather than quick profits, which allows social enterprises to focus on their mission without sacrificing financial sustainability.

By providing patient capital, investors can help social enterprises achieve their goals and create lasting social change.

This approach can lead to significant positive outcomes, such as improved health outcomes and increased economic opportunities for marginalized communities.

Patient capital is often characterized by its long-term focus and willingness to take on more risk in pursuit of social or environmental impact.

The most commercial sources of patient capital come from institutional investors, such as pension funds and endowments, which tend to prioritize returns over social impact.

Philanthropic organizations, on the other hand, are more likely to prioritize social impact over returns, making their patient capital more unpredictable and less likely to be invested in traditional markets.

Institutional investors typically prefer to invest in funds that have a proven track record of financial returns, whereas philanthropic organizations may be more open to investing in early-stage or high-risk ventures.

Patient capital investment strategies can be quite different from traditional venture capital. Some patient capital funds emphasize addressing social or environmental needs and are okay with smaller, community-based solutions that become profitable.

These funds often use a range of debt and equity as financing alternatives, and may deliver investments or debt to for-profits and nonprofits or a hybrid structure that links the two types of organization. They typically have a longer time horizon than standard funds, but still expect to invest equity in exchange for ownership as the founders search for highly scalable exponential growth solutions.

Investment structures are often driven by the exit options available in the local markets, and can include debt, equity, preferred shares, guarantees, and even revenue participation or royalty structures. Some funds will seek to do whatever best supports the business at its current stage of development, while others are willing to take risks on the exit.

Patient capital investors expect a longer time horizon than venture capital, often 3-5 years in some sectors and 10-15 years in others, before seeing financial returns.

The time horizon for patient capital is longer than venture capital, and patient capitalists believe the needs of the shareholders do not have primacy over the needs of end customers.

Some patient capital funds are okay with smaller, community-based solutions that become profitable and consider a range of debt and equity as financing alternatives.

Patient capital funds may deliver investments or debt to for-profits and nonprofits or a hybrid structure that links the two types of organization.

Some patient capital funds have longer time horizons but still expect to invest equity in exchange for ownership as the founders search for highly scalable exponential growth solutions.

Social investment funds can use any combination of investment structures, including debt, equity, preferred shares, guarantees, and even revenue participation or royalty structures.

The types of investments used will depend on the fund's capital source, the fund structure, and the time horizon for return expectations.

Return expectations vary widely and are dependent on the same factors: LP, structure, time horizon, and exit options.

At the more commercial end of the spectrum, investors are expecting 25 to 30% IRRs, while some funds will be fine with a multiple of 1x, or simply the real return of principal.

A fund's investment strategy is often articulated as its "theory of change", or why it believes the world will be a better place because of its investments.

Most social investment funds seem most comfortable with seed or early-stage investments, few have the resources to be later-stage or so-called mezzanine investors.

Funds are often explicit about geographic focus, such as Africa and India, or issue, such as global public health or renewable energy funds.

In the UK's startup ecosystem, the average round size of patient capital deals in 2021 was significantly smaller compared to all deals.

Patient capital is an underexplored area of equity investment, with more funds likely to enter this space in the coming years due to the impacts of the Patient Capital Review.

Impact investing is a growing field that combines social or environmental criteria with a disciplined approach to principal investing. It's not just philanthropy, but a way to generate real change and attractive financial returns.

Impact investors, like Acumen Fund, are looking to build the infrastructure for the sector, particularly in emerging markets. They're not just dumb money, but savvy investors who expect to see a return on their investment.

Impact investing is an emerging asset class that can generate serious deal flow, test new ideas, or expand into new markets, contributing to solving environmental and social problems. It's a reasonable return on investment by most measures.

Venture Capital expects fast returns, typically within 10 years, and looks for opportunities that deliver returns quickly. This makes it challenging for organizations working on complex issues like climate adaptation and social justice to secure funding from Venture Capitalists.

Philanthropic Grants, on the other hand, are unpredictable and may not align with traditional investment strategies. They are often provided by foundations and NGOs that prioritize social impact over financial returns.

Patient Capital was created as an alternative to both Venture Capital and Philanthropic Grants, popularized by the Rockefeller Foundation and the Acumen Fund. It offers a middle ground for impact investors who want to support organizations working on complex social and environmental challenges.

Venture Capital firms typically raise new funds every 3-5 years, which creates pressure to seek quick returns. In contrast, Patient Capital funders see financing options on a spectrum and position their investments in contrast to development grants and development finance.

The Acumen Fund, Omidyar Network, and Rockefeller Foundation are examples of organizations that have successfully used Patient Capital to support impact investments. These organizations have found a way to balance social impact with financial returns, making them attractive options for impact investors.

Pension funds are looking to diversify their risk and fulfill the social obligations of their clients and members.

Funds like Calvert are primarily invested in community housing, which often receive tax credits to generate competitive risk-adjusted financial returns.

Pension funds sometimes wade into clean tech or more progressive funds that foster innovation in new sectors.

Impact investors like Acumen Fund are part of an emerging asset class that can generate serious deal flow, test new ideas, or expand into new markets.

Funds like Calvert, which invest in community housing, are a prime example of pension funds seeking to fulfill their social obligations.

Impact investing is an investment approach that aims to generate both financial returns and positive social or environmental impact. It's not just about giving away money to charity; it's about using your capital to drive meaningful change.

Impact investors expect a return on their investment, but they're willing to take a longer-term view, often 5-10 years or more, to achieve their goals. This is in contrast to venture capitalists who typically expect a quick return on their investment.

Patient capital is a key component of impact investing, allowing organizations to take the time they need to find and validate a sustainable solution to a social or environmental need. This approach is not designed for perpetual funding, but rather for investing in organizations that can eventually become profitable.

Impact investors often use a range of financing alternatives, including debt and equity, to support their investments. Some funds may prioritize social or environmental needs over financial returns, while others may expect a commercial return.

The types of investments used by impact investors can vary widely, depending on the fund's capital source, structure, and time horizon. Some funds may focus on seed or early-stage investments, while others may invest in later-stage companies or mezzanine investments.

Impact investors are not just philanthropists; they're professional investors who use a disciplined approach to principal investing to generate real change and attractive financial returns. They're often motivated by a desire to address some of the world's most pressing social and environmental challenges.

The rise of impact investing has led to the emergence of new investors and strategies, including the use of pension funds and screened funds to support social and environmental goals. These funds are looking to diversify their risk and fulfill the social obligations of their clients and members.

Impact investors are a growing and influential phenomenon, with several hundred million dollars raised in the last few years. They're a key part of the global capital markets, and their influence is likely to continue growing in the coming decade.

Patient capital is not just about investing in social causes, but also about being patient with the returns. Many fund managers claim to be impact investors, but their time horizons are often short, making them no different from traditional venture capital.

The impact of patient capital is scattered and limited when funders prioritize profit over social or climate goals. This can lead organizations to ignore or delay addressing the needs of lower-income customers.

Funders with a well-defined investment thesis can become a learning network of like-minded organizations, as seen with the BlueRidge Fund, which has attracted both for and nonprofit organizations that have gone on to scale and raise additional capital.

The pandemic has accelerated the trend of capital targeted to address climate and underserved groups, but it's essential to ask potential funders about their approach and how they may have changed their approach to addressing access or climate aims.

Securing patient capital can be a challenge for organizations with social missions. Impact investors may not always prioritize the organization's mission, instead focusing on shareholder interests and short-term gains. This can lead to a watering down of the organization's social impact.

To avoid this, it's essential to clearly communicate your organization's needs and goals to potential investors. However, even with clear communication, it's not guaranteed that you'll find a patient capital funder who aligns with your mission.

A recent study of 20 years of patient capital found that it's crucial to understand the capital expectations, investment themes, and theories of change for funders that may be in alignment with your organization's mission. This requires doing your research and due diligence on potential investors.

Here are some key things to consider when evaluating potential patient capital funders:

It's also worth noting that securing patient capital may require more effort and outreach than traditional fundraising. You may need to reach out to 100 investors to get one favorable term sheet, and even more to find a values-aligned funder.

Trends in Patient Capital are shifting towards addressing issues of climate and delivering funding directly to underserved groups. This trend has accelerated due to COVID-19, the war in Ukraine, and rising food and energy shortages.

Funders are re-examining their motivations, structures, and intentions, and some are starting to address the critique that "doing well by doing good" may lead to more status quo rather than deep-rooted change.

Patient capital investors are often non-institutional, such as angel networks or crowdfunding platforms, but institutional investors typically have much more money to invest.

A comparison of equity deals secured by high-growth UK companies in 2021 found that patient capital investors took a far greater proportion of equity from their investees, particularly in the earliest stages of a company's growth journey.

Here are some key statistics on patient capital rounds in the UK:

Patient capital rounds also tend to be larger than those completed by conventional investors, with an average deal size of £30.6m and a median round size of £8.27m in 2021.